Where a Big 4 firm has a problem with an audit, it probably also involves a deficiency in the audit of internal control over financial reporting.
Big 4 firms exhibited problems in 35 percent of all audit engagements inspected in 2014, and a whopping 84 percent of those deficient audits involved problems with internal control over financial reporting, according to an analysis by Dan Goelzer, a former member and acting chair of the Public Company Accounting Oversight Board. The analysis shows the PCAOB found fault with slightly fewer Big 4 engagements in 2014 compared with 2013, but the share that also involved problems with the internal control audit was even higher at 89 percent.
While the deficiency rate among the Big 4 improved from 2013 to 2014, the spread between the four largest firms grew from 21 percentage points to 33 percentage points. In 2013, for example, Deloitte delivered the lowest deficiency rate at 28 percent, and EY the highest at 49 percent. The following year, Deloitte delivered the lowest rate again, dropping to 21 percent, while EY’s deficiency rate rose to 54 percent. Across the Big 4, inspectors scrutinized portions of a total of 219 audits in both years. In 2013, inspectors found problems in 85, or 39 percent. In 2014, the total number of deficient audit declined to 76.
With the PCAOB’s reports now providing more insight into which specific audit standards were violated in the eyes of inspectors, Goelzer determined 69 engagements, or 29 percent of all the audits inspected, involved problems with Auditing Standard No. 5, which governs the audit of internal control over financial reporting. Among audits with deficiencies, Goelzer finds, 84 percent also had problems with the internal control audit. The PCAOB has heard a great deal of push back over its focus on internal control, but regulators have indicated recently that the focus will continue even into the next inspection cycle.
In a distant second place behind internal control audit deficiencies, the PCAOB called out 13 percent of all Big 4 engagements inspected for problems with the auditor’s response to the risk of material misstatement. Those violations of Auditing Standard No. 13 occurred in 38 percent of audits with deficiencies, Goelzer reports. Following those, inspectors most often found problems with auditing accounting estimates, evaluating audit results, and auditing fair value measurements and disclosures, the report shows.
“The audit deficiency description and auditing standard deficiency tables could be used as something of a check list for topics audit committees may want to discuss with the auditor in order to understand how the auditor addressed, or plans to address, the most challenging areas in the company’s audit,” Goelzer says in his report.