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 second time in a row that the inspections team identified QC deficiencies.
The latest criticisms are in a report made public on July 11, 2024, and the findings are from the 2019 inspection cycle. The previous criticisms are from 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 quality control 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 because a faulty QC system could compromise audit quality. This is especially true when the 2019 inspection includes the same QC area—policies for financial holdings disclosures—that the 2018 inspection noted for problems.
The Big Four firm did not immediately respond to a request for comment.
In particular, the PCAOB faulted EY’s QC system related to independence, according to both the 2019 and 2018 findings.
The firm identified 32% percent of the managers who were audited had not reported financial relationships that were required to be reported in accordance with the firm’s policies in 2019. That rate is a drop from 2018 when it was 46%. The 2018 inspection notes 33 percent of the partners who did not comply. For 2019, there is no data for partners, which could indicate that all partners complied. But this is not certain.
“These high rates of non-compliance with the firm’s policies, which are designed to provide compliance with applicable independence regulatory requirements, provide 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,” according to the report on 2019 inspection findings.
The 2019 inspection includes two additional areas of QC problems that were not identified in 2018. One is on supervision of the audit, and the other is on internal inspection program.
EY is not the only Big Four firm that was criticized for QC problems during 2018 and 2019 inspections. Just three months ago in April, the PCAOB unveiled QC problems at KPMG LLP for both years.
Inspection Findings of Other Firms
The PCAOB on July 11 issued 16 other inspection reports, including an expanded report on Brown Armstrong Accountancy Corporation in Bakersfield, California.
The QC problems were identified in 2022. And the deficiencies are on several areas: testing revenue, fraud procedures, auditor reporting of certain audit participants, communications with audit committees, critical audit matters, engagement quality review, and independence.
Outside of the QC matters, the board identified deficiencies at 13 firms, including Deloitte and Ernst & Young affiliates in Hong Kong and mainland China. After a long standoff with Chinese regulators, the PCAOB gained the ability to inspect and investigate firms in those jurisdictions as part of an agreement the two sides reached in 2022.
The firms where the PCAOB identified non-QC deficiencies were:
- Assure CPA, LLC, in Spokane, Washington, with 10 clients for which the firm was the principal auditor.
- BD & Company, Inc., in Owings Mills, Maryland, with one client for which the firm was the principal auditor.
- Bober, Markey, Fedorovich & Company, in Akron, Ohio, with 12 clients for which the firm was the principal auditor.
- Deloitte LLP, in Toronto, Canada, with 37 clients for which the firm was the principal auditor. The firm also participated in 62 audits in which it was not the principal auditor.
- Deloitte Touche Tohmatsu, in Hong Kong, with four clients for which the firm was the principal auditor. The firm also participated in 17 audits in which it was not the principal auditor.
- Deloitte Touche Tohmatsu Certified Public Accountants LLP, in Shanghai, China, with 28 clients for which the firm was the principal auditor. The firm also participated in 71 audits in which it was not the principal auditor.
- Ernst & Young, in Hong Kong, with three clients for which the firm was the principal auditor. The firm also participated in 25 audits in which it was not the principal auditor.
- Ernst & Young Hua Ming LLP, in Beijing, China, with 25 clients for which the firm was the principal auditor. The firm also participated in 93 audits in which it was not the principal auditor.
- MNP LLP, in Calgary, Canada, with 31 clients for which the firm was the principal auditor. The firm also participated in two audits in which it was not the principal auditor.
- Navarro Amper & Co., in Taguig, the Philippines, with one client for which the firm was the principal auditor. The firm also participated in seven audits in which it was not the principal auditor.
- Somekh Chaikin, in Tel Aviv, Israel, with 21 clients for which the firm was the principal auditor. The firm also participated in four audits in which it was not the principal auditor.
- Tait, Weller & Baker, LLP, in Philadelphia, Pennsylvania, with 81 clients for which the firm was the principal auditor.
- Whitley Penn LLP , in Fort Worth, Texas, with 26 clients for which the firm was the principal auditor.
The remaining two firms were cleared by the PCAOB:
- Ennis, Pellum & Associates, P.A., in Jacksonville, Florida, with four clients for which the firm was the principal auditor.
- KBF CPAs LLP, in Irvine, California, with six clients for which the firm was the principal auditor.
This article originally appeared in the July 15, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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