* Watchdog: Control audit problems high and growing
* Problems found at eight biggest audit firms
* Audit problems involve primary bulwark against fraud
By Dena Aubin
NEW YORK, Dec 10 The biggest U.S. audit firms
are failing to properly test some companies' financial controls,
one of the main bulwarks against fraud, an audit watchdog group
said on Monday.
In a broad review of the "Big Four" and second-tier audit
firms, the Public Company Accounting Oversight Board said
problems are numerous and growing in audits of companies'
internal controls - the main method used to keep accurate books.
Tests of internal controls were among the requirements of
the 2002 Sarbanes-Oxley Act, which Congress passed to curb
abuses after accounting scandals at Enron Corp and other
companies. The Act created the PCAOB to oversee audit firms.
Controls can range from such simple procedures as checking
purchase orders and invoices before making payments, to proper
security procedures for computers, such as passwords and
Audit firms are required to test controls that could have an
impact on financial statements and attest that the safeguards
are adequate, but in many cases the companies in which the
auditors gave passing grades, the PCAOB found there was
insufficient evidence to support that opinion.
Internal control checks were deficient in 22 percent of
audits inspected in 2011, up from 15 percent in 2010, the PCAOB
said. But, it said 2011 inspection reports have yet to be
Audits of internal controls have improved financial
reporting overall, but "the trend is going in the wrong
direction," PCAOB board member Jeanette Franzel told reporters.
The PCAOB looked at internal control checks by the "Big
Four" audit firms - Deloitte & Touche, Ernst & Young
, KPMG and PricewaterhouseCoopers -
plus second-tier firms BDO Seidman, Grant Thornton, Crowe
Horwath and McGladrey.
The firms either did not immediately respond to calls from
Reuters seeking comment or referred questions to the Center for
Audit Quality (CAQ), which represents audit firms.
The growing audit deficiencies do not mean that companies'
controls were inadequate, just that auditors were not properly
checking them, said board member Jay Hanson. He discounted
complaints by auditors that PCAOB inspectors had become too
"We are not by any stretch requiring busy work," he said. In
some cases, auditors were not doing things required by their own
firms' policies, he said.
CAQ Executive Director Cindy Fornelli said in a statement
that the firms realized they need to improve and "devoted
significant additional resources" to that area over the past
Internal control lapses figured in high-profile accounting
problems at a number of companies in recent years, including:
Diamond Foods and MF Global.
The main areas where controls were not properly tested were
revenue, inventory, fair value of financial instruments, and
valuation of pension plan assets, the PCAOB said. Revenue is the
leading source of financial fraud.
When internal controls are unchecked, companies can more
easily cover up improper accounting, the PCAOB said.
The internal controls audit was one of the most
controversial parts of Sarbanes-Oxley and sparked complaints
from businesses that it would drive up audit costs.
In response, the PCAOB in 2007 issued a new standard urging
auditors to be more selective in how they reviewed controls. The
standard allowed auditors to scale back internal control tests
based on risk and rely more on broad, company-wide controls
rather than test specific procedures.
Workload pressures may be contributing to the problems with
control tests, the PCAOB said. In some cases where control
audits were deficient, the PCAOB found that the audit firm had