The Public Company Accounting Oversight Board (PCAOB) has criticized Deloitte & Touche LLP for failing to address quality control (QC) problems found during 2020 audit inspections. This is the third time in a row that the board found problems with certain aspects of the firm’s QC system.
When the PCAOB publishes an inspection report, it keeps confidential the portion that covers weaknesses with an audit firm’s quality management and supervision. If the firm has not addressed the problems within 12 months, the PCAOB makes quality control findings public. The entire process can be drawn out while a firm negotiates with the supervisory board about the fixes or remedial efforts made.
In the latest inspection report, made public on July 23, 2024, the PCAOB once again faulted Deloitte on its internal policies about financial holdings disclosures.
“The inspection results indicate that the firm’s system of quality control does not provide reasonable assurance that the firm and its personnel will comply with the firm’s policies and procedures with respect to independence-related regulatory requirements,” the inspection report states.
This was the same QC problem identified during 2018 and 2019 inspections.
“We are deeply committed to safeguarding our independence, which forms the core of the public trust that the markets place in the external audit profession,” Deloitte said in an emailed statement. “We take input from our regulators very seriously and, in response to the PCAOB’s comments, and consistent with our focus on continuous improvement, we embarked on a multi-year journey to further strengthen our system of quality control related to the reporting of personal financial holdings of our professionals and their immediate family members, including investing in innovative technology to identify potential conflicts on a real-time basis.”
The PCAOB said that the Big Four firm conducts regular internal audits of a sample of its personnel to monitor their compliance with its independence policies.
In the audits conducted during the 12-month period ended August 31, 2020, Deloitte found that 25% of the partners and principals and 39% of the managing directors and managers had not reported financial relationships.
“This high rate of non-compliance with the firm’s policies, which are designed to provide compliance with applicable independence regulatory requirements, provides cause for concern, especially considering that these individuals are required to certify on a semi-annual basis that they have complied with the firm’s independence policies and procedures,” the report states.
In 2019, Deloitte identified that 34% of the partners and principals and 29% of managing director and managers did not comply with internal policy.
In 2018, the firm found that 26% of the partners and principals and 38% of the managing directors and managers had not reported their financial holdings.
In the meantime, looking at audit performance from 2018 to 2022 inspections, the firm had improved the quality of its audit work until 2021 when the deficiency rate started to creep back up.
The deficiency rate in 2018 was 12%, going down to 10% in 2019, then 4% in 2020, and going up to 13% in 2021. In 2022, the latest report available, the rate was 17%.
The PCAOB does not inspect all audits but chooses audits to review based on a combination of risk assessment and random selection. Moreover, the number of audits reviewed is not exactly the same though they are in the same range of 50s. For example, in 2018, the PCAOB scrutinized 52 audits, but it was 58 audits in 2019.
Other Inspection Reports
On July 23, the PCAOB also issued inspection reports for other firms. The board criticized two smaller firms for not fixing part of its QC system in a timely manner.
The PCAOB flagged a host of issues at Freedman & Goldberg, C.P.A.’s P.C. headquartered in Farmington Hills, Michigan: testing goodwill and intangible assets; testing debt; engagement quality review; communications with audit committees; and audit reports and critical audit matters.
Kirtane & Pandit LLP in Pune, India, was also criticized for several QC problems: planning and performing an audit; engagement quality review; audit methodology; assigning personnel with adequate training and proficiency; audit reports; communications with audit committees; and auditor reporting of certain audit participants.
Besides the three firms, the board issued inspection findings for 10 other firms.
While Part II of the reports covers quality control observations, the PCAOB lays out its inspection observations in Part I of the reports, which it splits into three categories. Part I.A covers audits with unsupported opinions, Part I.B covers other instance of non-compliance with PCAOB standards or rules, and Part I.C – the newest section – addresses non-compliance or potential non-compliance with PCAOB and/or SEC independence requirements.
In six out of the 10 reports in the latest batch, the PCAOB flagged Part I.B problems, with one firm, PricewaterhouseCoopers in Dublin, turning up issue in both Part I.B and Part I.C.
For the PwC affiliate, the PCAOB said the firm was non-compliant in one audit reviewed with Auditing Standard (AS) 1301, Communications with Audit Committees, due to its failure to “make a required communication to the audit committee related to the name, location, and planned responsibilities of an other accounting firm that performed audit procedures in the audit.” And in one audit reviewed, the PCAOB said the firm was non-compliant with (AS) 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements because it communicated to the audit committee there were no significant deficiencies identified during the audit, even though an Internal Control over Financial Reporting (ICFR) audit “does not provide assurance that all deficiencies less severe than a material weakness have been identified.”
On Part I.C, the firm brought to the board’s attention one instance identified through its own independence monitoring, in which it may have been non-compliant with PCAOB Rule 3523 “regarding tax services provided to a person in a financial reporting oversight role at the issuer.” The firm told the PCAOB it had relayed the instance to the principle auditor, which determined its objectivity and impartiality were not impaired.
The firm, in its response letter, did not address any specific items identified by the PCAOB but said its “leadership and its partners maintain a strong commitment to audit quality, and we will continue to make investments to enhance audit quality.”
The firms where the PCAOB spotted deficiencies were:
- Ernst & Young Ltd., in Hamilton, Bermuda, with one client for which the firm was the principal auditor. The firm also participated in four audits in which it was not the principal auditor.
- Ernst & Young Ltd., in George Town, Cayman Islands, with one client for which the firm was the principal auditor. The firm also participated in five audits in which it was not the principal auditor.
- KPMG, in Taipei, Taiwan, with one client for which the firm was the principal auditor. The firm also participated in nine audits in which it was not the principal auditor.
- Kreischer Miller, in Horsham, Pennsylvania, with two clients for which the firm was the principal auditor.
- LBMC, PC, in Brentwood, Tennessee, with five clients for which the firm was the principal auditor.
- PricewaterhouseCoopers, in Dublin, Ireland, with three clients for which the firm was the principal auditor. The firm also participated in 29 audits in which it was not the principal auditor.
The remaining firms were cleared by the PCAOB:
- Blue & Co., LLC, in Carmel, Indiana, with six clients for which the firm was the principal auditor.
- Maloney + Novotny LLC, in Cleveland, Ohio, with two clients for which the firm was the principal auditor.
- Melton & Melton, L.L.P., in Houston, Texas, with two clients for which the firm was the principal auditor.
- Pivot CPAs, P.A., in Ponte Vedra Beach, Florida, with one client for which the firm was the principal auditor.
This article originally appeared in the July 25, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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