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Adverse internal control findings tapered off in 2016

Tammy Whitehouse | November 6, 2017

For the first time since the beginning of a steady rise in adverse internal control findings in 2012, a slightly smaller number of auditors issued such opinions in 2016, according to a fresh analysis by Audit Analytics.

Across all public companies in 2016, auditors issued 214 adverse opinions on internal control over financial reporting, which suggests a heightened risk to those particular entities’ ability to produce financial statements that are free of material misstatement. That number is down from 236 in both 2015 and 2014, but still higher than the 2013 total of 189.

Adverse auditor attestations reached a high of 492 in 2005, which was only a few years into the reporting of internal control findings under Section 404 of Sarbanes-Oxley. It tapered steadily until 2010, when it reached a low of 141, then began to rise again to 174 in 2011.

The increases beginning in 2010 coincided with the arrival of new board members at the Public Company Accounting Oversight Board, who called for new intensity to the regulatory inspection process at registered audit firms. Beginning in 2010, audit firms began to see marked increases in the number of deficiencies called out by inspectors, the majority of which focused on problems with the audit of internal controls.

Although all public companies are required to report on the effectiveness of internal controls, smaller public companies are exempt from the audit requirement. Audit Analytics found among those companies that do not face the auditor attestation, adverse internal control findings held relatively steady from about 2008 through 2010, then began to taper slightly. The number of management-only adverse reports totaled 1,234 in 2016, down from 1,402 in 2015 and 1,549 in 2014. 

Among both groups of companies, whether facing an auditor attestation or not, the most commonly cited reason for adverse internal control findings focused on personnel. More than half of companies that went through the internal control audit said they did not maintain effective control because they had problems with accounting personnel, whether that means a lack of people, or a lack of people adequately trained to do the work. Fewer than 100 companies also cited material or numerous year-end audit adjustments, and 60 reported technology issues.

Among smaller companies that did not face the audit, more than 1,000 listed accounting personnel issues as the cause for their internal control problems, and 860 said they had problems with control design and segregation of duties.