When 2016 inspection results are published on the major audit firms next year, they will show an overall reduction in adverse findings, but also a spike in findings for at least one Big 4 firm.
The Public Company Accounting Oversight Board has completed most of the field work associated with its 2016 inspections on 2015 financial statements, said Helen Munter, director of inspections at the PCAOB, at the recent national conference of the American Institute of Certified Public Accountants. “Inspection results are trending down overall, but for some firms we have seen an unfortunate spike back up in results in 2016,” said Munter. She elaborated in remarks to the media after her prepared remarks that “at least one firm” will see a spike in adverse findings, based on preliminary, unpublished results.
Inspectors have delivered persistently high findings for the major firms in recent years. Among the Big 4, 2015 inspection results suggested an average failure rate of 28 percent, meaning more than one in four audits selected for inspection exhibited serious problems in the eyes of inspectors. That's an improvement over the 2014 average for the Big 4 of 34 percent, but not an improvement that has anyone celebrating.
Given several years of troubling findings even after firms have taken measures to respond to inspection findings, Munter says she’s left to wonder how that’s possible. “We are challenged to think about how it is the findings continue to exist, given the remedial actions firms have been taking,” she said.
It suggests the need for continued, heightened focus on remedial efforts at the audit firms, Munter said. Adverse inspection findings are concentrated in difficult, judgmental areas, so remediation in those areas is an ongoing process, she said.
“At this point, the firms need to really challenge if what they have done is enough,” said Munter. “I don’t accept that the level we are at is an acceptable level of findings. It’s not a de minimis level of findings. That might mean they need to think about whether it’s truly a one-off, anecdotal problem, which I think not, and what they are going to do more significantly at the quality control level as a result.”
Adverse findings continue to be most prevalent in the internal control audit work, said Munter, with problems in management review controls and system-generated data and reports remaining common themes. Problems with the audit of accounting estimates and fair value also remain a recurrent theme in inspection findings, she said.
Despite isolated spikes in findings that may have occurred, Munter says inspectors also see a great deal of evidence of good audit work. Engagement teams that develop an appropriate understanding of the issuer and really follow the processes, transactions, and controls that are in place are doing some of the best audit work, she said.
Munter also sees evidence that good audit work emerges from engagement teams that incorporate good coaching or mentoring of middle and junior members of the team as well as good monitoring. “That has made a difference in improving audit quality,” she said.
The board will continue to focus on some of the more troubling areas of internal control audit work, especially auditors’ response to their own assessments of the risk of misstatement, said Munter. “I see it as a way to get to the heart of some of the lingering ICFR problems we have,” she said. “We note a disconnect between the specific risks an engagement team has identified and any planned audit approach. We want to have discussions with the firms about that.”