(Adds a comment from PwC)
By Sarah N. Lynch
WASHINGTON, April 10 Public company and bank
audits conducted around the globe by units affiliated with the
world's six largest accounting firms are persistently riddled
with flaws, a group of international regulators have found.
The finding, released on Thursday in a survey conducted in
2013 by the International Forum of Independent Audit Regulators
(IFIAR), raises major policy questions about whether enough has
been done by global regulators to improve audit quality since
the 2007-2009 financial crisis.
Leading up to the crisis, many publicly traded banks
portrayed a rosy financial picture of their corporate books,
only to later suffer massive losses on subprime mortgage
securities in their portfolios.
Critics have questioned why independent auditors tasked with
reviewing the accuracy and quality of public company financial
reporting failed to spot the problems sooner.
"The high rate and severity of inspection deficiencies in
critical aspects of the audit, and at some of the world's
largest and systemically important financial institutions, is a
wake-up call," said Lewis Ferguson of the Public Company
Accounting Oversight Board, the body that polices auditors in
the United States.
"More must be done to improve the reliability of audit work
performed globally on behalf of investors."
The global survey on audit performance comes at the end of a
three-day summit in Washington that included audit regulators
from around the globe.
Together, those 50 regulators comprise the IFIAR - a
coalition formed in 2006 to improve information sharing and
The findings discussed in Thursday's survey stem primarily
from inspections conducted at firms affiliated with the six
largest accounting firms.
That includes the "Big Four" - PricewaterhouseCoopers
, KPMG, Deloitte and Ernst & Young
, as well as BDO and Grant Thornton.
The survey looked at inspection results for audits of public
companies and large financial institutions considered
"systemically important" to the global economy.
It also looked at how well internal quality controls fare at
audit firms themselves.
With public company audits, regulators found problems
related to auditing fair value measurements, internal control
testing and procedures used to assess how financial statements
The regulators also said that audits of systemically
important financial firms often had deficiencies stemming from
allowances for loan losses and loan impairments and the auditing
of investment valuation.
As for audit firms, the regulators said they routinely
encountered problems with independence and ethics, among other
Cindy Fornelli, executive director at the Center for Audit
Quality, said Thursday in reaction to the survey that her
group's members recognize there is still "work to do."
At the same time, she noted that accounting reforms enacted
in the United States in 2002 "have led to improvements in audit
quality, financial reporting, and internal controls over
A spokesman for PricewaterhouseCoopers International said
that PwC remains "committed" to driving for improved audit
quality, and said it would carefully study the report to see how
it can best address the issues.
Spokespeople for the other large accounting firms either did
not respond to requests for comment or declined to comment.
The survey is IFIAR's second. Last year, similar types of
problems were flagged, though IFIAR says the survey itself does
not provide an adequate basis for a year-to-year comparison.
Ferguson, who chairs IFIAR, told reporters in a briefing it
is unclear exactly why problems with audits persist.
However, he noted that audit regulation is still relatively
new and few other professions get as much scrutiny.
"This profession is being subjected to a level of
scrutiny...that is both new and probably unique," he said. "I am
actually not all that surprised we are seeing these kinds of
Regulators in the United States and Europe have been
exploring ways to improve audit quality since the 2007-2009
Last week, the European Union approved some of the world's
toughest new rules for accountants after auditors gave banks a
clean bill of health before they were bailed out by taxpayers.
Those rules would prevent accounting firms from also
auditing the books of a public company client for more than 20
years, a reform designed to bolster auditor independence and end
cozy relationships between accountants and company management.
The PCAOB gave up on exploring a similar reform in the
United States after major business groups and accounting firms
lobbied fiercely against it.
However, the board is working toward completing several other
less radical reforms.
(Reporting by Sarah N. Lynch; Editing by Jonathan Oatis)