PCAOB Releases Part II of BDO’s 2019 Inspection Report

On July 23, the Public Company Accounting Oversight Board released previously nonpublic portions of BDO USA’s 2019 inspection report. Board criticisms of a firm’s quality control system appear in Part II of its inspection report, and, under the Sarbanes-Oxley Act, Part II is nonpublic when the report is issued. If the firm does not, in the PCAOB’s view, satisfactorily address a quality control criticism within 12 months of the report date, the Board makes the criticism public.

The now-public quality control criticisms in BDO’s 2019 inspection report relate to five aspects of the firm’s system of quality control:

• Application of Professional Skepticism.  The PCAOB states that “the firm’s system of quality control does not provide reasonable assurance that the firm’s personnel will appropriately exercise the professional skepticism required by PCAOB standards in the performance of issuer audits.”  In the inspection, the PCAOB staff found deficiencies in five audits that “appeared to have been caused, at least in part, by the firm’s personnel not appropriately exercising professional skepticism.”

• Testing Controls.  The inspection results indicated that BDO’s system of quality control does not provide reasonable assurance that the work performed by the firm’s personnel with respect to testing controls will meet the requirements of the Board’s auditing standards. The inspection team identified deficiencies in the firm's control testing in three areas: Identifying and testing controls that address risks of material misstatement, testing controls that include a review element, and identifying and testing controls over the accuracy and completeness of data or reports.

• Supervision of the Audit.  The 2019 inspection results indicated that BDO's quality control system did not provide reasonable assurance that “the supervisory activities, including reviews of audit work, performed by the firm's engagement partners will meet the requirements of AS 1201, Supervision of the Audit Engagement. In nine audits, the inspection team “identified one or more deficiencies that the engagement partner should have identified and appropriately addressed but did not.”

• Engagement Quality Review.  The inspection results indicated that BDO's system of quality control did not provide reasonable assurance that engagement quality review (“EQR”) partners would perform the procedures required by the Board’s EQR standard.  In six audits, the inspection team identified one or more deficiencies in an area that the standard required the EQR partner to evaluate.

• Policies for Financial Holdings Disclosures.  The 2019 inspection report states that BDO’s system of quality control did not provide reasonable assurance that firm personnel comply with BDO’s policies and procedures concerning independence-related regulatory requirements. BDO conducts periodic audits of a sample of its personnel to monitor compliance with firm independence policies. In reviews BDO conducted during the nine months ending June 30, 2019, the firm found that 35 percent of partners and 26 percent of managers and directors it audited had not reported financial relationships that firm policies required them to report.

The date of BDO’s 2019 inspection report is December 17, 2020. Therefore, the PCAOB’s disclosure of the above-described portions of the 2019 report indicates that BDO failed to persuade the PCAOB that, as of December 17, 2021, it had satisfactorily remediated the deficiencies.

These quality control deficiencies appear to be chronic challenges for BDO.  Except for the criticism regarding financial holding disclosures, the quality control deficiencies that the PCAOB found in its 2019 inspection of BDO and has now made public are similar to deficiencies that the Board identified and discussed in its 2018 and 2017 BDO inspections.  The PCAOB has previously made those deficiencies public because they were not remediated in response to the earlier inspections.

Audit committees of BDO clients may want to discuss with their engagement partner how the firm is addressing these matters, changes it has made since the PCAOB’s determination that the firm had not remediated the deficiencies, and whether the deficiencies might have affected the company’s audit.