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Regulators globally say 42 percent of audits are deficient

Tammy Whitehouse | April 7, 2017

Inspectors globally found problems in 42 percent of the individual audits they selected for inspection at the largest audit networks in the world, suggesting even bigger problems with audit quality in other countries than in the United States, according to a recent international poll of audit regulators.

The International Forum of Independent Audit Regulators, which includes the Public Company Accounting Oversight Board in the United States, polled 52 members to assess the state of audit inspection findings around the globe at the largest audit firm networks. Based on 36 responses, IFIAR says results globally are showing some incremental improvement, but still suggest there’s plenty of work to be done to improve audit quality and standardize audit procedures.

IFIAR’s fifth annual poll in 2016 suggests regulators are giving fewer negative findings to the largest of audit firms, but the organization says “too many audit firms continue to have high rates of inspection findings.” IFIAR’s report on the poll results describe the 42 percent rate for individual audit engagement findings as “unacceptably high.”

In IFIAR’s 2015 poll, the global rate of adverse findings landed at 43 percent, only one percentage point higher than in 2016. In the 2016 poll report, IFIAR called on the major networks — Deloitte, EY, KPMG, PwC, BDO and Grant Thornton — to achieve “a measurable reduction” in findings by 2019.

The PCAOB’s results for 2015, the most recent year reported, suggest the rate of deficiency in the United States is better than that in other parts of the world. The PCAOB so far has published results for all of the major networks except BDO USA. Its reports indicate inspectors selected 251 audits across the other five firms, finding deficiencies in 75. That’s an average deficiency rate of 30 percent.

In terms of the common audit tripping points, global regulators told IFIAR they found the most errors in the audit of accounting estimates, including fair value measurement. Globally, 32 percent of all audits inspected presented mistakes worthy of note in that area. Internal control testing ranked second at 18 percent, followed closely by audit sampling at 17 percent. Revenue recognition ranked behind that at 13 percent.

That’s a little different from mistakes most often identified in the United States, where internal control over financial reporting under Auditing Standard No. 5 is the most often identified trouble spot in U.S. audits. Auditing accounting estimates and fair value is a common problem in the United States as well.

With respect to firm-wide systems of quality control, the IFIAR poll suggests the 36 regulators collectively found problems in engagement performance at roughly half of the firms they inspected. Problems with independence and ethical requirements surfaced at 40 percent of firms, while problems with human resources were evident at 31 percent, and problems with monitoring at 28 percent.