The Public Company Accounting Oversight Board (PCAOB) criticized Ernst & Young LLP for failing to address quality control (QC) problems found during an audit inspection. This is the third time in a row that the inspections team identified QC deficiencies.
The latest criticisms are in a report made public on March 12, 2025, and the findings are from the 2020 inspection cycle. The previous criticisms are from 2019 and 2018 inspections.
The PCAOB’s standard practice is to publish inspection reports but keep 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 public QC findings. The entire process can be drawn out while a firm negotiates with the supervisory board about the fixes or remedial efforts made.
It is unusual for a firm to be faulted for QC problems back to back to back because a faulty QC system could compromise audit quality. This is especially true when the 2020 inspection criticism is about the same QC area—policies for financial holdings disclosures—that both the 2019 and 2018 inspections noted for problems.
To be fair, EY is not the only Big Four firm being dinged for QC problems for consecutive years on the same independence matters.
Last month, the PCAOB criticized Deloitte & Touche LLP for failing to address QC problems found during 2021 audit inspections. And this was the fourth time in a row that the board found problems on the firm’s 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 PCAOB said about EY.
EY periodically audits a sample of its personnel to gauge their compliance with the firm’s independence policies. In the audits carried out during the 12-month period ended March 31, 2020, EY found that 26% of the 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 quarterly basis that they have complied with the firm’s independence policies and procedures,” the inspection report notes.
At least the rate of noncompliance in the samples is improving.
The firm identified 32% percent of the managers who were audited had not reported financial relationships in 2019. That rate was a drop from 2018 when it was 46%. The 2018 inspection also noted 33 percent of the partners did not comply.
EY did not immediately respond to a request for comment.
Inspection Findings of Other Firms
The PCAOB at the same time issued 10 other inspection reports, including four expanded reports.
Expanded Reports Unveiling Unresolved QC Problems
- PWR CPA LLP in Houston Texas. This is from 2023 inspection. Inspectors found numerous areas of QC problems: testing intangible assets; evaluating conformity with GAAP for related-party transactions; fraud procedures; communications with audit committees; audit reports and critical audit matters (CAMs); auditor reporting of certain audit participants; engagement quality review (EQR); and compliance with PCAOB filing requirements.
- Eide Bailly LLP in Fargo, North Dakota. This is from 2020 inspection. The PCAOB said that the firm did not properly fix: testing controls; reliance on data and reports; audit reports. “In ten audits, the firm’s statement in the audit report regarding the year the firm began serving consecutively as the company’s auditor was inconsistent with the year the firm, and/or other firms that the firm acquired or that merged with the firm, signed the initial engagement letter,” the report said.
- Olayinka Oyebola & Co (Chartered Accountants) in Victoria Island in Nigeria. From 2020 inspection. One of the QC problems was on audit reports. “In one audit, the firm did not determine whether matters were critical audit matters.” Other QC problems were on communications with audit committees, auditor reporting of certain audit participants, and EQR.
- Stowe & Degon LLC in Westborough, Massachusetts. From 2020 inspection. The QC problem areas were: testing controls; testing certain assets and liabilities; testing accounting estimates, including fair value measurements; and EQR.
New Inspection Reports
The board released six new reports from 2024 inspections, faulting the following four firms for audit work deficiencies in Part I.A of the report:
- Adeptus Partners LLC in New York, New York. The firm at the outset of inspection had 12 public company clients. Two audits were reviewed and found deficiencies in both, scoring a 100% deficiency rate. The two companies audited were special purpose acquisition companies (SPACs).
- Freed Maxick P.C. in Buffalo, New York with 17 issuers. Inspectors reviewed two and found deficiency in one audit. It was on internal control over financial reporting audit related to business combinations and journal entries.
- HoganTaylor LLP in Tulsa, Oklahoma. The PCAOB reviewed two and found problems in both. The deficiencies were around accounts payable and revenue.
- Moore CPA Limited in Hong Kong. The firm had two issuer clients and participated in the audit of three other companies. Two audits were scrutinized and both had deficiencies. The PCAOB found problems in several areas of financial statement audit: equity, goodwill and intangible assets, other assets, revenue, deferred revenue, real estate investment properties, related-party transactions, and variable interest entities.
It must be noted that the PCAOB does not inspect all audits. Many audits are selected based on risk assessment. This means that inspectors will look at audits where problems are likely to occur because of the complexity of audits. The board also selects some audits to inspect randomly to better gauge how well firms are complying with PCAOB standards and rules.
The remaining two firms were cleared by the PCAOB:
- Deloitte Auditores y Consultores Limitada in Santiago, Chile. The firm did not have any issuer client but participated in the audit of four public companies.
- Deloitte RD, S.R.L. in Santo Domingo, Dominican Republic. This Deloitte affiliate also did not have a public company client but participated in the audit of five issuers.
This article originally appeared in the March 14, 2025, edition of Accounting & Compliance Alert, available on Checkpoint.
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