EY earned a 36-percent deficiency rating in its latest audit inspection report, with the majority of the busted audits showing problems in both the financial statement audit and the audit of internal control over financial reporting.
The Public Company Accounting Oversight Board’s report on its 2014 inspection of EY shows inspectors pored over portions of 56 audit files and found what it considered to be deficiencies in 20 of them, or 36 percent. That’s an improvement for EY over its Big 4 record high failure rate of 49 percent in 2013, but not enough to beat Deloitte’s 21 percent rate in its 2014 report. Reports for EY and Deloitte are the only two so far published among the major firms inspected annually from the PCAOB's 2014 inspection cycle.
In EY’s latest inspection, the PCAOB says the most common problem was a failure to sufficiently test the design and/or operating effectiveness of controls the firm selected for testing. That was a concern in 16 of the 20 deficient audits, the PCAOB reports says, an issue that became particularly difficult in the most recent audit cycle. Another common failure, spotted 13 times, the PCAOB reports, is sufficient testing of the accuracy and completeness of data or reports produced by the company, or the controls over those reports. Inspectors also flagged a dozen cases where auditors failed to properly identify and test controls that addressed risks related to a particular account or assertion.
Under the PCAOB’s newly expanded format for inspection reports, the board reveals not only that 19 of the 20 deficient audits reflected problems with the internal control audit, but that inspectors spotted 74 separate infractions from auditing standards across the 19 deficient audits. The board flagged 9 audits where auditors made 15 separate mistakes in responding to the risks of material misstatements.
With respect to auditing fair value measurements and other accounting estimates -- a common theme in inspection reports the past several years -- the board identified only five audits with a combined 10 errors in those areas. In terms of industry sector, the board reports that most of the problems audits came from companies in such sectors as information technology, financial services, health care, and industrials.
In a response to the inspection attached to the report, EY leadership says they have evaluated the matters raised in the report and taken actions to address the findings according to auditing standards and the firm’s own policies. “The PCAOB’s inspection process assists us in identifying areas where we can continue to improve audit quality,” wrote Stephen Howe, managing partner, and Francis Mahoney, vice chair of auditing services. “We respect and benefit from this process as it aids us in fulfilling our responsibilities to investors, other stakeholders, and the capital markets generally.”
In a separate written statement after the report was published, the firm said: "EY is fully committed to delivering high quality audits. We benefit from the PCAOB inspection process as it assists us in identifying areas where we can improve. We believe audit quality at EY and the profession on the whole is improving, and we are committed to continuing this progress.”