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PCAOB: Deloitte's Issues

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	12/8/2006 7:48 AM
Last week, the PCAOB released its report on its 2005 inspection of Deloitte & Touche. The report indicated that one of the eleven audits inspected by the PCAOB involved a subsequent restatement of financials. The main thrust of the report was that Deloitte didn't gather sufficient evidence for expressing an audit opinion on the engagements, an assertion that Deloitte refuted. (Rebuttal included in the report, pages 27 to 29.) Nevertheless, D&T obtained additional evidence and included it in their workpapers on eight of the engagements. On four of the engagements, the firm simply dug in its heels and wouldn't go along with the PCAOB conclusions. As always, it's interesting to see what accounting issues the PCAOB was examining in its inspections. There were gross vs. net revenue recognition issues (the sole restatement); several instances of multiple-element revenue arrangements; partnering revenue arrangements; tax accrual adjustments; inventory adjustments; and intangible asset amortization issues. One, however, stuck out: maybe because of the incessant drone about Section 404 roll-back. Here's a clip: When testing inventory, the Firm applied a controls reliance strategy, which included reliance on IT controls. The Firm's work papers indicated that the results of its tests of the issuer's information technology general controls did not support a conclusion that the issuer's information processing was reliable. The Firm, however, did not perform any additional procedures to address its finding, nor did it modify its audit strategy. Other than reviewing certain untested reports for reasonableness, there was no evidence that the Firm performed audit procedures, such as examination, observation, or re-performance, to obtain corroboration of management's explanations regarding a significant portion of the inventory controls identified for testing. For the moment, let's not harp on the fact that D&T didn't document their decision. (Harping to follow later.) The clip summarizes a point that I think people miss frequently. (At least the ones I talk to.) Aside from the fact that meaningful, effective internal controls in a firm produce more reliable information to investors, they also reduce the testing of the year end figures that must be done by an auditor in order to be satisfied that the financials are worthy of a clean opinion. In this case, it appears that the system was in place but the auditor didn't document its decision properly, and it's also not clear that they spent a lot more time on the year end work. But it serves as a reminder that the controls aren't just the horror stories you hear about junior auditors asking about who has custody over the washroom keys.

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