Most of you are acutely aware that PCAOB inspection reports, while chock full of interesting tidbits, are a little anti-climactic since we never learn who the auditees are. Oh sure, we can speculate until our heart’s content but the PCAOB says they took a vow of silence after 43 struck his signature on Sarbanes-Oxley.

The secrecy is frustrating (read: bor-ing) so it was especially cool to see Jonathan Weil let the cat out of the bag on at least one Big 4 client:

Two weeks ago,Accounting Oversight Board released its triennial inspection report on the Hamilton, Bermuda-based affiliate of KPMG, the Big Four accounting firm. And it was an ugly one. In one of the audits performed by KPMG- Bermuda, the board said its inspection staff had identified an audit deficiency so significant that it appeared “the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”

This being the hopelessly timid PCAOB, however, the report didn’t say whose audit KPMG-Bermuda had blown. That’s because the agency, as a matter of policy, refuses to name companies where its inspectors have found botched audits. It just goes to show that the PCAOB’s first priority isn’t “to protect the interests of investors,” as the board’s motto goes. Rather, it is to protect the dirty little secrets of the accounting firms and their corporate audit clients.

That’s why it gives me great pleasure to be able to break the following bit of news: The unnamed company cited in KPMG- Bermuda’s inspection report was Alterra Capital Holdings Ltd. (ALTE), a Hamilton-based insurance company with a $2.3 billion stock- market value, which used to be known as Max Capital Group Ltd.

Using his detective skills, Weil pieced together the number clients KPMG Bermuda had inspected, the timing of said inspections and the details of the audit deficiency (“the failure to perform sufficient procedures to test the estimated fair value of certain available-for-sale securities”) to come up with Alterra. Of course no one – the PCAOB, KPMG Bermuda or Alterra – would comment/confirm for Weil’s column but you probably knew that was coming. Nevertheless, JW gets into the how bad of an audit this really was:

It’s when you look at Alterra’s financial statements that the magnitude of KPMG-Bermuda’s screw-up becomes apparent. Available-for-sale securities are the single biggest line item on Alterra’s balance sheet. They represented almost half of the company’s $7.3 billion of total assets as of Dec. 31, 2008, and a little more than half of its $9.9 billion of total assets at the end of last year.

This sort of screw-up, some might argue, falls somewhere in the range of “horrendously bad” and “really fucking bad” and Weil wonders if Alterra shareholders will have the stones to throw the bums out at the shareholders meeting on May 2. We can’t say where any of the shareholders stand on the usefulness (or lack thereof) of the audit report, so maybe this revelation is NBD to them. But if that is the case, it seems to make an even stronger case for the irrelevancy of auditors.

Weil’s larger point is that the PCAOB continues to hide behind their policies that are supposed to protect investors but in reality come off as talking points, not so unlike the firms they regulate. The PCAOB says they’re working on that but we’ll have to wait until summer to find out how crazy things get and whether it will be enough to shove auditors back into some respectability.

Dirty Little Secret Outed in Bermuda Blunder [Jonathan Weil/Bloomberg]

UPDATE:
Alterra cops to it with an 8-K that was filed about 90 minutes ago:

Alterra is aware of a recently issued report by the Public Company Accounting Oversight Board (the “PCAOB”) related to the PCAOB’s review of KPMG Bermuda’s 2008 audit files of a public company client located Bermuda, as well as an article posted on Bloomberg that indicates that the public company client is Alterra (formerly Max Capital Group Ltd.). Alterra confirms that it is the client referenced in the PCAOB’s report.

The PCAOB report findings question the sufficiency of procedures performed by KPMG Bermuda in its audit of Alterra’s estimated fair value of certain available-for-sale securities as promulgated by generally accepted audit standards (“GAAS”). The PCAOB report questioned whether the audit procedures used by KPMG Bermuda in 2008 to verify such values were sufficient. The PCAOB report does not question the appropriateness of the values that Alterra attributed to assets available-for-sale in 2008.

Alterra notes that the PCAOB made substantially similar findings in a number of inspections of 2008 and 2009 audits performed by the larger accounting firms and, since 2008, we understand the firms have issued additional guidance to clarify the work to be completed on the audit of fair value investments.

KPMG Bermuda has represented to Alterra and its Audit Committee that it believes it properly and appropriately followed GAAS as defined at the time of the audit. KPMG Bermuda confirmed in its response to the PCAOB report that “none of the matters identified by the PCAOB required the reissuance of any of our previously issued reports.” Alterra reaffirms its belief that the asset values ascribed to its available-for-sale securities in 2008 and subsequent periods remain appropriate.

KPMG Bermuda issued an unqualified opinion for Alterra’s year end financial statements for each of 2008, 2009 and 2010.