The 2021 PCAOB inspection report season kicked off right before Christmas with the release of a batch of six big ones: PwC, Deloitte, EY, KPMG, BDO USA, and Grant Thornton.
It would be tough for PwC to top its 2020 inspection report as it was nearly blemish-free. Of the 52 audits reviewed by inspectors during that inspection cycle, only one mistake was found—related to the firm’s testing of controls over and substantive testing of revenue and related accounts and inventory—for a deficiency rate of 1.9%. We’re fairly certain that was an all-time-low error rate for a Big 4 firm.
In its 2022 Audit Quality Report, released a few months ago, PwC seemed pretty confident it would have a stellar 2021 inspection report too (bold part added by us for emphasis):
Part I, which is the public portion of the PCAOB inspection report, contains an overview of the inspection procedures and observations on the engagements inspected. Part 1.A includes discussion of deficiencies identified by the PCAOB in its inspection of issuer audits. Only one audit is included in Part 1.A of our 2020 Inspection Report—a significant decrease that reflects the positive impact of the investments we have made in audit quality. The PCAOB’s most recent 2021 inspection cycle (covering 2020 audits) is substantially complete, and the preliminary results are similarly positive.
Now that P. Dubs’ 2021 inspection report is out, let’s see how the folks in Trust Solutions did. But first, a quick word from the PCAOB:
In the 2021 inspection of PricewaterhouseCoopers LLP, the PCAOB assessed the firm’s compliance with laws, rules, and professional standards applicable to the audits of public companies.
We selected for review 56 audits of issuers with fiscal years generally ending in 2020. For each issuer audit selected, we reviewed a portion of the audit. We also evaluated elements of the firm’s system of quality control.
We also selected for review two reviews of interim financial information (“interim reviews”). Our reviews were performed to gain a timely understanding of emerging financial reporting and auditing risks associated with issuers that were formed by mergers between non-public operating companies and special purpose acquisition companies (SPACs). We did not identify any instances of non-compliance with PCAOB standards related to the interim reviews that we reviewed.
It also should be noted that this is the second-straight year the PCAOB has inspected firms’ audits virtually because of the COVID-19 pandemic.
Of the 56 audits reviewed by the PCAOB in 2021, only two contained significant deficiencies—for an error rate of 3.6%. So in the past two inspection cycles, PCAOB inspectors found only three significant errors in 108 PwC audits that were reviewed—for a deficiency rate of 2.8%. Not too shabby, PwC.
One of the audits selected by the PCAOB had deficiencies in both internal control over financial reporting and in the financial statement, while the other audit had deficiencies in the financial statement only.
There were three audit areas in which deficiencies were found, according to the PCAOB. They were:
- Long-lived assets: The deficiencies related to substantive testing of, and testing controls over, the valuation of oil and gas properties.
- Equity and equity-related transactions: The deficiency related to evaluating the appropriateness of the issuer’s accounting method for certain warrants.
- Business combinations: The deficiency related to evaluating the appropriateness of the issuer’s accounting method for certain equity awards in connection with a business combination.
The two deficient PwC audits were found for an issuer in the energy sector and for an issuer in the industrials sector. The lone deficient audit in PwC’s 2020 inspection report was also in the industrials sector.
We’ll take a look at the other five 2021 PCAOB inspection reports in the coming days. Spoiler alert: none of them are as good as PwC’s, which you can look at below.