The Public Company Accounting Oversight Board released its latest inspection reports Monday on the Big Four firms — Deloitte & Touche, PricewaterhouseCoopers, KPMG and Ernst & Young — plus two other large international firms, BDO USA and Grant Thornton.
The reports relate to the PCAOB's 2021 inspections and come at a time when the board's mostly new set of members is aiming to beef up the inspection process and improve the quality control system at firms. Earlier this month, the PCAOB previewed its inspection findings with a staff report finding deficiencies in about one-third of the audits it inspected in 2021, an increase from 2020 (see story).
For Deloitte, the inspectors found that seven of the 54 audits it reviewed in 2021 had such significant deficiencies that they were included in Part I.A of the report. Those deficiencies mainly related to the firm's testing of controls over and substantive testing of inventory. That was an increase from 2020, when two of the 53 audits reviewed by the PCAOB in 2020 were included in Part I.A due to the significance of the deficiencies. That year, the identified deficiencies mainly related to the firm's testing of controls over and substantive testing of revenue and related accounts.
"Executing high‐quality audits is our No. 1 priority," said a joint response from Deloitte & Touche chair and CEO Lara Abrash and Deloitte CEO Joseph Ucuzoglu. "We are dedicated to continuous improvement at all levels of our organization and unwavering in our efforts to enhance quality at every step of the audit process. In order to drive continuous improvements in quality, we are digitizing the audit, transforming the way we work, and fostering the development of our people, to fulfill our role of providing high‐quality audit and assurance services to the capital markets."
For PwC, the PCAOB included two of the 56 audits reviewed in 2021 in Part I.A of the report. Those deficiencies mainly related to PwC's testing of controls over and/or substantive testing of long-lived assets, equity and equity-related transactions, and business combinations. That was one more deficient audit than the PCAOB inspectors found in 2020, when one of the 52 audits reviewed was included in Part I.A of the report. It related then as well to the firm's testing of controls over and substantive testing of revenue and related accounts and inventory. However, PwC has made strides since 2019, when 18 of the 60 audits reviewed had significant enough deficiencies to be included in Part 1.A of the report.
"PwC is incredibly proud to deliver sustained, profession-leading audit quality results," the firm said in a statement emailed to Accounting Today. "Our exemplary audit quality record — as illustrated by the PCAOB inspection process and our own internal inspection results throughout the last two years — is a testament to our commitment to continuous improvement, the investments we have made, and the dedication of our people as we help build trust in the capital markets."
For EY, 12 of the 56 audits reviewed in 2021 were included in Part I.A of the report. The identified deficiencies mainly related to EY's testing of controls over and/or substantive testing of revenue and related accounts, long-lived assets, and equity and equity-related transactions. That was somewhat worse than 2020, when eight of the 52 audits reviewed were included in Part I.A. There too, the identified deficiencies mostly related to EY's testing of controls over and/or substantive testing of revenue and related accounts and inventory.
"From our most senior leaders to the most junior members of our audit teams, all of our people are accountable for the quality of the firm's audits and embrace the responsibility to perform high-quality audits that promote trust in the capital markets and investor confidence," said a joint response from EY U.S. chair and managing partner Julie Boland and U.S. vice chair of assurance John King.
KPMG had the most deficiencies of the Big Four on the PCAOB inspections, with 14 of the 54 audits reviewed in 2021 included in Part I.A of the report. The deficiencies mainly related to KPMG's testing of controls over and/or substantive testing of revenue and related accounts, allowance for credit losses, inventory and going concern. That was roughly the same as the previous inspection report for 2020, when 14 of the 53 audits reviewed were included in Part I.A of the report. The identified deficiencies in that report mostly related to KPMG's testing of controls over and/or substantive testing of revenue and related accounts, investment securities, goodwill and intangible assets, and the allowance for loan losses.
"We have reviewed the observations identified in Part I of the report and taken appropriate actions to address the engagement-specific findings in accordance with PCAOB auditing standards as well as our own policies and procedures," said a joint response from KPMG chair and CEO Paul Knopp and vice chair of audit Scott Flynn. "We value and respect the inspection process and look forward to continued dialogue with the PCAOB on our audit quality improvements. We believe the audit quality initiatives we are driving will strengthen our audit process and the reliability of financial reporting more broadly to the benefit of the capital markets and global economy. This year's inspection cycle once again affirmed the important role the PCAOB plays in improving audit quality."
BDO USA had even more deficient audits than KPMG. The PCAOB included 16 of the 30 audits reviewed in 2021 in Part I.A of the report. The deficiencies primarily related to BDO's testing of controls over and/or substantive testing of revenue and related accounts and expenses. That was a higher number of deficiencies than in the previous year's report, when the PCAOB included 13 of the 24 audits reviewed in 2020 in Part I.A. Those identified deficiencies similarly related to BDO's testing of controls over and/or substantive testing of revenue and related accounts, business combinations and income taxes. A BDO spokesperson pointed out, however, after this story was published that "while the raw number of deficient audits did increase, the deficient percentage went down by 1% (54% in 2020 to 53% in 2021)."
"We are continuing to strengthen our commitment to audit quality through several strategic initiatives, including a newly formed Audit Quality Advisory Council in 2022," BDO USA said in response to the report. "In addition, toward the latter part of 2021, we reorganized our assurance practice into two distinct functional areas and reporting structures. The purpose of this reorganization was to consolidate the operational, professional and client services under one umbrella and to implement an objective governance structure focused on delivering high-quality audits to protect investors and further the public interest."
For Grant Thornton, seven of the 31 audits reviewed in 2021 were included in Part I.A of the report. The identified deficiencies mostly related to GT's testing of controls over and/or substantive testing of revenue and related accounts and inventory. That was mostly in line with the previous year, when five of the 29 audits reviewed in 2020 were included in Part I.A of the report. The identified deficiencies similarly related to GT's testing of controls over and substantive testing of revenue and related accounts and business combinations.
Overall, across firms of all sizes, the PCAOB found last year that audits with deficiencies called out in Part I.A of the inspection reports increased 4 percentage points to 33% in 2021 compared to 29% in 2020.
"That means a third of the audits we inspected had deficiencies of such significance that PCAOB staff believe the audit firm failed to obtain sufficient appropriate audit evidence to support its opinion on the public company's financial statements or internal control over financial reporting," said PCAOB chair Erica Williams during an AICPA & CIMA conference last week (see story). "At the same time, we are seeing increased comment forms for both U.S. and non-U.S. firms in our 2022 inspections. These comment forms usually result in inspection findings in our reports. Together, these facts present a troubling warning sign."
