Audit Watchdog Faults Accounting Firms for Internal Controls Work
The Public Company Accounting Oversight Board (PCAOB), a nonprofit created to police the accounting industry, recently released a report identifying widespread problems with the internal control audits performed by the nation’s largest accounting firms. The report found that eight large accounting firms, including the Big Four, often used deficient methods in 2010 and 2011 in auditing their client’s internal controls aimed at curbing financial fraud.
The Sarbanes-Oxley Act, as amended by the Dodd-Frank Act, requires management of all companies to assess and report on the effectiveness of the company’s internal control over its financial reporting. The law also requires that independent auditors for larger companies attest to management’s disclosures about the effectiveness of that internal control. In nearly one-quarter of the audits inspected by the PCAOB in 2011, however, the accounting firm failed to obtain sufficient evidence to support its opinion approving of the client’s fraud prevention measures, a sharp increase from the flaws found in 2010. The PCAOB found “pervasive deficiencies” throughout the 2010 and 2011 audits, which frequently arose from the accountants’ failure to obtain and examine underlying documents to ensure the company was not misstating revenue or falsely valuing its assets. The watchdog cautioned that its findings did not indicate that a client’s internal controls were inadequate, but rather that the accountants frequently failed to follow proper procedures in executing their audits.
The takeaway from this report is that companies must not only maintain adequate internal controls over financial reporting but they must also provide complete and transparent records to their accountants to ensure sufficient audits over those controls.