Blown audit opinions
Yesterday we discussed PCAOB inspection reports and one question that remains unanswered, I think, is: What is an acceptable deficiency rate? For some people, anything greater than 0 is unacceptable, but for Big 4 firms, I'm sure they'd be happy keeping it below 20%.
One other finding of these inspections that is often overlooked is blown audit opinions. That is, audits that are deficient enough that an opinion is changed. Tammy Whitehouse of Compliance Week picked up on those, mostly notably for PwC:
[T]wo of the firm’s 12 deficient audits ended up in restatement after the PCAOB spotted problems, and PwC revised its opinion on internal control in six cases.
That means at least half of the PwC audits flagged by the PCAOB had failures so serious the audit opinion itself was not even reliable.
After its 2014 inspection, one PwC client restated and the firm issued four revised opinions on internal control. The firm’s 2013 inspection led to four restatements and five revised internal control opinions.
Now the quesiton is, what's an acceptable number of restatements and revised opinions? Again, I think lots of people would like those to be 0. Whitehouse writes that, "Across all firms in restatements more broadly, PwC and EY generally are connected to higher rates of restatement as well." It's worth noting that those "higher rates of restatement" for PwC and EY were just over 1% of their audit engagements for 2015.
All of this reminds me of how futile the concept of "audit quality" is. Sure, there are lots and lots of words written on the subject, but who reads those words? Does anyone care? This is auditing, so you should try to make it easy for people so they can care. Give them a grade or a score or some easy-to-understand assessment or metric. Make firms post it in a conspicuous place so people know what kind of audit they are getting. If there are cockroaches scurrying around these audits, regular people should know.
Elsewhere in PCAOB fun: Grant Thornton's 2014 inspection report was released yesterday, the last of the 8 largest firms. The collective deficiency rate of those firms for 2014 was 38%.
SEC comment letters
Here's a story about Visa's chief accounting officer, James Hoffmeister, and his can-do attitude when it comes to SEC comment letters. In the case of Visa, they were one of 166 companies that received questions about their custom accounting metrics:
Visa received a comment letter in March, kicking off a four-letter exchange that concluded in June and became public in early July. Mr. Hoffmeister said he called together a team that included his controller, the company’s internal and external legal counsel and Visa’s external accountants, KPMG, to craft a response.
“Every company gets [comment letters] on a periodic basis, so it’s inevitable that you’re going to get them,” Mr. Hoffmeister said. “Whenever we get one of these letters, I take it as an opportunity to take a second look at what we’re doing and if we can get better.”
Mr. Hoffmeister spent a couple of years at the SEC as professional accounting fellow so I'm not so sure every accounting department will have such an optimistic view on dealing with its regulator:
“They raised good points and I think our disclosures are better for it,” he said.
Has Donald Trump released his tax returns?
Nope! And Mark Cuban thinks he knows why, so naturally, he took his theory to Twitter. Cuban used Trump's testimony from a deposition to explain why DJT's use of S-Corporations might be the reason he's not releasing his returns:
"His personal tax returns would show the financial performance of his development projects," Cuban wrote. "Not good given how much he gets sued."
"It may also explain why reducing pass-through taxes is important to him," he continued. "I say 'may' because taxes are only paid if he makes a profit."
This isn't a bad theory! An 1120S would be filed for every year fir each ongoing project. Trump would get a K-1 for every return filed and, generally speaking, a person could get a decent idea if it was successful or not based on the amount of income he recognized from each project. I'm sure those of you that are pass-through experts can poke holes in this, but for now it's the best hunch I've read.
Elsewhere in DJT tax returns: Enough people thought that Bill Maher stole them off Trump's plane that the story got the Snopes treatment.
Previously, on Going Concern…
I wrote about how starting salaries in accounting keep going up.
In other news:
- PwC fined £2.3m over auditing of subprime lender
- Tim Cook, Apple Chief, Defends Tax Practices and Says Cash Will Return to U.S.
- Companies plan to hire—if they can find workers
- Facebook isn't Hooli
- Isis bans football referees in Syria because they enforce 'laws of Fifa not Sharia'
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