Inspection Results Vary Even Within Global Networks, PCAOB Member Says

Global affiliates of the six largest accounting firms turn in strikingly different inspection results as a group compared with the U.S. affiliates of the same firms, giving audit regulators more to ponder about what conclusions they can draw from their own inspection findings.

Data from the Public Company Accounting Oversight Board shows Deloitte in the United States, for example, has been reducing the rate of deficiencies in its audit inspections from 2011 through 2013, but Deloitte’s global affiliates as a group have turned in much higher rates. At KPMG, U.S. deficiencies are rising, while at KPMG’s global affiliates, deficiency rates are falling. At EY and PwC, the disparity between U.S. results and overseas results is not as stark. Deficiency rates at BDO in the United States and at Grant Thornton are much higher than at overseas affiliates.

PCAOB member Lewis Ferguson, who also chaired the International Forum of Independent Audit Regulators until recently, released data being tracked at the PCAOB showing how the global affiliates of Big 4 firms have fared in recent years’ inspections compared with their U.S. counterparts. He finds the aggregated data “interesting and useful to review and consider,” although it’s difficult to draw meaningful conclusions from the findings year-over-year.

“It would be a mistake to presume that an audit firm’s inspection results in the United States necessarily speak to the quality of its global network,” wrote Ferguson in an opinion article he authored. “There can be a real difference among audit deficiency findings for the firms in the United States and what we see at their affiliates around the globe. Sometimes even as we see inspection results improving at the U.S. firm, their affiliated firms around the world appear to be struggling, or vice versa.”

At Deloitte, for example, the rate of audit deficiencies fell from 42 percent in 2011 to 28 percent in 2013, but among Deloitte’s global affiliates, deficiencies grew from 41 percent in 2011 to 73 percent the following year, then 67 percent in 2013. At KPMG, the U.S. firm’s deficiency rate grew from 23 percent to 46 percent, while overseas it fell from 58 percent to 39 percent.

The inspection results are not a scorecard or a stand-alone measure of audit quality, says Ferguson. However, coupled with findings of IFIAR members, they show that auditors around the world are struggling with many of the same issues -- like internal control over financial reporting, revenue recognition, and hard-to-value securities. Ferguson says he’d like to see more dialogue on the root causes around such systemic problems, including whether the global audit networks are adequately governed. “It raises questions about whether the governing structures of the big accounting firms contribute to audit quality or potentially inhibit it,” he says.

The PCAOB has established agreements with a number of its counterparts to conduct inspections on firms located in those jurisdictions that are registered to audit financial statements filed in the United States. Not all countries, however, have provided the PCAOB with inspection access, most notably China.

Ferguson said he shares the data because investors and other stakeholders benefit from the board’s efforts to be “as transparent as possible about our work.” The board has increased transparency into inspection findings with its 2014 audit reports that began appearing in 2015 to share more information about specific audit standards that are violated and the types of entities whose audits were selected for inspection.

The board could go further, Ferguson says, to provide more insight into the severity of audit deficiencies. “Some findings are much more important than others,” he says. “In some, the auditing standards are not met but it was probably not threatening to the integrity of the financial statements. Some findings are potentially catastrophic. I would like to see more distinction of those findings.”

Ferguson says he would also like to see more discussion in inspection reports of root causes of audit failures. Often that includes a failure in the risk analysis process, he says. “When in the audit are difficult issues surfaced?” he asks. “One of things we find is that there are likely to be fewer deficiencies when the risk assessment process is vigorous and difficult issues are surfaced early.”

At the same time, Ferguson also would like to see more discussion of what auditors did right. “We could give some examples of practices that we think seem to be particularly successful,” he says. “We do see audits that are successful, but regulators are always concerned about saying anybody did anything well.”