Dive Brief:
- The Public Company Accounting Oversight Board said 42% of the audit firms that it inspected last year botched their engagement quality reviews, a 5-percentage-point surge compared with 2020.
- Inspectors found that half of large, U.S.-based audit firms that are part of a global network erred in their EQRs last year compared with just 17% in both 2020 and 2021, according to a PCAOB staff report.
- “The PCAOB staff has observed high and increasing rates of audit deficiencies related to EQRs, the trend of which is troubling considering the important role that the EQR reviewer plays in evaluating whether significant aspects of the audit have been performed in accordance with PCAOB standards before an audit firm issues its audit report,” according to the report by board staff.
Dive Insight:
Since a shake-up by Securities and Exchange Commission Chair Gary Gensler in 2021, the PCAOB has toughened enforcement, expanded inspections and tightened standards for the auditors of publicly traded companies.
Under the leadership of PCAOB Chair Erica Williams, the board last year doubled the number of enforcement orders compared with 2021 and imposed record penalties. Williams took the top post at the board in January 2022.
PCAOB inspectors this year will probably report flaws in 40% of the 2022 audits they review, Williams said this month in a speech, noting that many auditors fail to back up their opinions with solid evidence. Inspection reports this year will probably show that the proportion of flawed audits surged 6 percentage points in 2022 after rising 5 percentage points in 2021, she said.
The staff report on EQRs shows how the board has sharpened its oversight and inspections.
“Engagement quality reviews are an important investor safeguard during the audit process,” Williams said in a statement. “Unfortunately, audit firms are increasingly falling short when performing this function.”
Under AS 1220, auditors must line up a reviewer independent of the audit engagement team to vet the team’s significant judgments and the conclusions that undergird the audit opinion.
The standard “was adopted to increase the likelihood auditors will identify significant audit deficiencies before issuing their audit or attestation report,” the PCAOB staff said. “Auditors who fail to follow AS 1220 deprive investors of that PCAOB-mandated safeguard.”
PCAOB inspectors found that in 82% of the flawed EQRs last year, audit firms failed to ensure the reviews would meet industry standards, the board said.
In 6% of the bungled EQRs, the auditor’s quality control system “did not provide reasonable assurance that EQR reviewers had sufficient competence, independence, integrity and objectivity,” the PCAOB report said.
In 5% of the flubbed reviews, auditors did not obtain approval from the EQR reviewer before issuing the audit report. In another 5% of the cases, an audit firm failed to even perform an EQR.
“We urge audit firms and audit committees to read our EQR report so they can fully live up to their responsibility to protect investors against insufficiently supported audits,” Williams said.
