Following troubling increase in audit deficiency rates in the past few years, Public Company Accounting Oversight Board (PCAOB) Chair Erica Williams finally had some good news.
“Today I am pleased to stand before you and deliver the news that PCAOB inspectors are seeing significant improvements in the aggregate Part I.A deficiency rate from the largest firms,” Williams said at the AICPA & CIMA Conference on Current SEC and PCAOB Developments on December 10, 2024, in Washington.
Part I.A of PCAOB inspection reports identifies any deficiencies that the auditor had not obtained sufficient appropriate audit evidence to support its opinion on the company’s financial statements and internal control over financial reporting.
“Now, it must be repeated that Part I.A. findings are serious,” Williams said. “Examples of Part I.A findings include things like failing to perform any procedures at all to test revenue or the costs of inventory, as well as instances where the auditor did not identify and test any controls over long-lived assets and depreciation expense.”
A report summarizing findings from the 2023 inspections showed overall deficiency rate of 46% for all issuer audit inspections. But it also showed deficiency rates leveling off at Big Four firms, showing some positive signs already.
The deficiency rate for the 2022 inspection cycle for all firms was 40%, up from 34% in 2021, and 29% in 2020.
For the Big Four firms, the deficiency rate held steady at 26% in 2023. The firms collectively audit about 80% of the market capitalization.
The aggregate deficiency rate for the Big Four in 2020 was 12%, increasing to 16% in 2021, and 26% in 2022.
“The audit work performed in our most recently published reports, the 2023 inspection reports, was performed in 2022 and early 2023—which means that most of this board’s initiatives designed to drive audit quality forward had yet to be implemented,” the PCAOB chief said at the conference.
The audit firm watchdog will publish reports that describe the results of 2024 inspections in 2025, Williams said, and the staff “has indicated that they expect the results of these inspections to provide the first glimpse of progress made by firms in response to calls for improvement of audit quality under this board.”
“To be clear, it will take some time for firms to fully reverse this trend,” said Williams who has led the board since January 2022. “However, this news signals that the work of this board is taking root.”
Other Inspection Program Achievements
She also discussed other achievements during her tenure.
On inspections, the staff went through a backlog of reports left over from the pandemic, she said.
“When I started my position, there was a significant backlog of inspection reports from prior years,” Williams said. “In our first year, this board approved more than 280 inspection reports as it cleared this backlog, representing a 73% increase over the prior year, and the most reports the board has approved in any given year. I am happy to report we have resolved all of the backlogs.”
The board also issued inspection reports six months faster than last year. In August the PCAOB published results for all annually inspected firms from 2023 inspections.
The board in the past got frequently criticized for the prolonged time lag between inspections and reports being published.
Moreover, the current board published “nearly all” of the reports for firms that are inspected triennially within six months of the completion of the inspections.
Accounting firms that audit more than 100 public companies are inspected every year. Those that audit fewer are inspected every three years.
While inspection results can be a barometer of audit quality, it should be noted that the PCAOB does not inspect all audits. It selects audits based on risk assessments. The board also selects some audits randomly.
This article originally appeared in the December 12, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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