PCAOB Inspections Find 40% of Audits With Deficiencies

By Vincent Ryan for CFO.com

For the second year in a row, the Public Company Accounting Oversight Board (PCAOB) is finding more public company audits with deficiencies in the inspections of 157 audit firms in 2022, according to a staff report released Tuesday.

PCAOB staff expects 40% of the 710 audits reviewed will have one or more deficiencies included in “Part I.A” of an individual audit firm’s inspection report, up from 34% in 2021 and 29% in 2020. Part I.A deficiencies are significant in that the PCAOB believes the auditor did not obtain sufficient audit evidence to support its opinion on the financial statements or the internal controls over financial reporting (ICFR).

 

PCAOB Chair Erica Y. Williams called the level of deficiencies “absolutely unacceptable” and said the PCAOB would continue to bring strong enforcement actions. She also asked audit committees “to hold firms accountable by posing tough questions to their auditors on behalf of investors.”

Many of the deficiencies described in the report relate to insufficient testing of estimates or the data and reports used to support audit conclusions, the PCAOB said. Other observed deficiencies relate to “auditors’ testing of controls that include a review element,” specifically insufficient testing of whether ICFRs were precise enough to prevent or detect material misstatements.

The PCAOB also expects 46% of the audits reviewed will have “Part I.B” deficiencies, those involving noncompliance with standards or rules not related to the evidence to support an audit opinion. That percentage is up from 40% in 2021 and 26% in 2020. Many of those flaws were related to auditors’ communications with audit committees. (See chart.)

Outside of ICFR, the PCAOB report detailed areas of the financial statement where deficiencies have recurred over the past three years. These deficiencies appear in the initial communication with the audit firm during a PCAOB inspection. 

“Revenue and related accounts” was in part most common because it is a frequently selected focus area by the PCAOB. But audit firms are also failing in basic audit procedures related to revenue, such as sampling of transactions, the PCAOB said.

In light of the increased PCAOB inspection findings, PCAOB recommended some questions that audit committees should be asking their independent auditors, including:

• Has the engagement partner been inspected on other engagements? If so, what were the results of that inspection?

• What is the audit firm doing to address overall increased inspection findings?

• Are there any audit procedures that are unnecessarily complicated or not “straightforward” because management is not providing clear, supportable information?

“Ultimately, the responsibility falls on auditors to correct the problems that led to deficiencies in their audits,” Williams said in a statement on the PCAOB’s website. “But accountability from their clients offers a powerful incentive to find solutions.”

In the “good practices” recommendations section of the report, the PCAOB said higher-quality audit work was associated with risk assessment procedures, including “clear, concise, and understandable documentation linking risks identified and the audit response.”

As to which audit firms were most frequently guilty of deficiencies, the PCAOB said the most significant increase in 2022 was observed within global network firms (GNF), defined as firms based in the United States and members of their global network affiliations.