The Public Company Accounting Oversight Board announced Tuesday that its inspectors are finding “unacceptable” levels of problems at audit firms, marking another annual increase in 2022 inspections.
The inspection staff predicts that approximately 40% of reviewed audits will have one or more deficiencies included in the IA of an individual audit firm’s inspection report in 2022, up from 34% in 2021 and 29% in 2020, respectively. account. PCAOB inspectors also predict that approximately 46% of reviewed audits will have one or more deficiencies addressed in Part IB of the firm’s inspection reports, up from 40% in 2021 and 26% in 2020.
Part IA describes deficiencies that are so material that the staff believes that the audit firm has not obtained sufficient audit evidence to support its opinion on the company’s financial statements or internal control. In Part IB, staff describe instances of noncompliance with the Board’s standards or rules. Some audits have both Part IA and Part IB deficiencies, and the inspection staff expects that approximately 61% of the 710 audits reviewed by the PCAOB in 2022 will have one or more Part IA and/or Part IB deficiencies, up from 55% in 2021 and 44% in 2020.
The report is based on audit inspections of public companies conducted by 157 audit firms in 2022.
“The Part IA findings are serious,” PCAOB Chair Erica Williams said at a news conference Tuesday. “This means that the audit firm did not obtain sufficient appropriate evidence to support its opinion, and the audit opinions were signed without completing the audit work required to review the financial statements. These deficiencies reflect nearly every category of the 157 audit firms that the PCAOB inspected in 2022, including global network firms, both in the US and internationally. Let me be clear. Do better and perform high-quality audits.” that investors deserve. We have shown that we will not hesitate to bring enforcement cases against auditors where necessary, and we will continue to conduct hundreds of audits each year. At the same time, we also ask audit committees to hold audit firms accountable on behalf of investors.
The report comes at a time when audit firms are struggling to find enough people to fill their ranks and when the PCAOB is ramping up enforcement and personal inspections now that the pandemic has largely subsided. More audit firms are now relying on technology such as artificial intelligence and data analytics to help auditors identify problems with clients’ financial statements.
Accounting Today asked Williams about the impact of the PCAOB’s tougher inspection process under its new board and the AI technology being used by firms.
“The PCAOB inspectors are calling the same balls and punches that they always have, and the fact is that audit quality is moving in the wrong direction and firms need to turn it around,” Williams responded. “In the report, we set out examples of the types of gaps that we see, and those gaps are in areas where they are inherently complex. They require significant management judgment and generally involve a greater risk of material misstatement, meaning audit firms should pay more attention to them. [and] Long-term assets. Regarding your question about AI, that’s not something we’ve seen, but we’re still calling the same balls and strikes that we always have as far as our inspections go. “
The report outlines several questions the PCAOB recommends that audit committee members ask audit firms, Williams noted, including:
- Has our audit activity been reviewed by the PCAOB? Were there areas of the audit that required significant discussions with the PCAOB that did not result in a comment form?
- Has the engagement partner been vetted for other jobs? If so, what were the results of this inspection?
- What does the audit firm do to address the findings of a common escalated inspection?
“Investors can also use their influence with investor relations and the audit committees of the companies in which they invest and encourage them to seek out firms with a proven track record of quality,” Williams added.
He noted that for the first time, the PCAOB began including new information about independence and more in its inspection reports, and last week it expanded the tools available on its website to make it easier to find and compare indicators of audit firms’ deficiencies (See the story).
“Ultimately, the onus is on the auditors to correct the problems that caused the deficiencies in their audits,” Williams said. “But their clients’ responsibilities provide a strong incentive to find solutions. Today’s report also includes some good practice examples that firms can use to improve audit quality. There is no single answer as to why deficiencies have increased. The reasons are likely to vary from firm to firm, so the solutions will also vary. Firms must develop and implement solutions to improve audit quality. Make decisions about where to invest money. Auditors must get quality And results that are worthy of their trust.”