The Public Company Accounting Oversight Board released its latest inspection reports for EY and PwC, documenting another year of small change in audit deficiency findings.
Both PwC and EY knocked two percentage points off their rate of deficiency from the prior year. PwC fell from 22 percent in 2015 to 20 percent in 2016, and EY dropped from 29 percent in 2015 to 27 percent in 2016. In an earlier report, inspectors indicated they found deficiencies in 24 percent of Deloitte’s audit files in 2016, the same as in 2015. The only notable exception in report issued so far in 2016 is at Grant Thornton, where the firm registered a more meaningful reduction in deficiency findings.
In late 2017, representatives of the PCAOB spoke at a national accounting conference of a “plateau” in deficiency findings, calling on firms to double down on their efforts to address the root causes of audit deficiencies. Jeanette Franzel, PCAOB member, and Helen Munter, director of inspections at the PCAOB, said firms needed to revisit what they are doing to address PCAOB inspection findings and consider what more they can do to bring down the frequency with which inspectors identify audit deficiencies.
At PwC, the firm’s 20-percent deficiency rate is the lowest recorded at the firm since inspection findings spiked in 2010, and the lowest among all major firms during that same time frame. However, PwC’s report also shows deficiencies spotted by inspectors ultimately led to one financial statement restatement and two revised opinions on the auditor’s findings with respect to internal control over financial reporting.
That’s not unlike what happened at PwC in 2015, where the firm recorded the lowest rate of audit deficiency among the major firms, but had more restatements and revised audit opinions emerging from inspection than any other major firm as well.
At EY, inspection findings led to one client making “substantial adjustments” to financial statements and two cases where the firm revised its opinions on internal control. Deloitte’s latest report shows one instance of auditors revising their opinion on internal control following inspection.
The nature of audit deficiencies in the latest reports on PwC and EY are not unlike those from other firms and in prior years. At PwC, the most common problems involved failures to sufficiently test the design or operating effectiveness of controls that were selected for testing, failures to sufficiently evaluate significant assumptions used in estimates, and failures to sufficiently test accounts or portions of accounts to address identified risks.
At EY, inspectors also called out plenty of problems with testing the design or operating effectiveness of controls, as well as problems with evaluating significant assumptions used in estimates. Inspectors also noted problems testing controls over data and reports produced by the issuer as well as the accuracy and completeness of such data and reports.
EY says in its response to its inspection report that it evaluated the finding and took actions in accordance with standards and policies. “The PCAOB’s inspection process assists us in identifying areas where we can continue to improve audit quality,” the firm wrote. “We respect and benefit from this process as it aids us in fulfilling our responsibilities to investors, other stakeholders, and the capital markets generally.”
A PwC spokesman said the firm is pleased with the continued improvement in its inspectio results. PwC’s response in its report is similar in tone and content to EY's. The firm also offers additional insight into the “tangible steps we are taking to maintain and improve audit quality” with a link to the firm’s latest annual audit quality report.