PCAOB Reports On Second-Tier Firms, Improvements Made, But Still High Failure Rate

The PCAOB says Chicago-based Crowe Horwath (FY13 net revenue of $599 million) failed to properly audit half of the audits that inspectors studied in their 2012 inspections.

The board’s recently published 2012 inspection report on Crowe says inspectors selected 12 audits for the annual review and found deficiencies that are significant enough to call failures in six of them. That’s an improvement over the firm’s earlier failure rates – 62% in both 2011 and 2010.

It also improves Crowe’s standing among the major firms that are inspected annually by the PCAOB. Since 2009, Crowe has had the highest failure rate of the Big 4 and second-tier firms, which audit the vast majority of U.S. public companies. For the 2012 inspection cycle, Chicago-based Grant Thornton (FY12 net revenue of $1.2 billion) and Chicago-based BDO USA (FY13 net revenue of $683 million) turned in higher failure rates, at 65% and 55% respectively. McGladrey’s 2012 report is the only report for the major firms that is not yet published.

The PCAOB says Crowe failed in four of the six deficient audits to adequately check internal controls over financial reporting, a common theme throughout inspection reports among the major firms. In two cases, Crowe failed to properly respond to risks of material misstatement, inspectors said, while the firm recorded one failure each in auditing estimates, sampling, and identifying and assessing risks of material misstatement.

In a letter attached to the inspection findings, Crowe offered no objection to the findings and says it has taken appropriate follow-up measures related to each of the criticisms. “While we are pleased that we improved from the previous two years, we are still not satisfied with the results and are using this constructive criticism to make improvements in processes and procedures,” says Rick Ueltschy, MP of Crowe Horwath, in a prepared statement. “We continue to revise and expand our audit procedures and training, and are always taking steps to improve our audit quality. We welcome the input from the PCAOB.”