The Journal The Authority on Global Business in Japan

Quality of service is generally evaluated by the beneficiaries. When it comes to auditing and assurance services provided by public accounting firms, purpose and results determine who that may be. When management presents business results to the board and shareholders, the beneficiary of the audit is the management. When shareholders and investors compare business results with financial statements, they are the beneficiaries.

To assist in evaluating service quality, accounting firms provide detailed reports of internal control findings, recommendations, and result summaries to their clients. Shareholders and investors outside a company generally have limited access to detailed audit results, but can still reach out to inspection reports from The Public Company Accounting Oversight Board (PCAOB) to understand the accounting firm’s service quality. The Sarbanes-Oxley Act, passed by the US Congress in 2002, authorizes the PCAOB to inspect registered firms to ensure compliance with certain laws, rules, and professional standards.

According to reports available on the PCAOB website as of the end of January 2017, PCAOB found deficiencies when inspecting more than 50 issuer audits for Big Four firms, 30 for Grant Thornton, 20 for BDO, and 10 each for Crowe Horwath and McGladrey (Figure 1). The ratio is not fully indicative of a firm’s service quality, but does provide a key to how it is perceived.

These deficiencies can be categorized into an audit for internal control over financial reporting (ICFR audit) and an audit for financial statements (FS audit), as shown in Figure 2. These numbers show audit engagements in which deficiencies were found. More than 60 percent of audit engagements found to have deficiencies had them on both ICFR and FS audits.

The results suggest that, when it comes to quality, the capability of the audit engagement team is more important than an accounting firms brand or reputation.

*These numbers do not include deficiencies at three firms for which inspection reports have not yet been disclosed. (Inspection and deficiency data was extracted from PCAOB reports available as of the end of January 2017.)

For more information, please contact your Grant Thornton representative at +81 (0)3 5770 8829 or email Toru Shirai at toru.shirai@jp.gt.com
www.grantthornton.jp/en

Toru Shirai is a senior manager at the Tokyo office of Grant Thornton Japan