Audit regulators found problems with 24 percent of the audits they inspected at Deloitte & Touche in 2016, the same number inspectors flagged in 2015.
The Public Company Accounting Oversight Board at last published its report on the inspection it performed in 2016 on 2015 financial statement audits at Deloitte, finding deficiencies in 13 of the 55 audits selected for inspection. That’s the exact same number of audits both inspected and found deficient in 2015 at Deloitte.
The PCAOB’s report says 12 of the 13 deficient audits contained problems with the audit of internal control over financial reporting, also similar to 2015 findings, which has been the common sore spot in inspection findings the past few years across all the major firms. In the 2016 report, inspectors tallied up 21 separate violations of rules governing the internal control audit.
The finding is consistent with PCAOB foreshadowing of a “plateau” in improvements to audit quality that are becoming troubling to audit regulators. PCAOB member Jeanette Franzel, whose term expires at the end of 2017 and is not being renewed by the Securities and Exchange Commission, said recently the leading audit firms didn’t make any significant progress in improving their rate of audit deficiencies in the 2016 inspection cycle. “This plateau may call for a renewed focus on firms’ quality assurance systems from the top down,” she said at a recent national accounting conference.
Deloitte’s rate of audit deficiencies spiked in 2010 at 45 percent followed by 42 percent in 2011. The firm brought it down to 25 percent in 2012, 28 percent in 2013, then a low of 21 percent in 2014. In 2015 the rate crept back up to 24 percent, and it remained there in 2016. That 21 percent in 2014 is the lowest rate any major firm has achieved since 2010.
In terms of the nature of the audit mistakes, auditors continued at Deloitte to struggle with testing the design and operating effectiveness of controls selected for testing, evaluating significant assumptions used in developing estimates, and testing the accuracy and completeness of issuer-produced data or reports. Those also have been common themes the past few years in PCAOB inspection reports, not only for Deloitte but across all major firms.
As for the accounting areas where auditors most frequently stumbled, inspectors most often called out problems with investment securities, including derivatives; loans, including allowances for loan losses; and revenue recognition, including deferred revenue.
Deloitte’s comment letter on the inspection, attached to the report, says the firm is working to transform audits by leveraging innovative technologies and training its people to prepare them for a digitally driven future. “We are confident that our ongoing digital transformation, along with the investments we continue to make in our audit processes, policies, and quality controls, are resulting in significant enhancements to our audit quality,” the firm wrote.
The SEC recently announced the appointment of an entire new slate of PCAOB members, to be led by a new chairman, current U.S. Senate staffer William Duhnke. The new panel will take the reins at the PCAOB beginning in 2018.