(Adds a comment from PwC)
By Sarah N. Lynch
WASHINGTON, April 10 (Reuters) - 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 coordination.
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 are presented.
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 things.
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 financial reporting."
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 things."
Regulators in the United States and Europe have been exploring ways to improve audit quality since the 2007-2009 financial crisis.
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)