PCAOB unveils inspection reports on major firms

The Public Company Accounting Oversight Board released its annual inspection reports Tuesday for the Big Four firms, along with eight other firms that are inspected each year.

For PricewaterhouseCoopers, 18 of the 60 audits inspected in 2019 were included in a section of the report that spotlights significant deficiencies. For KPMG, 17 of the 58 audits were included in that section, Part 1.A, due to the significance of the identified deficiencies. For Ernst & Young, 11 of the 60 audits were included, and for Deloitte & Touche, six of the 58 audits reviewed were included.

The PCAOB generally releases its inspection reports for the Big Four firms on separate days, and it is unusual for it to release them with some of their smaller competitors on the same day where they can be compared more easily. The PCAOB has also been overhauling the format of its reports to make them easier to read.

Courtesy of PCAOB

Other major firms whose inspection results were posted include BDO USA, which had 11 of its 26 audits included in Part 1.A; Grant Thornton, which had seven of its 31 audits highlighted; RSM, which had three of the 15 audits inspected included in that section; and Crowe, which had seven of the 14 audits inspected included in Part 1.A.

In PwC’s case, the identified deficiencies for 2019 mainly related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts, income taxes, the allowance for loan losses, investment securities and inventory. However, a PwC official recently told Accounting Today that the firm had improved its performance in its latest PCAOB report for 2020, and anticipates that only one of the 52 engagements subject to inspection will be included in Part 1.A of the report (see story).

“I’m thrilled with the progress that we’ve made, but I also know that the progress is not over,” said PwC U.S. assurance leader Wes Bricker. “Quality has been our first priority. That is reflected in the results. We’ve made significant progress on improving our inspection results. The PCAOB inspection cycle having recently been completed, and our own internal inspection cycle also having been concluded, I feel really good about the progress we’ve made. Only one engagement of the 52 that were subject to inspection being included in part 1.A, that reflects a number of steps we’re taking to enhance our assurance work. We’ve seen a lot more consistency and execution across our entire portfolio. It really reflects the positive investments we’ve made and the leadership of our people.”

For KPMG, the PCAOB said the identified deficiencies primarily related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts and business combinations. “We recognize the importance the capital markets places on high quality audits and consistently executing at that level is our highest priority,” said KPMG in response to the report. “To that end, we remain dedicated to the continuous improvement of our audit engagement performance and our system of audit quality control. The specific actions we have taken and continue to take to achieve these improvements are discussed in our 2020 Audit Quality Report as we seek to provide transparency to our stakeholders about our overall efforts to improve audit quality.”

For EY, the deficiencies mostly related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts, business combinations and long-lived assets. “Performing high-quality audits with independence, integrity and professional skepticism is at the heart of our responsibilities as auditors,” said EY in response to the report. “While we are facing significant uncertainties in our working world and society in general right now, our commitment to audit quality remains constant.”

For Deloitte, the deficiencies mainly involved the firm’s testing of controls over and/or substantive testing of inventory and revenue and related accounts. “Executing high-quality audits is our number one priority,” wrote Deloitte CEO Joseph Ucuzoglu and Deloitte & Touche chair and CEO Lara Abrash in response to the report. “In order to drive continuous improvements in quality, we are transforming the audit to leverage innovative technologies, along with enhancing the skill sets of our talent to prepare them for a digitally driven future. We are confident that our ongoing digital transformation, along with the investments we continue to make in our audit processes, policies, and quality controls, are resulting in significant enhancements to our audit quality.”

For BDO, the deficiencies identified by the PCAOB inspectors mainly related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts and income taxes. “We remain committed in making audit quality our top priority,” said the firm. “The PCAOB’s inspection process assists us in improving our audit performance and our underlying quality control systems. We look forward to continuing to work with the PCAOB on the most effective means of achieving this objective.”

For Grant Thornton, the deficiencies mostly involved the firm’s testing of controls over and/or substantive testing of revenue and related accounts, inventory, and goodwill and intangible assets. “Quality is our highest priority and is the foundation of all that we do at Grant Thornton,” said Grant Thornton CEO Bradley Preber and national managing partner of audit services Jeffrey Burgess. “We are committed to seeking new ways to further advance high audit quality, including through the creation in 2019 of our Audit Quality Advisory Council. The Quality Council, which includes two outside members, advises our Partnership Board and Senior Leadership Team on our audit quality, and provides deep, practical, and objective advice regarding ways we can continue to deliver high quality.”

For RSM, the deficiencies mainly related to the firm’s testing of controls over and/or substantive testing of the allowance for loan losses. “We support the PCAOB’s inspection process and believe that it helps us improve the quality of our audit engagements,” wrote RSM US managing partner and CEO Joseph Adams and national audit leader Joel Shamon. “RSM US LLP is committed to using the inspection comments and observations to improve our system of quality control. We have a long history of audit quality founded on our commitment to integrity, objectivity and excellence.”

For Crowe, the deficiencies mainly related to the firm’s testing of controls over and/or substantive testing of business combinations, the allowance for loan losses, and investment securities. “Crowe LLP is committed to performing high quality audits, and we have designed our quality control and monitoring systems to drive continuous improvement,” said the firm. “We look forward to continued dialogue with the PCAOB to advance the shared goal of audit quality.”

The PCAOB also posted annual inspection reports for several smaller firms Tuesday, including Cohen & Company, MaloneBailey, Marcum and Moss Adams.