Big Four of accounting 'let clients distort facts'

Published on Monday 30 August 2004 12:15

THE Big Four accounting firms wrongly let some corporate clients understate liabilities and distort their financial health in their 2003 accounts, America’s regulatory body for auditors said in a report.

The Public Company Accounting Oversight Board, in its first examination of the audit industry, said the Big Four misinterpreted one nine-year-old rule.

Among other faults found were inadequate documentation, mistaken calculation of shares and deferred taxes, and underestimation of some contingent liabilities.

Created two years ago to tighten governance of the industry after several accounting scandals rocked corporate America, the PCAOB assessed audits by PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte & Touche.

PCAOB, appointed by the United States Securities and Exchange Commission, has the power to regulate and discipline US audit firms. It examined policies, practices and procedures in auditing clients’ books, and found the firms allowed clients to incorrectly classify some debt as a long-term liability.

By not properly classifying the debt, companies understated current liabilities and overstated working capital, distorting the financial position of the company to look stronger than it should have.

The guideline, set in place nine years ago, relates to revolving lines of credit agreements under which a company’s balances are classified as current liabilities if the agreement contains certain clauses.

The US audit industry came under harsh scrutiny after auditor Arthur Andersen collapsed when it was discovered it did little to stop accounting fraud at bankrupt energy trader Enron Corp.

Despite the findings, head of the PCAOB William McDonough, a former chief of the New York Federal Reserve Bank, said: "None of our findings have shaken our belief that these firms are capable of the highest quality auditing."

Michael Stevenson, PCAOB’s associate general counsel, refused to comment on possible disciplinary penalties.

Donald Nicolaisen, chief accountant at US regulator the Securities and Exchange Commission, said: "Each of the four firms need to improve the quality of their audits."