Public company audits worldwide suffer from persistent deficiencies in critical audit areas, raising concern among international audit regulators, according to a new report released Thursday by the International Forum of Independent Audit Regulators.

“The high rate and severity of inspection deficiencies in critical aspects of the audit, and at some of the world’s largest and systemically important financial institutions, is a wake-up call to firms and regulators alike: More must be done to improve the reliability of audit work performed globally on behalf of investors,” said Lewis H. Ferguson, who chairs IFIAR and is a board member of the U.S. Public Company Accounting Oversight Board.

IFIAR’s Report on 2013 Inspection Findings Survey summarizes some of the main inspection results of audits of public companies, including systemically important financial institutions, submitted by 30 IFIAR members from around the world. The results came from inspection reports issued during the members’ most recent annual reporting periods that ended July 2013. 

The report indicated that the most prominent areas of deficiency in the inspected audits of listed public interest entities, or public companies, related to auditing fair value measurements; internal control testing; and procedures to assess the adequacy of financial statement presentation and disclosures.

The leading areas of deficiency in audits of systemically important financial institutions, including global systemically important banks, related to auditing of allowance for loan losses and loan impairments; internal control testing; and auditing of the valuation of investments and securities.

Audit firms’ own quality control systems had the highest number of inspection findings in the areas of engagement performance; human resources; and independence and ethics requirements.
Ferguson noted that the survey found the inspection findings were prevalent across many nations and firms worldwide. The findings came primarily from inspections of audit firms affiliated with the six largest international audit firm networks: BDO International Limited, Deloitte Touche Tohmatsu Limited, Ernst & Young Global Limited, Grant Thornton International Limited, KPMG International Cooperative, and PricewaterhouseCoopers International Limited. In many cases, a regulator’s response to an inspection finding was to require the audit firm to perform additional procedures necessary to complete the audit satisfactory.

The inspection findings identified deficiencies in audit procedures indicating that audit firms did not obtain sufficient appropriate audit evidence to support their opinion. Most of the findings in the new survey were consistent with the results of a similar survey from December 2012 that IFIAR issued last year, although IFIAR cautioned that the survey does not provide an adequate basis for year-to-year comparison of the quality of audit performance. A fact sheet is also available on the latest findings.

Root-Cause Analysis
IFIAR noted that it has made an effort to improve global audit quality by meeting with global network firm leaders to discuss the inspection results and actions that the firms can take to show improvement in their audit performance. IFIAR is also using the survey results in its members’ home countries to inform their respective inspection and standard-setting activities. It hopes the firms will focus on doing a root-cause analysis to uncover the reasons behind the findings.

“The firms should develop robust root-cause analysis to gain a clearer understanding of the factors that underlie inspection findings and to take appropriate remedial actions,” said IFIAR vice chair Janine van Diggelen, who heads the Audit & Reporting Quality Division at the Netherlands Authority for the Financial Markets. “Only with a thorough understanding of the underlying factors that have led to findings can audit firms take appropriate measures. These measures should be aimed at improving their auditing techniques, as well as their oversight policies and procedures, but also consider the cultural and behavioral influences in the firms that were relevant to the deficiencies. Both audit firms and regulators must do more to improve audit quality.”

In its meetings with global audit firm leaders, IFIAR expects the firms to provide information about the results of root-cause analyses, the performance measures used to assess progress, and whether measurable improvements are being made. The global network firms with which IFIAR meets have agreed to provide such information.  

In monitoring the firms’ progress in these areas, IFIAR hopes to gain insight into whether the firms are successful in addressing firm-wide issues and, accordingly, promoting consistency in the execution of their audits. 

In a conference call with reporters, Accounting Today asked if IFIAR had seen many differences among the countries whose audit firms they had examined. “There clearly are differences among countries,” said Ferguson. “For example, probably the most notable difference is the adequacy of financial reporting and the adequacy of disclosure varies among countries. Particularly countries with highly developed financial systems have fewer problems with that than others do. The areas where there is great consistency around the world are things like fair value measurement and internal control testing. It appears that auditors all over the world don’t do a very good job of testing and analyzing internal controls.”

“I think it’s also good to add here that the survey shows the commonality in inspection findings and these are material shortcomings that we came across,” said van Diggelen. “What also should be borne in mind is that there are of course differences amongst the firms that were inspected by our members. If you add them up, there could also be differences between countries. But the big concern we have is if you look at the findings, there is so much commonality overall. If we add all the inspection outcomes from the 30 members who contributed to the survey together, you see a real trend. In the last survey in 2012, we had the same kind of issues, the same kind of findings, in terms of significance, and that is really a concern.”

Ferguson noted that among the root causes for the audit deficiencies that could be uncovered by further analysis are behavioral, structural and cultural aspects at firms. Van Diggelen acknowledged that there might not be improvement overnight at the firms by doing such analysis, but it is important for firm leadership to drive such changes.

Ferguson was also asked by reporters what part the growing role of the advisory and consulting practice plays at firms. He acknowledged that is a source of great concern to regulators throughout the world as they see the changing economic model of the firms, with the audit part of the practice not growing as quickly as the advisory and consulting areas. Data analytics has also become an increasingly important part of many audits, he pointed out. Firms are recruiting people who are skilled in the analysis of large amounts of data, looking at areas such as the general ledger to find exceptions and outliers, which is not part of the habitual skill set of most auditors.