PCAOB report gives Deloitte its lowest deficiency rate

Deloitte & Touche’s recently published 2017 audit inspection report reflects the lowest deficiency rate the firm has ever earned.

In its first report on a major firm from the 2017 inspection cycle, the Public Company Accounting Oversight Board says it inspected portions of 55 audit files at Deloitte, 52 of them integrated audits on both financial statements and internal control over financial reporting. Inspectors said they found deficiencies in 11 of the audits significant enough to conclude auditors didn’t obtain sufficient evidence to support their audit opinions.

That’s a 20-percent rate of deficiency for the firm in 2017, an improvement over the 24-percent rate in both 2016 and 2015. It’s also the lowest level the firm has ever recorded since the PCAOB first began providing data in inspection reports in 2009. The PCAOB cautions against regarding deficiency rates as indicative of audit quality at firms, as the inspection process is intentionally geared toward finding problems in higher-risk audits.

The majority of mistakes called out by inspectors focused on the audit of internal control, with inspectors flagging failures to sufficiently test the design or operating effectiveness of certain controls, failures to identify and test controls that addressed identified risks, or failures to test the relevant criteria for revenue recognition. Those have been common themes in PCAOB inspection findings the past several years.

Across the 11 deficient audits, inspectors identified 13 separate departures from auditing standards with respect to the internal control audit, and three mistakes in responding to risks of material misstatement. Inspectors also noted four deficiencies in evaluating audit results.

In Deloitte’s report, the firm’s response letter indicates it evaluated the inspection findings and took appropriate steps under professional standards to address deficiencies. “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,” wrote Joe Ucuzoglu, chairman and CEO of Deloitte & Touche, and Cathy Englebert, CEO of Deloitte.

A spokesman for the firm said in a written statement that the firm is proud of its “continued positive trajectory” with respect to PCAOB inspection findings. The firm is making investments to “enhance the quality and value of our audits by leveraging innovative technologies and enhancing the skillsets of our talent to prepare them for a digitally driven future.”

As audit deficiencies go, Deloitte historically has earned among the better rates across Big 4 firms. In 2016, Deloitte’s 24 percent rate was better than EY’s 27 percent but not enough to match PwC’s 20 percent rate.

KPMG’s report on its 2016 has not yet been published, hung up in uncertainty amid charges of fraud and conspiracy associated with the inspection process. PCAOB Chairman William Duhnke said in December that the board would “soon” publish the report.

The PCAOB, which is governed by an all-new five-member board beginning in 2018, has indicated it plans to make significant changes to its inspections process beginning in 2019. Inspectors plan to focus more attention on firms’ quality control systems, looking for evidence of how well firms manage the audit process to prevent errors or failures from occurring.