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Five Foreign Affiliates of Big Four Firms Cited for Flawed Audits

The PCAOB released inspection reports for 23 accounting firms on October 3, 2013, and found problems at 13 of them.

The reports included reviews of work done by Deloitte Touche Tohmatsu in Australia, Ernst & Young Inc. in South Africa, KPMG’s operations in India and the Netherlands, and PricewaterhouseCoopers in Germany and Papua New Guinea.

No problems were found in the inspection of E&Y’s South Africa affiliate. The other Big Four firms were cited for problems.

Deloitte in Australia failed to properly test the value of a client’s assets held for sale, according to the PCAOB. The firm’s written response, included in the report, said it has “taken action as appropriate under PCAOB standards.”

The U.S. audit regulatory board found KPMG in India to be deficient in one audit because it didn’t test a client’s reserve for an asset that was written down. Its operations in the Netherlands failed to meet the PCAOB’s standards in two separate audits. In the first, the firm didn’t verify the existence of cash and cash equivalents. In the second, it didn’t appropriately test the value of real estate investments that had been acquired. Each office sent a written response to the PCAOB insisting that the findings have been addressed “in a manner consistent with PCAOB auditing standards and KPMG policies and procedures.”

PwC performed one insufficient audit apiece in its offices in Germany and Papua New Guinea, the audit regulator said. The German office didn’t evaluate a client’s accounts receivable, revenue transactions, and sales deductions. In Papua New Guinea, PwC failed to appropriately value a client’s inventory. Each office provided a written response.

The operations in Germany accepted blame and said they remedied the situation. But the response from the office in Papua New Guinea said, “While we understand and acknowledge the PCAOB’s finding, we also note that as with any audit process, judgments are necessarily involved in the inspection process, and professionals can reach different conclusions about the adequacy of audit evidence in a particular circumstance.”

The PCAOB released inspection reports for 17 smaller firms and found problems at eight of them.

• Dixon Hughes Goodman LLP in Charlotte, NC, with 54 publicly traded clients;
• Hansen Barnett & Maxwell PC in Salt Lake City, with 24 public company clients;
• Lake & Associates CPAs LLC in Schaumburg, IL, with 32 public company clients;
• Mah & Associates LLP in San Francisco, with no clients that traded publicly at the time of the inspection;
• Mitchell & Titus LLP in New York, with 20 public company clients;
• Rothstein, Kass & Co. PC in Roseland, NJ, with 40 clients that trade publicly;
• S.R. Snodgrass AC in Wexford, PA, with 28 clients that trade publicly; and
• Wolinetz, Lafazan & Co. CPAs PC in Rockville Centre, NY, with eight clients that are public;

The PCAOB also issued an expanded report on Parker Randall CF CPA Ltd. in Hong Kong for failing to address quality control problems in a timely manner. The board found the firm to be deficient in 11 separate ways, chief among them a failure to address a departure from GAAP related to a potentially material misstatement. Parker Randall also failed a number of tests of its audit procedures ranging from evaluation of long-lived assets to the balances for taxes and accounts receivable, the PCAOB said.

Parker Randall’s quality control system “appears not to provide sufficient assurance that the firm effectively monitors whether other elements of quality control are suitably designed and effectively applied,” the audit regulator said. The firm didn’t provide a written statement to the PCAOB, and it didn’t respond to an e-mail sent to its London office as this story was being written.

Nine audit firms were cleared:

• Farber Hass Hurley LLP in Camarillo, CA, with 13 public company clients;
• Gregory, Sharer & Stuart PA in St. Petersburg, FL, with two clients that trade publicly;
• Kyle L. Tingle CPA LLC in Las Vegas, with eight clients that are public;
• Lesley, Thomas, Schwarz and Postma Inc. in Newport Beach, CA, with one publicly traded client;
• Mohler, Nixon & Williams Accountancy Corp. in Campbell, CA, with 10 public company clients;
• Morris Davis Chan & Tan LLP in Oakland, with eight clients that trade publicly;
• Saddington Shusko LLP in Irvine, CA, with no clients at the outset of the audit that are public;
• Smolin Lupin & Co. PA in Fairfield, NJ, with one publicly traded client; and
• Zwick and Banyai PLLC in Southfield, MI, with one client that trades publicly.

The PCAOB inspects auditors as part of its charter under Section 104 of the Sarbanes-Oxley Act of 2002.