BDO USA’s 2023 PCAOB inspection is out and Financial Times‘ article about it is pretty dark. Their headline says BDO “sinks to bottom of US audit quality league table” among the six largest audit firms in the US but really, they sunk under the table and through the floor. It’s a sad day when Grant Thornton outperforms you by a long shot. GT may have racked up deficiencies in more than half of audits inspected this inspection cycle (54%) but that’s nowhere near BDO’s humiliating 86%. We couldn’t tell you the last time we saw a deficiency rate that bad for a top six firm. To be fair, everyone did sort of bad this time around.
We knew this was coming. In July, BDO put out a damage control press release that used words like “continuous improvement” and promised the firm implemented “multiple strategic initiatives” to strengthen audit quality and build trust and confidence in the capital markets. In other words, “We really bungled this and the one before it wasn’t great either but pinky swear, we’re doing better. Trust us.”
So what’s the total damage? 25 out of 29 audits inspected scored Part I.A. deficiencies.
Oftentimes, and rightfully, we criticize the PCAOB for excessive paper-pushing and nitpicking but in this case, one issuer restated its financial statements to correct misstatements and in another audit, an issuer revised its report on internal controls over financial reporting (ICFR). In both cases, BDO revised its opinion and in the latter case, the firm expressed an adverse opinion. 2022 and 2021 also had some mess to be cleaned up:
In addition, in connection with our 2022 inspection procedures for two other audits, the issuer corrected a misstatement in a disclosure or an omission of a required disclosure in a subsequent filing. Our 2022 inspection procedures also involved one audit for which the issuer, unrelated to our review, revised its report on ICFR and the firm revised its opinion on the effectiveness of the issuer’s ICFR to express an adverse opinion and reissued its report.
Our 2021 inspection procedures involved one audit of an issuer that was formed by a merger between a non-public operating company and a special purpose acquisition company (SPAC) for which the issuer, unrelated to our review, restated its financial statements to correct a misstatement and the firm revised and reissued its report on the financial statements.
The most common Part I.A deficiencies in 2023 related to identifying controls related to a significant account or relevant assertion, performing substantive testing to address a risk of material misstatement, and testing the design or operating effectiveness of controls selected for testing. The Part I.B deficiencies in 2023 related to consideration of fraud, retention of audit documentation, audit committee communications, risk assessment, the firm’s audit report, management communications, critical audit matters, and Form AP.
We propose the PCAOB add a new data point to its inspections and public reports: What percentage of audit work is performed offshore. Hell, throw in what kind of work it is, too.
Revenue and related accounts tripped BDO up the most followed by inventory, business combinations, and finally goodwill and intangible assets. At least they’ve gotten better at goodwill.
We don’t need to cover each deficiency but Issuer A is worth a look, a health care client that went on to restate its financial statements in connection with the PCAOB inspection:
With respect to Revenue:
The issuer recorded revenue at the time its services were provided to its customers. The firm did not perform any substantive procedures to test whether the performance obligation had been fully satisfied before revenue was recognized. (AS 2301.08)
The firm used information produced by the issuer in its testing of transaction prices, but did not perform any procedures to test, or test any controls over, the accuracy and/or completeness of certain of this information. (AS 1105.10)With respect to Warrants:
During the year, the issuer issued warrants that were recorded as liabilities. The firm did not identify and evaluate misstatements in the fair value measurement of these warrants. (AS 2810.30)
In connection with our review, the issuer reevaluated its accounting for these warrants and concluded that misstatements existed that had not been previously identified. The issuer subsequently corrected these misstatements in a restatement of its financial statements, and the firm revised and reissued its report on the financial statements.
In its response to the PCAOB inspection, BDO linked their 2023 Audit Quality report and said the “numerous investments” they’ve made in improving audit quality can be found there.
Better luck next time.
The full 2023 PCAOB inspection of BDO USA, P.C. can be found here [PDF]
BDO is a complete and total disaster
BDO senior executives were massively distracted with stuffing their pockets from either a PE deal or the LBO disguised as an ESOP they ultimately chose. Touted for all of 2021 and 2022 how much they saved by eliminating expensive training. Now the only thing that matters is trying to keep their head above water for covenants that seemed reasonable at the time, which means no room to invest in legitimate improvements. It’s time for us to bow out of public work voluntarily before the PCOAB makes us.
That kind of non-performance is effectively a professional disaster. That said, are there any firms that are now actually performing at anything close to an A or B level in their audits?
It seems that every one of the big firms are being named in governmental and financial regulatory actions in multiple countries for audit failures and in too many cases complicity in enabling fraudulent financial reporting by their clients/