Audit regulators found fault with 21 percent of the audits inspected at Deloitte in 2014, lower than any rate delivered for any major firm since 2009.
The Public Company Accounting Oversight Board also revealed its expanded inspection reports with the Deloitte report, delivering more insight into the types of problems it found, the number of deficiencies in each problem audit, and the types of companies where problems were most prevalent. Deloitte's is the first major firm report to be published revealing 2014 inspection findings.
The 2014 inspection report for Deloitte, which covers inspections performed in 2014 on 2013 financial statement audits, shows inspectors dug into 53 audit files and found problems in 11 of them. Four of the deficient audits exhibited problems on the financial statement audit only, while four others had problems only with the audit of internal control over financial reporting. Three of the eleven audit files had problems in both areas.
The report shows, for example, the PCAOB inspected 11 audit files of financial services companies, and found 21 percent of them to have problems. Among industrials, inspectors dug into 10 audit files and found problems with 19 percent of those. Seven audit files came from information technology companies, and 13 percent were deficient; eight audit files dealt with consumer discretionary companies, and inspectors found fault with 15 percent of those.
In terms of the most common mistakes, inspectors called out six of the 11 audits for failure to sufficiently test controls over data or reports produced by the entity, or failure to sufficiently test the accuracy and completeness of such reports. That’s become a particularly contentious area for management and external auditors as auditors have responded to inspection results and PCAOB guidance telling them to dig deeper than they had in prior years.
In four audits, inspectors found failures to sufficiently test significant assumptions or data that the company used in developing an estimate -- also an area for new rule making from the PCAOB because of persistent problems. Three audits revealed problems with testing the design or operating effectiveness of controls, and three audits exhibited problems in testing controls that addressed the risks related to a particular account or assertion.
Nearly one-third of the audits chosen for inspection represented companies with revenues between $1 billion and $2.5 billion. The next largest tranche of companies, 21 percent, fell between $2.5 billion and $5 billion in revenue. On the extremes, inspectors selected only two audits for inspection for companies below $100 million in revenue, and only two for companies with revenues greater than $50 billion.
Despite all the added detail on deficiencies, the final result reflects an improvement in recent years in terms of the rate of audit deficiencies uncovered in an inspection. In 2013, Deloitte fared better than any other major firm with a 28-percent deficiency rate, with other major firms trending toward a high of 65 percent.
Deloitte’s response to the inspection, included with the report and signed by Deloitte leadership, took no exception with any of the inspection findings. “We believe that the PCAOB’s inspection process serves an important role in the achievement of our shared objectives of improving audit quality and serving investors and the public interest,” wrote Cathy Englebert, CEO of Deloitte LLP, and Joe Ucuzoglu, chairman and CEO of Deloitte & Touche.