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Audit Watchdog Report Raps Ernst, KPMG
By David Reilly
The Wall Street Journal
Friday, January 12, 2007

In its final two inspection reports on 2004 corporate audits done by the country's biggest accounting firms, the Public Company Accounting Oversight Board yesterday criticized Ernst & Young LLP and KPMG LLP for failing to follow accounting rules or gather sufficient evidence for their judgments in a handful of audits.

The issuance of the reports by the PCAOB brings to a close its most recent reporting season on its annual inspections of the Big Four accounting firms -- PricewaterhouseCoopers LLP, Deloitte & Touche LLP, E&Y and KPMG.  PCAOB Chairman Mark Olson has acknowledged criticisms from investors and members of corporate audit committees that the agency is taking too long in getting the reports out and has pledged to try and speed up the process this year.

The PCAOB is required by law to annually inspect accounting firms that audit more than 100 public companies, but isn't given a deadline for issuing a report on the firms.

Those reports, though, are the only public assessment of audit firms' work available to investors and corporate audit committees.

The agency's reports on E&Y and KPMG, like those issued late last year, are based on inspections done in 2005 of the firm's audits of companies' 2004 financial results.  In previous years, annual reports have been issued by November of the year following an inspection.

The PCAOB singled out 10 E&Y audits for criticism in its report on that firm, while citing KPMG for deficiencies in 11 audits.  In keeping with the board's policies, the report doesn't identify the companies that had their audits cited.

In a statement issued last night, E&Y said, "We constantly re-examine and improve our audit policies and processes, and we will continue to work closely with the PCAOB to use its findings to refine and further improve our audits."

KPMG in a statement also issued last night said, "The feedback we've received from PCAOB inspections has served to enhance KPMG's audit quality."

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