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September 26, 2023

Hey Look, McGladrey’s PCAOB Inspection Wasn’t So Good

The PCAOB released its inspection report for the accounting firm soon-to-be-formerly-known-as McGladrey yesterday and it's not the best but it's not the worst, either. Out of 15 audits selected, the inspectors found deficiencies in 7 of them. Most of the issues related to AS No. 5 and AS No. 13. It's all pretty shrug but I pulled out a couple of handy tables that give it the issues a little more color:

Okay, so there were some problems with auditing inventory on Issuer A. Here's an interesting paragraph about that:

With respect to the existence of raw materials held at issuer locations, the Firm failed to observe or perform procedures on any of the issuer's cycle counts. Specifically, the Firm was not present to observe any cycle counts and failed to test the issuer's procedures or methods to evaluate whether they were sufficiently reliable to produce results substantially the same as those that would have been obtained by a count of all items each year 

Am I crazy to think that this is strange? Isn't observing an inventory count a pretty easy thing to do because all you have to do is, uh, show up? I'm sure there are circumstances where showing up might be difficult, like, if the inventory were on the Moon or the bottom of the ocean or something. Did someone call in sick at the last minute? I don't know, just seems weird.

Here's another table that goes well with the one above:

Alright, so Issuer A is a healthcare company, noted. But also, apparently AS No. 5 in financial services is especially problematic, most notably Issuer B where the firm fell short on testing the controls around IT "that supported one of the core banking functions" but also "the existence and completeness of loans," allowance for loan losses, and investment securities. 

I guess what these tables show is that the inspection reports have far more useful information in them than they used to. Or maybe it's the presentation. I am in no way suggesting that they're user friendly (because they're not) but if someone really wants to go digging, they might be able to get a pretty good idea of which issuers have dodgiest audits. Of course if the PCAOB just told us who the issuers were, we wouldn't have this problem, but that's a discussion for another day.

Anyway, let's look at the scoreboard of deficiency rates:

There are some big names coming, so stay tuned. We know how much you love discussing these.


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