PCAOB 2021 inspection reports: PwC sees best results again; EY deficiencies increase

The results, posted Monday, cover the 2021 inspection cycle. Only two of PwC’s 56 audits reviewed (3.6 percent) returned deficiencies, a slight increase over last year’s rate (1.9 percent) but still a far cry from the 30 percent the firm was at in 2019.

Second place among the Big Four firms went to Deloitte (13 percent), followed by EY (21.4 percent) and KPMG (25.9 percent). EY’s 2021 inspection results ended the firm’s prior trend of declining deficiencies in each year from 2017-20, while KPMG’s results improved for a fourth consecutive year.

Deloitte had a run of three straight years of improvement snapped.

The focus of PCAOB inspections in 2021, as in 2020, was to evaluate firm procedures related to areas of current audit risk and emerging topics. In 2021, the board focused primarily on audit areas affected by Covid-19, including fraud and going concern.

Below are highlights of each firm’s 2021 results.

PricewaterhouseCoopers

Only two of PwC’s 56 audits (3.6 percent) inspected in 2021 had significant deficiencies, compared with one of 52 audits (1.9 percent) in 2020.

The 2021 deficiencies related to control and substantive testing over valuation of long-lived assets (oil and gas properties) and evaluating the accounting for warrants and equity awards in a business combination. The only deficiency in 2020 was in testing controls, a repeat finding from 2019 inspections, in the areas of revenue and inventory.

Other 2021 noncompliance issues primarily related to failure to make required communication to the audit committee of other accounting firms that performed audit procedures (9 of 50 audits), a repeat deficiency from 2020. There was also noncompliance with audit workpaper documentation standards (3/56).

“PwC is incredibly proud to deliver sustained, profession-leading audit quality results,” the firm said in a statement. “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.”

Deloitte & Touche

Significant deficiencies for Deloitte in 2021 increased to 13 percent (7 of 54 audits), compared to 3.8 percent (2/53) in 2020. Although the 2021 deficiency rate was second best among the Big Four, it is the highest the firm has experienced since 20 percent in 2017. Deloitte had recorded the best performance among Big Four firms in each of the inspection years 2017-19.

In both 2021 and 2020, deficiencies were identified in testing design and operating effectiveness of controls over revenue. Other 2021 deficiencies were noted in testing controls and substantive testing of inventory, including controls of cycle counts (2), and insufficient procedures to address a going concern issue (1).

Other 2021 noncompliance issues included failure to incorporate all matters communicated to the audit committee regarding material accounts or disclosures in procedures related to the determination of critical audit matters (CAMs) (3/46) and deficiencies in audit workpaper documentation (2/54).

“Our strong results in the 2021 PCAOB inspection report reflect our continued focus on executing high-quality audits, which forms the foundation of our sustained leadership in the profession,” said Deloitte. “… While we are proud of our recent inspection results, we will continue to focus relentlessly on continuous improvement and audit quality.”

Ernst & Young

EY’s significant deficiencies increased to 21.4 percent (12 of 56 audits) in 2021 from 15.4 percent (8/52) in 2020. The most common deficient areas related to testing: identifying controls related to significant accounts or relevant assertions, design or operating effectiveness of controls selected for testing, and the accuracy and completeness of information used to select controls tested.

The areas with the most frequent deficiencies in 2021 were revenue and related accounts (7), long-lived assets (2), equity transactions (2), and inventory (1). Revenue deficiencies were also frequent in 2020 (5) and related to control and substantive testing. For most of the 2021 deficiency areas noted, there were weaknesses found in controls over IT systems associated with the area.

In 2021 and 2020, EY was noted for noncompliance with PCAOB standards for required audit committee communications. In 2021, deficiencies related to other accounting firms that performed audit procedures in the audits (11/15). There was also noncompliance related to CAMs (7/49) and inaccurate information on Form AP relating to other audit firm participation (4/13).

“The PCAOB inspection process, along with our internal monitoring processes, provides us with valuable information that we use to drive continuous improvement in our audit approach and to strengthen our system of quality control,” said EY. “After experiencing meaningful improvements in our inspection results from 2017-20, there was an unfavorable increase in inspection findings reported in 2021.

“We are disappointed by these results, and we take them seriously. We have already implemented actions to deliver quality improvements and drive greater consistency in audit execution during the 2022 audit cycle while continuing to advance our multiyear transformation strategy to enhance audit quality. More details will be included in our forthcoming audit quality report.”

KPMG

The rate of significant deficiencies at KPMG in 2021—14 of 54 audits, 25.9 percent—was a slight improvement over 2020 at 26.4 percent (14/53). The firm’s deficiency level has dropped each year since reaching 50 percent in 2017, though it remains behind its Big Four peers.

KPMG’s most common 2021 deficiencies related to testing: of the design or operating effectiveness of controls selected for testing, the accuracy and completeness of information used in operation of controls, data or reports used in substantive testing, and overreliance on controls during substantive testing.

Significant deficiencies were noted in the areas of revenue and related accounts (6), allowance for credit and loan losses (3), inventory (2), going concern (2), and investment securities (1).

In 2021 and 2020, deficiencies in revenue related to testing of controls and substantive testing. In 2021, deficiencies in the allowance for losses and inventory primarily related to testing controls. The going concern deficiency was related to substantive testing of the issuer’s evaluation of its ability to continue as a going concern.

Other instances of noncompliance in 2021 included failure to incorporate all matters communicated to the audit committee regarding material accounts or disclosures in the procedures related to determination of CAMs (9/45) and audit workpaper documentation (2/54).

“KPMG continues to focus on sustainably enhancing audit quality through our investments in learning and development, technology, and service delivery model,” the firm said in a statement. “Global adoption of KPMG Clara, along with enhanced monitoring and reviews, industry-specific data and analytic routines, and automation, is powering a more-risk based, consistent, and high-quality audit today.”

Overall landscape

The PCAOB shared a 2021 inspection result preview in early December and noted increases in the number of audits with significant (Part I.A) deficiencies for firms audited annually and triennially. The board expects significant deficiencies in approximately 33 percent of 2021 audits inspected—up from 29 percent in 2020—and that 55 percent of reviews will return Part I.A and/or I.B deficiencies (up from 44 percent last year).

There were more deficiencies noted in assessment and reporting of CAMs, along with areas of recurring deficiencies over many years of inspections. PCAOB Chair Erica Williams has indicated in recent public statements the board intends to focus on audit quality through inspections, enforcement, and improvements to auditing standards.