Another day, another scathing speech from PCAOB Chair Erica Williams. Today it’s from prepared remarks given at the AICPA & CIMA Conference on Current SEC and PCAOB Developments on Monday.
First, let’s talk about why she’s mad. On December 8, the PCAOB issued a concerning staff Spotlight report about an increase in the percentage of engagements reviewed with at least one “comment form,” comment forms being where inspectors tell audit firms a potential deficiency has been found, which generally result in Part I.A or Part I.B inspection observations. After the firm’s response to the comment form, the PCAOB evaluates the matter for inclusion in the inspection report.
From that December 8 report:
We expect approximately 33% of the audits we reviewed will have one or more deficiencies that will be discussed in Part I.A of the individual audit firm’s inspection reports, up from 29% in 2020. In addition, we expect that approximately 40% of the audits we reviewed will have one or more deficiencies discussed in Part I.B of the individual firm’s inspection reports, up from 26% in 2020. Some audits have both Part I.A and Part I.B deficiencies, such that we expect that approximately 55% of the engagements we reviewed will have one or more Part I.A and/or Part I.B deficiencies, compared to 44% in 2020.
So you see, audit quality is taking a tumble. And this is after the PCAOB has warned auditors repeatedly that they are not playing around and are liberally handing out demerits for naughty behavior. “Renewed vigilance” is the term Chair Williams used in another angry speech she gave in September. Mom is getting ready to turn this car around if auditors don’t get it together.
Anyway, here’s what she said on Monday:
There is no one-size-fits-all answer as to why deficiencies increased in 2021. The causes likely vary from firm to firm.
But some firms have told us that the combination of the COVID-19 pandemic, remote auditing, the Great Resignation, and the war for talent have made it difficult to maintain stable audit teams and provide training to newer hires.
As we near the end of 2022, these factors are no longer new, and no one should be caught off guard by the challenges they present.
Fair enough. Except what exactly are firms supposed to do about the talent issue? It is only getting worse and reinforcements are not coming.
She does acknowledge progress has been made to address these issues, she does not go into detail. She does however call firms out for blaming the pandemic — now in its third year — for issues that have been pervasive across firms long before March 2020.
Firms have a responsibility to design and implement solutions to restore and maintain audit quality.
I want to acknowledge that a number of firms are taking steps toward meeting these challenges, and it will take time before we see that reflected in our inspections.
At the same time, the 33% of audits with at least one Part I.A finding cannot be explained away by the pandemic.
Some of the auditing deficiencies we identified have recurred for many years, well before COVID-19 – including auditor independence, which is a critical element of an audit firm’s quality control system and is essential to an audit firm’s credibility with investors.
Firms must sharpen their focus and prioritize their efforts to increase audit quality and ensure investors are protected.
In order to effectively – and credibly – meet the responsibility to enforce honesty in our system, firms must enforce the highest ethical standards within your own walls.
In case auditors think she is making empty threats, she provides a list of things the PCAOB has nailed firms and individuals for just this year. Audit firms should anticipate the PCAOB is eager, willing, and able to add to this list heading into 2023.
This year, the PCAOB has announced sanctions related to:
- Exam cheating,
- Modifying work papers,
- Noncooperation with investigations,
- Unlawfully obtaining and using confidential PCAOB information, and
- Failure to have sufficient quality control processes in place to guard against ethical violations.
Let me be clear: the PCAOB will not tolerate unethical behavior.
I have said before, and I will say again, the PCAOB means business when it comes to enforcement.
She will absolutely without a doubt say it again. And again, and again, and again…
Chair Williams Challenges Firms to Uphold the Highest Standards in Audit Quality [PCAOB]
Firms refuse to admit the real problem is that they are unable to retain competent staff and the 95% of the audit work is done by fresh college grads or off shore resources that don’t understand accounting, and that that problem is caused by long hours.
The real problem is: the classical agency problem. In October pogo.org printed a good analysis of this: Accounting’s Big Lie. Uncle Sam has not been able to “fix” the problem since 1976 when the Metcalf report came out. Uncle Sam will not “fix” it.
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