Two more Big 4 firms took new criticism from the Public Company Accounting Oversight Board after the board published 2012 inspection reports for KPMG and PwC.

KPMG got a failing grade on 17 of 50 audits inspected by the PCAOB for an overall failure rate of 34 percent, up from a 22.60-percent failure rate in 2011. PwC took heat for 21 of 54 audits inspected for a rate of 38.9 percent, down only barely from last year's rate of 41.3 percent. Among the Big 4, EY turned in the worst rate of 2012 at 48 percent while Deloitte fared the best at 25 percent. Deloitte is the only Big 4 firm to register a significant improvement from 2011 to 2012, perhaps explaining what PCAOB member Jeannette Franzel meant when she said recently the board is seeing "limited improvement" in inspection results.

Inspectors hit KPMG the hardest for failures to properly audit internal control over financial reporting. Inspectors found problems with 14 of the firm's audits in that area alone. The board also took KPMG to task over its compliance with Auditing Standard No. 13, The Auditor's Response to the Risks of Material Misstatement, finding problems in nine separate audits. inspectors noted a handful of instances where the firm identified fraud risks, but failed to complete audit procedures that addressed the heightened risk. In terms of accounting issues, the PCAOB says the firm failed in a number of respects to properly audit revenue recognition, allowance for loan losses, valuations of securities, inventory, and others.

In its letter to inspectors attached to the report, KPMG Chairman and CEO John Veihmeyer and audit Vice Chair James Liddy, tell inspectors they evaluated the matters identified in the draft report and addressed the engagement-specific findings in a manner consistent with PCAOB auditing standards and KPMG policies and procedures. “We understand our responsibility to the capital markets and are committed to continually improving our firm and working constructively with the PCAOB to improve audit quality,” they wrote. In an additional statement, KPMG says since 2003, the PCAOB's inspection process has played an important role in helping the firm identify areas to enhance performance and strengthen its system of audit quality control.

At PwC, inspectors noted 19 instances where the firm failed to properly audit internal control, and nine cases where the firm failed to properly audit accounting estimates. Inspectors called out seven audits where the firm failed to fully audit fair value measurements and disclosures, and only five cases where auditors failed to properly respond adequately to risks of material misstatements. 

PwC's written response to the PCAOB, signed by US Chairman Bob Mortiz and US Assurance Practice leader Vincent Colman, conveys a bit of pushback to the inspection findings. “We believe that as with any audit process, judgments are necessarily involved in the inspection process and professionals can reach different conclusions about the adequacy of audit evidence in a particular circumstance,” they wrote. Where the firm saw such differences, “they generally related to the significance of the observation in relation to the audit evidence taken as a whole rather than the specific nature of the observation. So, while we may disagree with the significance of inspection observations in certain cases, we have taken all of the board's observations into account in formulating our plan to continuously improve audit quality.”

In a separate statement, Colman says audit quality is the firm's top priority, “and we are committed to continuing our significant audit quality investments.” He says the firm's investments and efforts internally have enhanced audit quality overall at the firm.