Major accounting firms that are supposed to perform audits on big banks and other public companies may have played a role in creating the credit crisis. The Public Company Accounting Oversight Board (the “Board”) found evidence that at least one of the Big Four firms routinely performed flawed audits on banks. According to a harshly critical report by the Board, Deloitte & Touche failed to check assumptions and was overly reliant on bank management’s assertions of what was proper. The Board’s report stated in part that Deloitte’s audit flaws were the result of “a firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis analysis and collection of objective evidence, and that rely largely on management representations.” See “Audit Flaws Revealed, At Long Last,” by Floyd Norris (New York Times).
The Board issued a censored version of its report over three years ago. The full report is only now coming to light. This is because the Sarbanes-Oxley law that created the Board contains delaying provisions to protect the public images of the accounting firms that override the public’s right to know.
The Board found flaws in 44% (27 of 61) audits done by Deloitte. Deloitte’s response to the Board’s findings was dismissive. Deloitte did not like the Board’s “second guessing” and said “we strongly take exception” to the Board’s conclusion about its firm culture. “By protesting that it was unfair to criticize Deloitte’s culture, the firm may have spoken volumes about that culture,” according to the article. Deloitte’s response to the Board was not signed by an individual, but was from “the firm.”
It appears that Deloitte’s culture was to pull together and back a partner criticized by a regulator. “Would the culture provide similar backing for a partner who angered a client’s management by forcing changes in financial statements that the company did not like?”
The secrecy that preserved Deloitte’s reputation for over three years may have the unintended consequences of raising doubts about other accounting firms. Did flaws in other firms’ audits approach 44%?
The secrecy misled the public and Deloitte’s other clients for over three years.
Congress should change the law to require: (1) that full, unredacted inspection reports be released immediately, (2) that enforcement actions are made public when they are filed, and (3) that responses to the Board be signed by the partner(s) responsible for the audit(s) flagged by the Board, with a statement from the CEO approving the response.