From WSJ: Self-regulatory audit system fails to safeguard charities, pension funds and private companies, a WSJ analysis finds.
Six months before Los Angeles-based Shepherd University collapsed into bankruptcy in 2017, accounting firm BW CPA Group Inc. gave the school’s finances a clean bill of health.
State regulators called the audit “grossly deficient,” saying it missed red flags for potential fraud and left numerous errors in the financial statements uncorrected. The year before, BW CPA Group failed its second every-three-year peer review in a row, state regulators said.
Until regulators took disciplinary action in 2019, there was no way for the public to know that a fellow auditing firm twice took the rare step of giving a failing grade to BW CPA. The firm was banned from auditing last year.
Firms that audit private entities essentially police each other, often with no public disclosure. A Wall Street Journal analysis of the system shows that auditors give top grades to one another, hardly ever find fault with the biggest accounting firms and often don’t disclose failures among smaller auditors.
Of the firms that disclosed their results, 91% got the highest “pass” grade and only 4% the worst “fail” score on the three-grade scale, the analysis found. None of the biggest 100 firms failed, and 99% of them got the top “pass” score, according to the analysis.