PCAOB says deficiencies rise among reports by audit firms

Dive Brief:

An increase in flawed reporting by audit firms persists, the Public Company Accounting Oversight Board said, while noting steadier performance among Big Four firms and improvement at several others.
“A notable inspection trend in recent years is an increase in deficiencies among audit firms,” the PCAOB said in a report. “In 2023, these negative trends continued in the aggregate.”
The most error-prone audit firms “are strongly influencing the aggregate deficiency rate,” the PCAOB said in a review of 2023 inspections of financial reports for 2022.

Dive Insight:

Inspections of nearly half (46%) of the engagements reviewed by the PCAOB revealed a Part 1.A flaw, or evidence that the audit firm failed to obtain enough evidence to support its opinion on a company’s financial statement or internal control over financial reporting, the PCAOB said. The data excludes inspections of broker-dealers.

At the same time, deficiencies in audit reports by the Big Four — PwC, Deloitte, EY and KPMG — held steady in 2023 inspections at 26%, after spiking to that level in 2022 from 12% in 2020, the PCAOB said.

Among Big Four firms, Part 1.A deficiencies “appear to represent more isolated incidents than in the past, where we often saw the same or related types of deficiencies on multiple audits,” the PCAOB said.

The more isolated flaws suggest that the firms have improved their quality control systems in recent years, the PCAOB said.

“These results are promising,” the PCAOB said. “The staff is hopeful that this decrease in the concentration of deficiencies, together with an overall decline in the combined number of QC system criticisms among the Big Four firms, signals improvement in those firms’ QC systems, which in turn could lead to declines in their audit deficiencies going forward.”

PCAOB inspectors usually find more Part 1.A flaws in reports by firms inspected for the first time. For example, inspectors identified Part 1.A flaws at 96% of non-affiliated triennial firms inspected for the first time last year. PCAOB inspects the firms every three years.

“Recurring and pervasive deficiencies continue,” the PCAOB said, including insufficient testing of estimates, data or reporting used to support audit conclusions. Audit firms also tend to insufficiently test companies’ controls.

“These inspection results point to some small signs of movement in the right direction,” PCAOB Chair Erica Williams said in a statement.

“Still, overall deficiency rates are unacceptable, and firms must do better,” she said. “Now is the time to double down on efforts to improve and deliver the audit quality investors deserve.”