BDO Is in Damage Control Mode

The other day, BDO USA released a press release entitled “BDO Strengthens Audit Quality Commitment with Addition of Second Independent Member on Audit Quality Advisory Council,” the content of which strongly suggests that their next Public Company Accounting Oversight Board (PCAOB) inspection is going to be hot garbage. No, not suggests. Confesses.

Here’s what they said:

BDO’s 2023 Audit Quality Report

BDO’s commitment to quality – and a mindset of continuous improvement – reflects the firm’s core purpose and values as well as its ongoing efforts to engage in important and constructive dialogue with stakeholders, including investors, regulators, audit committees and clients.

In BDO’s 2023 Audit Quality Report, the firm shares how the implementation of multiple strategic initiatives strengthens audit quality and builds trust and confidence in the capital markets. These initiatives, building on the strategic foundation set in 2022, are multifaceted and interdependent. The firm is working to ensure changes are not only embraced by BDO professionals but embedded in processes, decisions and daily work. BDO’s leadership and professionals are engaged in this journey and are committed to audit quality excellence in the pursuit of a sustainable and resilient business that serves the interest of the capital markets.

BDO has made numerous investments to improve the quality of its audits over the past two years, including, among others, the deployment of a reimagined approach to learning, an enhanced approach to audit phasing, the implementation of a new methodology enablement group, the continued nationalization and standardization of its assurance practice, as well as the continued expansion of its digital audit suite. To learn more about these initiatives, see BDO’s 2023 Audit Quality Report.

TLDR: We’re getting better. Promise.

BDO racked up deficiencies for more than half of the audits inspected by the PCAOB for its 2021 inspection report. Here’s what we wrote at that time:

Terrible PCAOB inspection reports are par for the course for BDO lately. For the second straight inspection cycle, the PCAOB found significant mistakes in more BDO audits than ones without (16 out of 30 in 2021 and 13 out of 24 in 2020). As a result, BDO followed its 54.2% failure rate in its 2020 inspection report with a failure rate of 53.3% in 2021.

For 2021 inspections, six audits had problems in both internal control over financial reporting and in the financial statement, nine had deficiencies in the financial statement only, and one ICFR audit wasn’t up to snuff.

The news release also mentioned the firm has added PCAOB alum John Fiebig as the second independent member to BDO’s Audit Quality Advisory Council (AQAC), established in 2022. Fiebig is founder of ADIGEO Consulting, LLC — “a consulting firm focused on advancing audit quality for the benefit of strong capital markets” — and prior to that was senior deputy director and program leader for the Global Network Firm Program at the PCAOB.

Bloomberg Tax wrote about the press release when it came out and has now followed up with this article: BDO Pares Back Clients, Reforms Audit Practice to Boost Quality. Resident accounting firm watcher Amanda Iacone writes:

In the past few years BDO, among the six largest audit firms in the country, has restructured its audit practice, shrunk its book of public company clients, and launched a new learning program meant to train entire audit teams. It’s also aiming to frontload more work for its auditors to ease the burdens of the busy annual report filing season.

“Humans work a lot better when they have time to think and they’re not dealing with battlefield conditions,” Lillian Ceynowa, BDO’s national managing principal of audit quality, said in an interview with Bloomberg Tax.

Oh the poor India team. See: Rise Up! BDO USA Is Gonna Double Its Offshore Workforce, Mostly in India

Ceynowa said the changes are meant to improve regulatory inspection results and to remake the firm’s culture and shift auditor behavior.

“We are moving in the right direction,” she said, though predicting the firm’s progress won’t pay dividends until BDO’s current 2024 inspection results are published.

The next inspection report coming out will be for 2022. And, as mentioned above, it will have to be significantly worse than the last deficiency rate of 53.3% to prompt a press release that reaffirms a commitment to audit quality.

But wait! There’s more!

BDO is also considering updates to its audit methodology and a revamp of the core platform that auditors use every day. Last year, the firm began to shift the calendar for its audits, aiming for the bulk of its work to be completed before a client’s fiscal year ends.

Those changes won’t erase the strains of the busy annual report filing season but are meant to carve out more time for staff to research decisions or dig into red flags. Completing more work earlier in the audit also could help lead to fewer inspection findings, Ceynowa said.

A source of ours postulates there’s some kind of big regulatory settlement coming down the pike, we’ll just have to wait to see if that prediction materializes.

BDO Pares Back Clients, Reforms Audit Practice to Boost Quality [Bloomberg Tax]