The PCAOB on July 18, 2023, published five inspection reports, including one on Grant Thornton LLP, that revealed failures to address quality control (QC) deficiencies identified in a timely manner.
The other four are smaller firms: Berkower LLC, Ernst & Young AB in Stockholm, Sweden, K. R. Margetson Ltd. in Vancouver, Canada, and Louis Plung & Company, LLP.
Berkower is based in Iselin, New Jersey, and Louis Plung is in Pittsburgh, Pennsylvania.
When the PCAOB publishes an inspection report, it keeps confidential the portion that covers weaknesses with an audit firm’s quality management and supervision. If the firm has not addressed the problems within 12 months, the PCAOB makes quality control findings public.
“Any changes or improvements to its system of quality control that the firm may have brought to the Board’s attention may not be reflected in this report, but are taken into account during the Board’s assessment of whether the firm has satisfactorily addressed the quality control criticisms or defects no later than 12 months after the issuance of this report,” inspection reports note.
Grant Thornton
The inspection year in question is 2018 for GT, and the report is dated April 2020. At the time, deficiencies related to the firm’s system of quality control in Part II of the report were not included.
The PCAOB criticized GT on four areas: testing controls, supervision of the audit, engagement quality review (EQR) and policies for financial holding disclosures, according to the report, which now reveals Part II findings of the April 2020 report.
On testing controls, for example, the PCAOB said that inspections indicate that the work performed by the firm’s auditors on testing controls fell short of what is required under the board’s auditing standards.
During the 2018 inspection cycle, the PCAOB reviewed 32 audits and found problems on eight. Of the 32 selected for review, five were picked randomly. The rest, 27, were reviewed based on risk assessment of areas that are likely to present problems.
Inspectors identified problems in the firm’s testing of controls in seven audits in: identifying and testing controls that address risks of material misstatement, testing controls that include a review element, and identifying and testing controls over the accuracy and completeness of data or reports.
The PCAOB’s “annual-inspection process is a critical part of our commitment to audit quality, which is at the foundation of all we do,” the firm said in an emailed statement. “Grant Thornton has implemented policy and process updates, rigorous trainings and enhanced quality controls over the past several years to address the 2018 Part II findings. Our commitment to quality remains our principal focus, and we are dedicated to continuous improvement.”
The PCAOB inspects Grant Thornton annually because it has more than 100 public company audit clients.
Smaller Firms
These firms have fewer than 100 issuer clients and are thus inspected triennially.
For Berkower, the PCAOB issued the expanded version of the July 2021 report, and it deals with the 2019 inspection. At the time of the inspection, the firm was the principal auditor for four public companies. The PCAOB reviewed two audits and found problems in both.
The PCAOB criticized Berkower on a host of QC areas: testing revenue, testing certain assets, related parties, testing certain transactions, communications with audit committees, EQR and auditor reporting of certain audit participants.
As for EY in Stockholm, the expanded report is about 2019 inspections. The report is dated January 2021.
EY Sweden had five publicly-traded clients and participated in audits of 23 other public companies at the time of the inspection.
The PCAOB reviewed three audits and found problems in one. EY, according to the expanded report, did not have proper controls over policies for financial holding disclosures.
The report for Vancouver-based K. R. Margetson is dated September 2021, and also relates to the 2019 inspection. At the time, the firm had three public company clients. The PCAOB reviewed three audits and found deficiencies in one.
The inspectors flagged quality control deficiencies in five areas: testing related-party transactions, EQR, communications with audit committees, auditor reporting of certain audit participants and audit reports.
“The inspection report was publicized because I didn’t complete the review process,” Keith Margetson said. “I didn’t complete the review process because I am retiring.”
On Louis Plung, the PCAOB said QC deficiencies were related to independence, testing certain assets, communications with audit committees and EQR.
The inspection report date is February 2021, and the inspection year is 2019. At the onset of inspections, the firm had two publicly traded-company audit clients. The PCAOB reviewed two audits and identified deficiencies in both.
“At Louis Plung & Company, we take the quality of our audits very seriously,” the firm said in an emailed statement. “The engagement partner on the issuer audit work has been separated from the firm since 2020. In addition, issuer clients in which the firm was the principal auditor listed in the inspection reports are no longer clients of the firm. We have not been the principal auditor on any issuer clients since the engagement partner’s separation.”
The two other firms did not respond to requests for comment.
This article originally appeared in the July 20, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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