In the public’s first view of the results of audit inspection performed in 2015 on 2014 financial statements, the Public Company Accounting Oversight Board reveals some indicators of improvement, but some troubling signs as well.
At PwC, where inspectors selected 55 engagements for inspection and found problems in 12, the firm’s 22 percent deficiency rate for 2015 represents an improvement over the 2014 rate of 29 percent. At the same time, however, two of the firm’s 12 deficient audits ended up in restatement after the PCAOB spotted problems, and PwC revised its opinion on internal control in six cases.
That means at least half of the PwC audits flagged by the PCAOB had failures so serious the audit opinion itself was not even reliable. PwC has had similar problems in earlier years. After its 2014 inspection, one PwC client restated and the firm issued four revised opinions on internal control. The firm’s 2013 inspection led to four restatements and five revised internal control opinions. Across all firms in restatements more broadly, PwC and EY generally are connected to higher rates of restatement as well.
The PCAOB also published its 2015 findings for Deloitte showing a slight uptick in the rate of deficiency, and a blown audit opinion there as well. Inspectors selected 55 engagements and found problems in 13 of them for a deficiency rate of 24 percent, which is an increase over the prior year when the rate was 21 percent. In terms of failed opinions, Deloitte had no such issues in its 2014 inspection, but one of the 13 audits in its 2015 inspection led to a restatement, which prompted the firm to revise its audit opinion on the effectiveness of internal controls.
At one of the smaller major firms, Crowe Horwath, inspectors selected 14 audits for scrutiny in 2015 and found fault with three for a rate of 21 percent. That’s an improvement for the firm over its 2014 inspection results, where inspectors called out 36 percent of audits inspected.
Internal control over financial reporting continues to be a dominant theme in the newest inspection reports, with 10 of the 12 audits called out at PwC reflecting deficiencies in the internal control audit. Inspectors found 22 separate instances where PwC auditors did not adhere to Auditing Standard No. 5, which governs the internal control audit, the most frequently violated standard. Following closely behind, audit work around fair value measurements and disclosures led to 17 separate violations.
At Deloitte, all 13 of the audits flagged by inspectors demonstrated problems in the internal control audit, where inspectors tallied up 17 separate violations of auditing standards. Deloitte turned in only four mistakes related to fair value measurements and disclosures, but six problems with auditing accounting estimates. Both firms racked up a number of audits where inspectors criticized testing of controls and significant assumptions.
PwC had no comment on the references in its report to restatements or withdrawn audit opinions. In a prepared statement, the firm says it is proud of the quality of its audits and the progress it is making. “We remain committed to advancing audit quality through our continued investments in technology, enhancements in processes, and in the development of our people,” the statement said.
Deloitte also issued a statement to say it will continue to invest in audit quality. “The PCAOB inspection process serves a critical role in achieving our shared objectives -- improving audit quality, and serving investors and the public interest,” the statement said. “Executing audits of the highest quality is Deloitte’s top priority. We are confident that our ongoing investments in this area will continue to yield significant enhancements.”
Crowe said the firm is pleased with its improvement trends. “We will continue to use this constructive criticism to enhance our audit processes, procedures and training," said Mark Baer, managing partner of audit services for the firm. "We welcome the input from the PCAOB."