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Upcoming Inspection Report Deficiencies Are ‘Completely Unacceptable,’ Writes PCAOB Chair in Venomous Op-Ed

people holding emojis over their faces

We’re not sure how many more times it needs to be said and it’s shocking Public Company Accounting Oversight Board Chair Erica Y. Williams does not have severe audit firm-induced trichotillomania (to our knowledge) because here she is again warning auditors that the PCAOB is tired of them being so terrible at auditing.

To get her point across she had to write a whole-ass op-ed in the Wall Street Journal:

High-quality audits are essential to the integrity of U.S. capital markets and the protection of investors. As President George W. Bush said when signing the law creating the Public Company Accounting Oversight Board to oversee audits of public companies: “The fundamentals of a free market—buying and selling, saving and investing—require clear rules and confidence in basic fairness. The only risks—the only fair risks—are based on honest information.”

It is therefore unacceptable that audit quality is trending down for the second year in a row. A PCAOB report released Monday finds that when inspection reports are finalized later this year, PCAOB inspectors expect that approximately 40% of the audits they reviewed in 2022 will have had one or more deficiencies, in which the audit firm failed to obtain sufficient appropriate evidence to support its opinion. That is up 6 percentage points from 2021, which was 5 points higher than the deficiency rate in 2020.

This means audit opinions were signed without completing the audit work required to verify the financial statements. That is a serious problem at any rate, and 40% is completely unacceptable

The “Staff Update and Preview of 2022 Inspection Observations” Spotlight released this month [PDF] explains:

Audit deficiencies rose in 2022. In a concerning trend, the percentage of audit engagements reviewed that are expected to be included in Part I.A of an inspection report is higher in 2022, in nearly all firm categories, than in 2021. PCAOB staff expects approximately 40% of the audits reviewed will have one or more Part I.A deficiencies, up from 34% in 2021 and 29% in 2020. The most significant increase in 2022 was observed within the Global Network Firms (GNF) category of firms inspected by the PCAOB (including both U.S. and non-U.S. GNF). The following table illustrates this unsettling trend in the issuer program by firm category.

Cool. Firms are probably going to blame the decline in audit quality on the after-effects of the pandemic and staff shortages again to which Williams already has a snippy retort, expressed in prepared remarks given at the AICPA & CIMA Conference on Current SEC and PCAOB Developments in December:

[S]ome 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.

And again in this WSJ op-ed:

Some firms point to the continuing effects of Covid-19, including the great resignation and heightened competition for talent. Three years after the pandemic began, these challenges are no longer new and firms should have a strategy to meet them.

At the same time, Covid-19 can’t simply explain away a 40% deficiency rate. Many of the deficiencies PCAOB inspectors identified have recurred for years, well before the pandemic.

Because threats, fines, and strongly worded prepared remarks don’t seem to be working to incentivize firms to get better at doing the thing they’re supposed to be doing, the PCAOB is now going to try public shaming. For this to effective they need the cooperation of the public and clients–both current and prospective. She says:

Transparency is one of the most powerful tools the PCAOB has to improve audit quality. Sharing our inspection results empowers audit committees and boards of directors—which are responsible for hiring auditors of public companies—to hold audit firms accountable directly.

As part of its efforts to improve transparency, earlier this year the PCAOB began including more information in our public inspection reports than ever before, including information about auditor independence violations. Last week we added more tools on our website to make it easier to compare deficiency rates across audit firms.

The tool she’s talking about makes the public portion of every inspection report easily searchable on the PCAOB’s website. And this data has been compiled in a data set available for download in CSV, XML, and JSON formats. It’s a bit awkward to use but as an example, say you want to search for inspection reports with a part I.A deficiency rate of 80 percent or higher. Gotchu:

Or, because the PCAOB has kindly provided a special search box, you can search the 3780 total results by firm for six global networks. Of those 3780 total results here’s the scoreboard for how many times each firm appears (note this is for all inspection reports, not only the terrible ones):

  • BDO International Limited (68 results)
  • Deloitte Touche Tohmatsu Limited (144 results)
  • Ernst & Young Global Limited (165 results)
  • Grant Thornton International Limited (70 results)
  • KPMG International Cooperative (147 results)
  • PricewaterhouseCoopers International Limited (166 results)

Writes Williams:

We hope boards of directors and audit committees will use PCAOB inspection reports to hold audit firms accountable for high-quality results and ask tough questions on behalf of their investors.

Audit committees should know the deficiency rate of the audit firm they hire and how it compares with other options. They should ask audit firms if the audits of their company have been inspected and, if so, for the results. They should find out whether the specific auditors who are assigned to work with their company have had their audits for other clients inspected and what the results were.

Similarly, investors should engage with investor relations and the audit committees of the companies in which they invest and encourage them to seek out audit firms with quality records.

In other words, she is straight up telling clients to avoid firms with terrible inspections. RIP Marcum.

If clients heed this advice, PwC will have its pick of the best clients and KPMG will be banished to the audit leper colony. That’s assuming upcoming inspections follow historical trends. EY hasn’t been doing so great in recent years, coming in at a 21.4 percent deficiency rate in its 2021 inspection — their worst since 2018 — and allegedly bracing themselves for bad grades this year so who knows where they’ll end up. Deloitte came in better than them at 13 percent but compared to themselves that’s the worst deficiency rate Deloitte has had since 2017 when they scored 20 percent.

For now we have to wait for the actual inspection reports but it’s not looking good for firms. Thus Williams ends her op-ed:

Ultimately, the responsibility falls on auditors to correct the problems that led to deficiencies in their audits. But accountability from their clients offers a powerful incentive to find solutions. The root causes of increased deficiencies vary from firm to firm, and there is no one-size-fits-all explanation for deteriorating audit quality.

