U.S. audit regulators are not the only ones alarmed by high rates of busted audits. Around the globe, audit regulators who are members of the International Forum of Independent Audit Regulators compared notes and found nearly half of the audits they inspected in 2014 contained deficiencies that suggest the audit firm didn’t have enough evidence to issue a sound opinion.
In its 2014 Survey of Inspection Findings, IFIAR said 47 percent of audits inspected contained deficiencies, 24 percent of them problems with internal control testing, 20 percent with fair value measurement, and 14 percent with revenue recognition. Those are some of the same themes that have emerged from the Public Company Accounting Oversight Board’s inspection of U.S. audit work in recent years. “We continue to see high levels of inspection deficiencies in vital areas of public company audits,” IFIAR Chairman Lewis Ferguson said in a statement. Ferguson is a member of the PCAOB. “This is a problem for investors and stakeholders around the world.”
IFIAR says in audits of “systemically important financial institutions,” such as banks and insurers, audit deficiencies most often related to internal controls (27 percent), followed by and valuation of investments and securities (27 percent), and allowances for loan losses and loan impairments (17 percent). In terms of audit firms’ quality control systems, regulators globally most often noted problems with engagement performance, independence and ethics compliance, and human resources.
The results suggest a need for root cause analysis to identify why audits fail, said Janine van Diggelen, IFIAR Vice Chair and an audit regulator in the Netherlands, in a statement. Root cause analysis is “high on the agenda,” she said, both at the global level and in individual jurisdictions. “I hope that the effects of the analysis of causal factors and the measures taken by networks and member firms in response to those causal factors will increasingly become observable in future surveys,” she said.
IFIAR consists of 51 audit regulator members from jurisdictions in Africa, the Americas, Asia, Europe, the Middle East, and Oceania. The forum’s 2013 survey yielded similar overall results, although IFIAR said the nature of the survey does not lend itself to a year-over-year comparison of audit quality. “In addition to root-cause analysis, IFIAR hopes to see firms review their audit practices. “The extent of findings across jurisdictions in various audit areas demonstrates that firms should continue improving their auditing techniques, as well as their oversight policies and procedures,” IFIAR said.