Adverse auditor attestations on the state of internal controls at public companies made a bit of a comeback in 2018 after a brief retreat.
A coming report from research firm Audit Analytics will say 6 percent of accelerated filers received adverse findings from auditors on the state of their internal control over financial reporting in 2018 financial statements. That represents an increase of nearly 1 percentage point over the 5.2 percent of accelerated filers who received the same marks in 2017, which was 1.5 percentage points lower than in 2016.
In raw numbers, Audit Analytics says 217 accelerated filers reported adverse findings by auditors in 2018, compared with 189 in 2017 and 247 in 2016. The data suggests adverse opinions experienced something of a rebound in 2018 after declining slightly in 2017.
Accelerated filers are required under Sarbanes-Oxley to report on the effectiveness of internal controls and to have external auditors check their findings. The earliest years of SOX reporting began with higher levels of adverse findings that declined steadily until a low of 3.5 percent in 2010. That’s the year the Public Company Accounting Oversight Board began taking a tougher stand in its inspection of audit firms, particularly their work in auditing ICFR, after which the percentage of adverse findings began creeping back up to a recent high of 6.7 percent in 2017.
Non-accelerated filers are required to provide the same reporting, but they are exempt from the audit requirement. Management-only adverse reporting has hovered in the range of 40 percent since about 2013, and that figure didn’t move in any meaningful way in 2018, Audit Analytics will report.
Audit Analytics reports annually on the state of internal controls reporting at public companies, and its newest report when published will also shed light on what prompted the majority of adverse findings in 2017. In the majority of cases, companies were compelled to conclude internal controls were not effective as a result of material or numerous year-end audit adjustments, followed closely by accounting personnel problems. IT issues and segregation of duties or control design problems also contributed.
In terms of accounting areas that proved most problematic, revenue recognition was at the core of the majority of internal control issues, followed by loans or accounts receivable, investment, and cash issues.
Amid increased focus on internal control issues, some audit firms have adapted their audit methodologies and begun to show improvements, but some major firms are still struggling, according to PCAOB inspection reports. The PCAOB has promised to continue its focus on internal controls in its inspections, although it also promises to take a harder look at the work firms are doing internally to control the quality of their audit work.