Now is the time for solutions, not excuses.

Investors trust audits to verify the financial reporting that underpins our capital markets. Auditors must deliver quality results worthy of that trust.

Let’s circle back when inspection reports start coming out later this year.

13 thoughts on “Upcoming Inspection Report Deficiencies Are ‘Completely Unacceptable,’ Writes PCAOB Chair in Venomous Op-Ed

  1. I read Williams’ WSJ op ed. My spin: After 20 years, the PCAOB has not “cleaned up” the CPA profession. At best, it doesn’t know how. Alternatively, it doesn’t want to. Suppose the PCAOB found no problems in its inspections, what then? Would Congress say, “Let’s save the investing public $300 million a year. Dissolve the PCAOB”. Suppose that happened, then each PCAOB commissioner would lose his or her $600,000 a year “iron rice bowl”. How terrible.
    About 18 years ago, I suggested to a PCAOB inspector that it write model audit programs and distribute them to the CPA profession. Free. He said something to the effect, we are not in that business. I asked are you in the business of improving the CPA profession or aren’t you? He had no response.
    Williams’ “cry de couer” reminded my of Inspector Reynaud’s comment in “Casablanca”, “Round up the usual suspects”.
    If PCAOB inspections were of any value, they would contain detailed instructions on how to fix the problems. They don’t. How can anyone learn what to do from them? Similarly for enforcement actions, By the way, only about 80 of 370 enforcement actions were against the Big Four (BF), BF partners and overseas affiliates of the BF and their partners. These firms audit 97% of SEC registrants by market cap. The PCAOB has no enforcement action arising from a defective audit with the auditee having a MC over $6.6 billion. Think about that.

    1. I agree with your comment. It’s all just a show. If the PCAOB was serious about audit quality, they would provide actionable feedback. What we have now is just finger pointing

      1. The PCAOB does provide actionable feedback. They tell the firms to follow their fucking policies.

    2. While there are undoubtedly recurring failures by firms on the same topics, the PCAOB’s constant characterization that firms are deficient is ridiculous. The goalposts move from year to year and from inspector to inspector. I’ve dealt with inspectors that were reasonable and inspectors that seemed to be hell bent on giving a finding before the inspection even started.

      At some point registrants and firms are going to need to push back, as the PCAOB’s interpretation of their standards are getting onerous for clients and auditors.

      1. This!! The PCAOB’s auditing standards are woefully out of date in key areas. There are no interpretive guides to help auditors understand how these standards might be applied to new developments.

        A large portion of audits are based on professional judgment. PCAOB inspectors have different opinions from their own professional judgment, sometimes based in misinterpretations because they can’t fully understand the company’s business in two weeks. In the end only their opinion matters, and the audit becomes “deficient.”

      2. I totally agree that it is past time for the CPA profession to push back. Since Enron, we have allowed our entire profession to be controlled by lawyers and bureaucrats. As can be expected with government, it has turned into a beast. I think my count is correct that of the 5 PCAOB commissioners, only two are CPA’s with any experience in public company auditing- and it isn’t Williams. I believe the CPA profession should advocate for the abolishment of the PCAOB. If this isn’t possible, the PCAOB should purely serve the original purpose of inspections. They have taken on too much power, and should not be promulgating rules. Unmentioned is how much administrative burden the PCAOB has created for auditors, with duplicative reporting.

        1. I would love for an auditor to send in a letter to the editor on this that I could publish to open up the discussion (and maybe scare the PCAOB haha). I believe many auditors are in agreement.

    3. I’m trying to be nicer these days, but I just can’t with this one. This is a really dumb comment. It’s like saying that police departments don’t really want to fight crime, because then there would be no crime and all the police departments would get closed down.

      The PCAOB’s job is not to teach gigantic global accounting firms how to do audits. They already know how to do audits, and if they don’t, they have the resources to figure it out.

  2. Wow, this lady must be fun to have at a dinner party. Talk about being on a high horse…Her comment about how staffing problems should no longer be a valid excuse because ‘no one should be caught off guard’ by it any longer is absurd. Does the mere awareness of staffing shortfalls mean the issue can be resolved? Were all the firms supposed to snap their fingers and fill their staffing needs? As a senior manager, I still don’t have enough people to staff my jobs and the people I do have are typically not recurring and not as strong as the staff I had 2+ years ago. The talent pipeline has dried up and I don’t know how it gets any better.

  3. While I understand that many are angry, I do think it is the companies and especially partners to blame.
    Not enought staff for your engagements? Then you did not do the staff planning correcly and accepted to many engagements. Change deadlines and accept the reputation loss that is deserved for not planning correctly. Or: Pay more and you’ll get more staff. Otherwhise a partner is just compromising audit quality for his own paycheck. Which is of course questionabl and being called out is well deserved.
    And please “actionable feedback” from the PCAPB? Check your audit methodology and apply it correctly. Do the risk assessment, sample and then do the evaluation and draw your conclusion. Audit is no rocket science. As an engagement partner, I was usually aware of what the weak spots in my audit engagements were, sometime I could fix them, sometime I did not have the ressources to do so. But actionable feedback would not have helped me, as I was already aware of it beforehand but was in no position to change it.

  4. There will never be a fully acceptable audit in the eyes of the PCAOB, because you can always do another test. And if you’ve done every test that could possibly be imagined, then you could always have had it performed at a higher level or reviewed one more time. As was stated by another commenter, if they don’t find a problem, then they lose their reason for existence, so of course they are going to find problems. It’s their job.

  5. The goal post is moved every year and heavily influenced by the political landscape. The chairs comments are complete nonsense made for the sake of self preservation. The profession has played along with this for years, but it’s probably time for a collective non-cooperation effort as the board really has no teeth or ability to do anything in the case of coordinated resistance from the large firms.

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