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At Least EY’s 2017 PCAOB Inspection Report Is Not as Not Good as KPMG’s

The PCAOB just released EY’s 2017 inspection report, and there’s some good news and some bad news for the Black and Yellow.

The good: Congrats, EY, your audit deficiency rate of 31% is below your historical average deficiency rate of 32%. Of the portions of 55 issuer audits PCAOB inspectors reviewed during 2016, 17 weren’t up to PCAOB standards. While a 31% deficiency rate is pretty not good, it’s not as bad as some years’ EY inspection reports. Since 2009, there have been four EY inspection reports that had worse percentages of audit deficiencies than 2017. Who can forget the 50% deficiency rate in 2013, 48% in 2012, and 36% in both 2011 and 2014.

Also, EY’s 2017 inspection report wasn’t as bad as KPMG’s 2017 inspection report, so that’s good news, right?

The bad: EY’s 2017 inspection report is the third worst among the Big 4 firms in terms of highest percentage of audit deficiencies, only better than KPMG’s 50%. Deloitte had a failure rate of 20% and PwC’s deficiency rate was 24%.

I still can’t believe this happened, but even Grant Thornton had a lower deficiency rate than EY for audits conducted in 2016.

Also, the percentage of deficient audits had been trending downward until 2017: 29% in 2015’s report and 27% in 2016’s report.

If this were 2014, we could say that PCAOB Auditing Standard No. 5 continues to kick EY in the AS5. But because it’s 2019, we’ll have to instead say that the standard formerly known as AS5 (now known as AS 2201), An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, continues to be difficult for EY auditors to do correctly.

In addition, EY auditors, much like auditors at Deloitte, KPMG, and PwC, still suck at auditing revenue:

For example, we have Issuer B, a company in the IT industry sector:

In their response to the PCAOB, Kelly Grier, EY US chairman, and John King, EY Americas vice chair of assurance, said the firm’s new Independent Audit Quality Committee will help EY not be so meh at auditing:

Performing high quality audits with independence, integrity and professional skepticism is at the heart of our responsibility as auditors. Our objectives include continuously improving the quality of our audits. To accomplish this, we are creating a truly digital audit that enhances audit quality to lead in a transformative age in which technology is reshaping every aspect of business. We are also simplifying our processes to enable our audit teams to focus on what matters the most, as well as building a workforce of the future by investing in attracting, training, engaging and retaining our audit professionals. We have also formed an Independent Audit Quality Committee (“IAQC”), comprised of seasoned external leaders with extensive, diverse and highly relevant experiences, that are advising our senior leadership on the many aspects of the Firm’s business, operations, culture, talent, governance and risk management that affect audit quality. We believe that gaining insight and advice from the IAQC will help us fulfill our important role of delivering high-quality audits that build confidence in the U.S. and global capital markets.

I guess anything is possible!