Big Four accounting firms overall appear to be doing a good job of auditing public company’s financials, according to 2020 PCAOB audit inspection reports made public on November 1, 2021. The reports are dated September 30, 2021.
In particular, PricewaterhouseCoopers LLP and Deloitte & Touche LLP made substantial improvements last year.
The board includes a standard language about what deficiency means in the reports: “our report discusses deficiencies that were of such significance that we believe the firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion on the issuer’s financial statements and/or ICFR.” ICFR is internal control over financial reporting.
PwC on Top
PwC had the biggest improvement among the Big Four.
The board reviewed 52 audits and found deficiency in only one. This is a huge positive jump from 2019 when the PCAOB faulted 18 out of 60 reviewed. In 2018, the board inspected 55 audits and found deficiencies in 14 of them.
Likewise, the PCAOB only found two deficient audits by Deloitte out of 53 audits reviewed for 2020 inspections.
This compares to 58 audits examined in 2019 with six of them deficient. In 2018, the PCAOB observed six deficient audits out of 52 reviewed.
Ernst & Young LLP did not do as well.
The PCAOB scrutinized 52 audits and found problems with eight in 2020.
In 2019, it had 11 deficiencies out of 60 reviewed. In 2018, it was 14 out of 54 reviewed.
The pace of improvement at KPMG LLP seems to have plateaued.
In 2020, the PCAOB reviewed 53 audits and found deficiencies in 14.
The previous year, it was 17 out of 58 audits reviewed. In 2018, it was 19 out of 52.
Not a Definitive Overall Assessment of Audit Quality
Even though the PCAOB notes how many audits were deficient in its inspection reports, it is difficult to draw firm conclusions about exactly how well each audit firm is doing. This is because the board does not review a representative sample of a firm’s total population of public company audits.
The PCAOB largely inspects audits based on risk assessments, but it also reviews some audits based on random selection for an element of unpredictability.
For example, of the 52 audits reviewed in 2020 for PwC, 37 were selected based on risk assessment, 13 were selected randomly, and two were based on target team selections.
In 2019, of the 60 audits reviewed for PwC, 41 were risk-based selections while 14 were based on random selections. Five were target team selections.
“Our target team performs inspection procedures in areas of current audit risk and emerging topics and focuses its reviews primarily on evaluating the firm’s procedures related to that risk or topic,” the report for PwC stated. “In 2020, to gain an understanding of how COVID-19 affected how the firm performed its procedures, our target team focused on audits of issuers with fiscal years primarily ending between March 31 and June 30, 2020 and interim reviews of issuers for quarterly periods ending on or before June 30, 2020.”
Moreover, board inspectors do not review every aspect of the audit.
“Rather, we generally focus our attention on audit areas we believe to be of greater complexity, areas of greater significance or with a heightened risk of material misstatement to the issuer’s financial statements, and areas of recurring deficiencies,” the 2020 inspection reports stated.
“Our inspection findings are specific to the particular portions of the issuer audits reviewed,” the PCAOB said. “They are not an assessment of all of the firm’s audit work nor of all of the audit procedures performed for the audits reviewed.”
In addition, if a problem is listed in the report, the PCAOB said that this does not necessarily mean that the firm has not fixed it.
For example, the PCAOB found problems with PwC’s audit of Issuer A, which is the industrials sector. In particular, inspectors identified flaws in the financial statement and ICFR audits related to revenue and inventory.
The PCAOB does not identify the public company client.
The inspection report said, among other things, that the company used an application to generate reports from various systems that processed and recorded revenue and inventory transactions.
The board said the firm tested a control that consisted of the client’s review of changes to the configuration of the reports. But PwC did not evaluate the specific review procedures that the control owner performed to assess whether the changes were appropriate.
According to a response letter attached to the inspection report, PwC said that it has evaluated the observations and has taken “appropriate responsive actions.”
“Our response included those steps we considered necessary to comply with AS 2901, Consideration of Omitted Procedures After the Report Date, and where applicable, AS 2905, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report and AS No. 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements,” PwC U.S. Chair Tim Ryan and U.S. Vice Chair Wesley Bricker wrote in the letter.
The PCAOB also issued inspection reports of the next two biggest audit firms. (See PCAOB Flags Deficiencies at Grant Thornton, BDO in the November 2, 2021, edition of Accounting & Compliance Alert.)
This article originally appeared in the November 2, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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