PricewaterhouseCoopers is under attack.

For example, questions are starting to be raised about whether the world’s largest auditing firm should be held partly responsible for the accounting misdeeds at American International Group, its client of 30 years.

So far, the auditor does not appear to be the target of an official investigation and no one has accused it of any wrong doing.

However, Reuters reported that the Securities and Exchange Commission has subpoenaed PwC as part of a larger investigation into AIG’s accounting.

The AIG scandal is playing out at the same time that the folks at proxy research firm Glass Lewis found in a study that a disproportionately high number of PwC clients recently sought an extra 15 days to report their year-end results.

According to a recent report that highlighted nearly 300 companies that filed for extensions, 99 or 35 percent of the total late filers are clients of PwC. This is more than double the 42 (15 percent) that are clients of Deloitte & Touche, the auditor with the second largest number of tardy clients.

Ernst & Young only had 26 late filing clients while KPMG just 20.

This is no one-time fluke. PwC audited 47 percent, 46 percent and 46 percent of the late filers in the first, second and third quarters, respectively, according to Glass Lewis.

Important Indicator?

Of course, PwC has the largest number of publicly traded clients. According to Public Accounting Report, PwC has 3,234 clients, Ernst & Young has 2,856, KPMG, 1,893 and Deloitte, 1,296. “PwC does audit a higher percentage of public companies,” Glass Lewis acknowledges in its report highlighting the year-end late filers. So, naturally it would have more late filers.

Livnat

PwC also points out in an email response that it audits a higher percentage of $100 million-plus companies than the other firms. “If it is also the auditor of 35 percent of the late filers, it could be a reflection of its share of publicly listed companies,” asserts Joshua Livnat, professor of accounting at NYU's Stern School of Business, who is currently involved in an exhaustive research project that is examining 40,000 late filings going back to 1993.

Cheffers

Mark Cheffers, CEO of AuditAnalytics, however, says E&Y audits the same number of companies as PwC in the $100 million-plus category.

So, when it comes to auditing late filers, size is not the only thing that matters. GL adds in its report, “It appears this does not account for the significantly higher rate of non-filers among companies audited by PwC. In our opinion this raises a question as to which auditing firm has the highest quality process for risk assessment for client acceptance.”

Indeed, nearly 3.1 percent of PwC’s clients sought an extension. This compares with 1 percent of KPMG’s and less than 1 percent of E&Y’s clients.

In fact, 3.2 percent of Deloitte’s clients wound up asking for more time, a larger percentage of its clients that PwC’s.

Turner

Noting how KPMG’s and E&Y’s numbers were running significantly lower than their two huge peers, Lynn Turner, managing director of research, at Glass Lewis and former chief accountant of the Securities and Exchange Commission asserts, “I do believe that is an important indicator that perhaps these two firms do a better job of selecting the companies they audit.”

Turner, though, doesn’t generally fault a company if it consciously chose to accept higher-risk clients as a business strategy. He simply says they must put in place procedures, controls and expertise to deal with this increased risk.

“If they have the right people on the engagement and they are compensated for this higher risk, they can say they have taken on a lot more risk but have taken steps to deal with it,” he adds.

In email statements, Raymond Bromark, the PwC partner in charge of technical, risk and quality, said “The 15-day extension is a reasonable and practical way to ensure that the capital markets get timely and accurate data. [We] don't see a correlation between the risk profile of an audit client and a company taking advantage of the automatic filing extension."

Meanwhile, in a separate study, Compliance Week found at least two dozen companies with market caps that exceed $100 million wound up missing the March 31 extended deadline and asked for even more time to report their year-end results.

Of those companies, exactly half are PwC clients and another six—or 25 percent—are Deloitte clients.

In virtually every case, the companies had still not completed a previously announced restatement or their work required by Section 404 of Sarbanes-Oxley.

Many of these companies are on the smallish side—just several hundred million dollars in market caps.

But two of PwC’s clients that missed both deadlines include high profile companies like AIG, which is currently embroiled in a large and possibly growing accounting scandal, and Eastman Kodak, which, like AIG, plans to restate its financials.

Meanwhile, PwC’s clients also account for the largest number of companies that recently restated their results, according to a recent analysis by AuditAnalytics.com, an independent research provider.

Over the past six months, 115 PwC clients restated their results compared to an average of 75 for the other three major auditing firms, according to Cheffers of AuditAnalytics. “One could argue that PwC has been looking long and hard at their clients’ accounting and caused more restatements to be made,” he explains. “Also, it could be that it has higher risk clients. I could see a relationship between the higher number of restatements and late filers.”

GL’s Turner says his firm is finishing up what he calls “the most comprehensive analysis of restatements,” which among other things found that Deloitte was involved in a higher number of revisions than even PwC.

When it comes to restatements, however, Turner insists you can’t judge an auditor by how many of its clients must revise their numbers. “Unless you work in the firm’s national office, you can’t make the conclusion which firm has done a better job,” the one that forced its client to restate or the one that doesn’t.

Interestingly, AuditAnalytics also recently analyzed the companies that have so far reported material weaknesses in their internal controls. In this case, the percentage of material weakness firms as a percentage of the Big Four’s total clients range between 4 percent and 6 percent, Cheffers notes. He adds: “The numbers are not dramatic.”

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