In its first inspection of a Big Four public accounting firm for the 2011 cycle, the Private Company Accounting Oversight Board (PCAOB) reviewed 52 audits by KPMG—plus one in which it was not the primary auditor—and found deficiencies in 12. Among other problems, the PCAOB identified the firm’s failure to sufficiently test the issuer’s valuation of securities, assets and liabilities, business combinations, troubled debt, accounts receivable, and more. To read the 2012 inspection report, click here.
Curiously, the board cited the same number of deficient audits (12 out of 52) in last year’s inspection of KPMG, but in 2009, it cited only eight audits (out of 60); and in 2007, only seven had problems (out of an unnamed total). Another apparent shift: As we noted in our report on the 2007 findings, KPMG was cited for failing to have an external valuation specialist test the conclusions, but in this most recent cycle, such citations related to KPMG’s use of an internal specialist. Has the firm largely brought the fair value work in-house, or is its use of external specialists not leading to deficiencies? And we don’t mean to pick on KPMG; the board will soon post inspection reports of the remaining Big 4 firms as well as McGladrey, BDO, Crowe Horwath, and Grant Thornton. According to at least one report, Jim Doty, PCAOB chair, expects to find at least as many problems with these firms’ fair value audits as KPMG’s.
What can independent valuation specialists do? “For those of you who are valuation specialists providing services to financial statement preparers and/or auditors, consider how you can help increase the understanding of preparers and auditors into what you do and how you do it,” said PCAOB member Jay Hanson (formerly of McGladrey) in his address to an AICPA conference on fair value this summer. “Proprietary valuation models aside, think about how you can explain the assumptions you are using, the sources of information on which you rely, and the judgments that are inherent in your valuation results,” Hanson added. “All of the important work that you do will mean very little if investors decide that they cannot trust the process by which important valuations are established and audited.”