BDO Pares Back Clients, Reforms Audit Practice to Boost Quality

BDO USA P.C. has launched a multiyear shake-up of its audit practice in a bid to repair a track record that lags its peers and bolster the performance of its audit teams.

In the past few years BDO, among the six largest audit firms in the country, has restructured its audit practice, shrunk its book of public company clients, and launched a new learning program meant to train entire audit teams. It’s also aiming to frontload more work for its auditors to ease the burdens of the busy annual report filing season.

“Humans work a lot better when they have time to think and they’re not dealing with battlefield conditions,” Lillian Ceynowa, BDO’s national managing principal of audit quality, said in an interview with Bloomberg Tax.

Ceynowa said the changes are meant to improve regulatory inspection results and to remake the firm’s culture and shift auditor behavior.

“We are moving in the right direction,” she said, though predicting the firm’s progress won’t pay dividends until BDO’s current 2024 inspection results are published.

BDO said last week that the firm expects deficiencies to climb again when the Public Company Accounting Oversight Board releases results for inspections conducted last year.

US firms are under pressure from their regulator to bolster their audits and bring down inspection violation rates. They also face an onslaught of tough new rules meant to hold auditors to a higher standard and better protect investors from fraud and other risks that could tank stock values or topple a company.

The firm created Ceynowa’s role in 2022 as part of a restructuring that pulled oversight of BDO’s auditing and independence outside of its assurance practice. That year, the firm also created a council to advise top leaders on how to improve and protect audit quality.

BDO is also considering updates to its audit methodology and a revamp of the core platform that auditors use every day. Last year, the firm began to shift the calendar for its audits, aiming for the bulk of its work to be completed before a client’s fiscal year ends.

Those changes won’t erase the strains of the busy annual report filing season but are meant to carve out more time for staff to research decisions or dig into red flags. Completing more work earlier in the audit also could help lead to fewer inspection findings, Ceynowa said.

BDO also launched a new training program meant to fill the gaps in learning for staff who started their careers working fully remote during the pandemic. The in-person sessions bring entire engagement teams together, from the lead audit partner to recent graduates—a shift from typical training programs.

Inspection Results & Enforcement Risks

BDO offered a preview of its 2023 inspection results in its annual audit quality report released last week, saying its violation rate would tick higher. The firm has struggled in recent rounds of inspections and consistently falls behind its peers. Two-thirds of the firm’s audits picked for inspection fell short of US standards in BDO’s most recent report.

Those annual inspections cover a sample of audits largely conducted the prior year, providing a lagging indicator of how well firms meet the board’s requirements. Still, the findings offer investors and other financial statement users an important gauge of auditors’ work vetting corporate revenue and asset values.

PCAOB Chair Erica Williams has pressured firms to bring down violations and has called a 40% deficient rate “unacceptable.”

“It’s an important step forward,” said Rob Pawlewicz, assistant professor of accounting at the University of Richmond. “Anytime you have any of the firms responding to regulatory pressure and saying, ‘We need to do better’ is a positive thing.”

Among other changes, the firm has also whittled down its public company client list, shrinking its portfolio by more than a quarter since 2019, according to data from Ideagen Audit Analytics. Sports betting company DraftKings Inc. and footwear-maker Skechers USA Inc. are among BDO’s current audit clients.

The firm has taken a fresh look at its guidelines for assessing whether to work with a new client or continue serving an existing client. Among the factors BDO considers is whether the client puts “quality first,” Ceynowa said.

“Not leaving any stone unturned, we’re taking a look at all our policies and procedures and our approaches,” she said.

Larger competitor KPMG LLP rolled out similar systemic changes after it admitted to trying to cheat on its PCAOB inspections and found staff had relied on shared answers to complete internal training tests.

PwC LLP, another Big Four firm, has pledged to make a series of reforms aimed at improving accountability of top leaders for audit failures and to bolster its fraud detection efforts, among other changes.

Firms have been facing tougher mandates intended to boost compliance and the effectiveness of their work, including new international standards for how firms police compliance and ensure investors can rely on their audits. The PCAOB in May finalized similar rule changes, known as quality controls, and is quickly working to overhaul its rulebook.

The PCAOB has also reset penalties for audit flaws as it more aggressively polices auditors for failing to meet basic requirements. BDO agreed to a $2 million settlement with the audit regulator in September for missing red flags related to a health care company’s accounting.

The firm also is fighting legal challenges over its audits of global insurer AmTrust Financial Services Inc. Three former BDO auditors were suspended from appearing before the Securities and Exchange Commission in 2018 for their AmTrust work.

“While BDO’s multiyear effort to enhance audit quality is commendable, the firm faces significant challenges in restoring its reputation and reassuring the market,” said Tony Menendez, associate professor of accounting at Loyola Marymount University.