Audit regulators are encouraged by a reduction in the number of audits with problems in the internal control findings, but they are still troubled by the nature of the problems they identify.

Among the Big 4 firms in the United States, the overall number of audit deficiencies related to internal control improved in 2014 inspections, said Jeanette Franzel, a member of the Public Company Accounting Oversight Board. From a high in 2013 where inspectors found internal control problems in 36 percent of all Big 4 audits inspected, the figure dropped to 30 percent in 2014, according to data Franzel presented during a recent address to the American Accounting Association.

The improved number is encouraging, but that figure is still high in Franzel’s view, according to her published outline that formed the basis for her presentation.

When it comes to the auditor’s selection of controls for testing, the PCAOB still appears to have some concerns. Franzel pointed out that the results from 2013 to 2014 show improvement in auditors’ testing of the design effectiveness of controls and in the testing of the operating effectiveness of controls. However, the data showed no improvement in the auditor’s selection of appropriate controls to test.

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If an auditor isn’t selecting the right controls to test, that means the auditor is missing controls that might be important to preventing a material misstatement, Franzel’s notes indicate. “Although the lower number of deficiencies in testing design and operating effectiveness of controls is encouraging, the lack of progress in selecting the appropriate controls to test is concerning,” she wrote.

While inspectors have concerns that auditors are missing some control problems, Franzel also points out that auditors have been increasing their issuance of adverse opinions on internal controls. In 2010, auditors gave adverse opinions on 3.4 percent of a little more than 4,000 audits where they performed an internal control audit as required under Sarbanes-Oxley Section 404B. (Not all companies are subject to that audit requirement.)

The figure increased somewhat steadily until it hit a high of 6 percent in 2014, Franzel noted, citing data provided by Audit Analytics. While the data is not yet complete for 2015, a count through mid-July put the rate of adverse internal control opinions at 5.4 percent.

Franzel also points out, however, that the majority of companies that file financial restatements did so after receiving a clean opinion on internal control. In 2014, for example, 76.5 percent of all restatements that year were filed by companies that had clean internal control opinions. In 2015, the overall number of restatements declined, but the portion of restaters that had clean internal control opinions rose to 78.4 percent.

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