Fat Joe’s favorite audit firm once again had a spectacularly horrible PCAOB inspection report.
In the 2021 inspection of BDO USA, LLP, the PCAOB assessed the firm’s compliance with laws, rules, and professional standards applicable to the audits of public companies.
We selected for review 30 audits of issuers with fiscal years generally ending in 2020. For each issuer audit selected, we reviewed a portion of the audit. We also evaluated elements of the firm’s system of quality control.
We also selected for review two reviews of interim financial information (“interim reviews”). Our reviews were performed to gain a timely understanding of emerging financial reporting and auditing risks associated with issuers that were formed by mergers between non-public operating companies and special purpose acquisition companies (SPACs). We identified instances of non-compliance with PCAOB standards, which appear in Part I.B.
Sixteen of the 30 audits we reviewed in 2021 are included in Part I.A of this report due to the significance of the deficiencies identified. The identified deficiencies primarily related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts and expenses.
Terrible PCAOB inspection reports are par for the course for BDO lately. For the second straight inspection cycle, the PCAOB found significant mistakes in more BDO audits than ones without (16 out of 30 in 2021 and 13 out of 24 in 2020). As a result, BDO followed its 54.2% failure rate in its 2020 inspection report with a failure rate of 53.3% in 2021.
For 2021 inspections, six audits had problems in both internal control over financial reporting and in the financial statement, nine had deficiencies in the financial statement only, and one ICFR audit wasn’t up to snuff.
The most common Part I.A deficiencies related to evaluating the appropriateness of the issuer’s accounting method or disclosure, performing substantive testing to address a risk of material misstatement, testing the design or operating effectiveness of controls selected for testing, and testing controls over the accuracy and completeness of data or reports used in the operation of controls., according to the PCAOB.
The three main areas of the audit where the most errors were found included:
- Revenue and related accounts: The deficiencies in 2021 (as well as in 2020 and 2019) primarily related to substantive testing of, and testing controls over, revenue.
- Expenses: The deficiencies primarily related to substantive testing of expenses, including deficiencies in substantive analytical procedures performed to test expenses.
- Allowance for credit losses/Allowance for loan losses: The deficiencies in 2021 (as well as in 2020 and 2019) related to testing controls over the valuation of the allowance for credit losses or allowance for loan losses.
Of the seven audits of issuers in the financials sector, BDO botched five of them. BDO also failed four of its six audits of issuers in the consumer discretionary sector, three out of five audits in industrials, one out of two in consumer staples, one out of four in health care, one out of two in materials, and it flubbed its only audit of an issuer in real estate. But congrats to BDO auditors for making no screw ups in their three audits of issuers in the IT sector.
The House of Berson did announce last May that it was doing some stuff to improve the quality of its auditing. First, it formed an Audit Quality Advisory Council. Then the firm said it had reorganized its assurance practice into two distinct functional areas and reporting structures. BDO said the purpose of the reorganization was “to consolidate the operational, professional, and client services under one umbrella and to implement an objective governance structure focused on delivering high-quality audits to protect investors and further the public interest.”
Time will tell if any of that will make BDO less shitty at auditing. The firm’s latest inspection report is below for your amusement.
Why did the PCAOB inspect 30 of BDO’s audits? It inspects about 220 (4 x 55) Big Four (BF) audits. The “Little Three” (LT), i.e., BDO, GT and RSM audit about 1.5% of the market cap (MC) of all SEC registrants. The BF audit about 97%. If the PCAOB inspects about 30 audits for GT and RSM, we get 90 LT inspections. Hmm. 220 / 90 = 2.444; .97 / .015 = 64.67; 64.67 / 2.444 = 26.5. Why is the PCAOB inspecting BDO’s audits at 26.5X the rate it inspects BF audits? Is BDO 26.5X the threat to the capital markets per dollar of MC audited of the BF? Who is kidding whom?
Will the PCAOB ever find BF audits of major banks so deficient that it demands they be reaudited? If not, who needs it?
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