The Public Company Accounting Oversight Board (PCAOB) said that accounting firms should do a better job of auditing their clients’ financial statements because 2021 audit inspections found troubling increase in the number of audits with deficiencies compared to 2020.
This is according to a staff report that provides a preview of 2021 inspection findings. The spotlight document was published on Dec. 8, 2022.
For larger audit firms that are inspected every year, which are all Big Four firms and about 10 second-tier firms, the PCAOB inspection staff identified “a collective increase in the number of audits with deficiencies in 2021 compared to 2020 inspections.”
Similarly, inspectors noted an increase in audit problems at smaller firms, which are inspected every three years. This was in part due to an increase in deficiencies related to the auditor’s assessment and reporting of critical audit matters (CAMs).
Separately, on Dec. 7, the PCAOB published an analysis that provides more evidence on the initial impact of CAM requirements. Among other findings, the report notes that the average number of CAMs has declined over time, and the proportion of audit reports that communicate a single CAM has increased.
The PCAOB in October 2020 issued its first interim analysis report on the initial impact of CAMs.
Related to 2021 inspection findings, among CAMs-related problems among smaller firms, most had to with auditor procedures to determine CAMs. They did not include every matter that should have been analyzed as a potential CAM.
“These instances of non-compliance do not necessarily mean that other CAMs should have been communicated in the auditor’s report,” the board stated.
The spotlight document related to 2021 inspection cycle is a summary of observations from 141 firm inspections.
“Higher deficiency rates in 2021, coupled with the fact that the PCAOB is also seeing an increase in comment forms for 2022, are a warning signal that the audit profession needs to sharpen its focus on improving audit quality and protecting investors,” PCAOB Chair Erica Williams said in a statement. “The PCAOB will continue our work to increase audit quality by modernizing our standards, enhancing our inspections, and strengthening our enforcement.”
The board explained that comment forms are sent to audit firms about potential observed deficiencies from inspections. Audit firms have the opportunity to provide a written response to the comment form.
The report notes that about one third of audits reviewed will have one or more deficiencies that are discussed in Part I.A of the audit firm’s inspection reports. This would be an increase from 29 percent in 2020.
“Part I.A of the individual audit firm’s inspection report discusses deficiencies, if any, that were of such significance that PCAOB staff believes the audit firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion on the public company’s financial statements and/or internal control over financial reporting,” the PCAOB noted.
As for Part I.B, the staff expects that about 40 percent of audits reviewed will have one or more deficiencies, up from 26 percent in 2020. In this part of the report, the staff discusses instances of noncompliance with board standards that are not directly related to the evidence that the audit firm obtained to support its opinions, such as CAMs, Form AP and certain independence related problems.
The PCAOB said that some audits had both Part I.A and Part I.B deficiencies; thus, the staff expects that about 55 percent of the 690 audits the PCAOB reviewed in 2021 will have one or more Part I.A and/or Part I.B problems, compared to 44 percent in 2020.
In addition to increased deficiency rates in 2021 inspection cycle compared to 2020 cycle, the staff continued to find recurring deficiencies that have been a problem for many years.
The analysis identified continued deficiencies related to auditing internal control over financial reporting (ICFR) and to auditing financial statements. Deficiencies in auditing ICFR were related to the sufficiency and appropriateness of audit evidence that would support an audit firm’s ICFR opinion.
“We expect audit firm leadership to address the recurring nature of these deficiencies and monitor the effects of actions taken,” the report states. “An audit firm’s inadequate response to address recurring deficiencies may warrant additional action, such as the Division of Registration and Inspections referring firms to the Division of Enforcement and Investigations for potential investigation or disciplinary action for failing to comply with PCAOB standards.”
The report also highlights some good practices that the staff believes might help a firm to improve its quality control system and audit quality in general.
This article originally appeared in the Dec. 9, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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