EY delivered failed audits in almost half of the audits inspected by the Public Company Accounting Oversight Board in 2013 and blew the audit of internal control in nearly every one of those cases.
It was the first time a Big 4 firm has come so close to the 50-percent mark in the five years the PCAOB has provided data in its inspection reports. EY’s is the third of the Big 4 firms to have its report published in 2014 reflecting 2013 inspections of 2012 financial statements. PwC took heat for 32 percent of its audits inspected, and Deloitte for 28 percent of its inspected audit work. KPMG’s 2013 report has not yet been published, nor have any reports on the second-tier major firms.
In EY’s inspection report, the PCAOB finds fault with 28 of the 57 audits inspected, and 27 of the 28 failed audits contained problems in the audit of internal control over financial reporting. The report says EY most often stumbled in selecting controls to test, testing the design effectiveness of controls, and testing operating effectiveness.
The PCAOB says in the report that each of the deficiencies described represent situations where the firm failed to obtain adequate audit evidence to support its opinion on financial statements and internal control. Many of the deficiencies, the PCAOB says, involve a lack of professional care and professional skepticism. In addition to the 27 audits that violated Auditing Standard No. 5 on internal control, a recurring theme in many inspection reports and PCAOB initiatives, the PCAOB also calls out 15 failures to properly respond to risk of material misstatement and 11 instances of problems with audit sampling.
EY’s own audit failure rate as described in PCAOB reports has crept up from 8.6 percent in 2009, before the PCAOB began clamping down on all the major firms, to 22 percent in 2010, 36 percent in 2011, and 48 percent in 2012.
EY made no attempt to dispute or protest the PCAOB’s assertions. In a letter attached to the report, firm leadership says they have thoroughly evaluated the issues raised in the report and have taken actions to address the findings. “The PCAOB's inspection process assists us in identifying areas where we can continue to improve audit quality,” wrote Stephen Howe, managing partner, and Frank Mahoney, vice chair of assurance 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.”
After the report was published, EY said in a statement: “Across our organization, EY is fully committed to audit quality. The PCAOB’s inspection process assists us in identifying areas where we can continue to improve.”