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PCAOB Inspection Reports Show Increase in Audit Deficiencies by Big Four Firms

S.J. Steinhardt
Published Date:
Feb 29, 2024

GettyImages-614840826 Audit

The U.S. units of three of the Big Four accounting firms had a greater deficiency rate in their audits of public companies’ 2021 financial statements, compared to their audits of 2020 financial statements, according to inspection reports by the Public Company Accounting Oversight Board (PCAOB), The Wall Street Journal reported. The deficiency rate of the fourth firm has been redacted. The PCAOB conducted these inspections in 2022.

The PCAOB inspected 215 audits conducted by all Big Four accounting firms in the United States, down from 220 a year earlier. Ernst & Young, Deloitte and PwC had an average 24 percent deficiency rate in their 2021 audits of public-company financials, up from 13 percent, according to the PCAOB’s most recent data, the Journal reported. KPMG’s audit-deficiency rate was redacted from the PCAOB’s inspection report on the firm—the Journal couldn't determine by press time why this information was redacted. 

EY’s U.S. unit had a deficiency rate of 46 percent based on the 54 audits the PCAOB reviewed, up from 21 percent. Its audit shortcomings largely related to "the testing of controls over and/or substantive testing of revenue and related accounts, business combinations, and inventory," the PCAOB's EY report stated.

"The rate of findings identified in the report does not reflect our high standards and is unacceptable to us," wrote EY's U.S. chair and managing partner Julie Boland and U.S. vice chair of assurance Dante D'Egidio in response to the report, Accounting Today reported. "As leaders, we set clear expectations for audit quality, and we foster a culture of integrity and accountability. To underscore that point, we recently appointed a Chief Ethics and Compliance Officer who reports directly to the US Chair and Managing Partner. Our expectations are clear: we execute every audit with objectivity, independence and integrity in accordance with professional standards. In response to the issues raised in the report, we performed an in-depth review of our audit practice and developed a comprehensive action plan that we are confident will improve and sustain audit quality in both the short and long-term."

Deloitte's U.S. unit had a deficiency rate of 17 percent on 53 audits in 2021, up from 13 percent in 2020.

Deloitte’s identified deficiencies mainly related to its testing of controls over and/or substantive testing of revenue and long-lived assets, Accounting Today reported.

"Our pursuit of audit quality is at the center of our culture of continuous improvement," wrote Deloitte & Touche chair and CEO Dipti Gulati and Deloitte CEO Jason Girzadas in response to the report, Accounting Today reported. "In order to drive continuous improvements, we are digitizing the audit, transforming the way we work, and fostering the development of our people, to fulfill our role of providing high-quality audit and assurance services to the capital markets."

PwC’s U.S. unit had a deficiency rate of 9 percent on 54 audits in 2021, up from 4 percent in 2020. The identified deficiencies related primarily to the firm's testing of controls over and/or substantive testing of business combinations and the allowance for credit losses, Accounting Today reported.

"We recognize the inspection process provides a valuable opportunity to further enhance the quality of our audits," wrote PwC US senior partner Tim Ryan and vice chairs Wes Bricker and Kathryn Kaminsky in response, Accounting Today reported. "We continue to support the PCAOB in its mission and are committed to furthering the public interest through the preparation of informative, accurate and independent audit reports."

In a separate statement sent to Accounting Today, a PwC spokesperson said, "We value all feedback—whether from the PCAOB, our own identification or our Global Network—as it helps inform how we reinforce our foundation for audit quality,"  "Quality is our top priority, which is why we continue to invest in our audit approach, people and technology. As a part of our commitment, we were a first mover across the audit profession in voluntarily committing to a series of bold actions to further enhance the quality of and confidence in the information that drives the capital markets. We recognize and accept our responsibility to lead change to meet growing stakeholder expectations because confidence in independent auditors is critical."

These deficiency rates are “unacceptably high,” said PCAOB Chair Erica Williams, the Journal reported. Beyond the Big Four, the PCAOB said in July that it expected deficiencies in 40 percent of public-company audits covering 2021, up from 34 percent in 2020 and 29 percent in 2019.

While KPMG’s audit-deficiency rate was redacted from the PCAOB’s inspection report on the firm, KPMG also provided a response to the report.

"We continue to design actions and make decisions to promote audit quality that align with the root causes of matters identified during the PCAOB inspection process," wrote KPMG chair and CEO Paul Knopp and vice chair of audit Scott Flynn, Accounting Today reported. "These actions include, among others, strategically upskilling our auditors, making meaningful investment to develop audit technology, deploying that technology throughout the firm, as well as, designing and operating our system of quality control to sustainably and continually enhance audit quality. We are confident our ongoing investments will drive a more timely, streamlined, and technology-focused audit process that better enables our auditors to identify and respond to risks in the financial reporting process."

Preliminary inspection results for 2022 audits show a “modest improvement” in audit quality at some of the U.S. divisions of global accounting firms, Williams said, according to the Journal. “It will take time for the quality-control improvements to take root, and firms will need to be diligent to ensure they translate into improvements in engagement performance,” she said. 

The PCAOB compiles its findings with a lag, the Journal noted. It has been working to clear a backlog of inspections, but thus far its reports are arriving at a two-year remove.

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