PCAOB dings EY, other big firms in new inspections

The Public Company Accounting Oversight Board released a group of inspection reports Wednesday for the Big Four and other major firms, showing mixed results on auditing quality, with Ernst & Young issuing a major mea culpa following a failed split of the firm last year.

At Ernst & Young, 25 of the 54 audits reviewed in 2022 were included in Part I.A of the report due to the significance of the deficiencies identified (more than double the 12 out of 56 in the previous year's report). The identified deficiencies primarily related to the firm's testing of controls over and/or substantive testing of revenue and related accounts, business combinations, and inventory. The most common Part I.A deficiencies in 2022 related to testing the design or operating effectiveness of controls selected for testing, testing controls over the accuracy and completeness of data or reports used in the operation of controls, and in some cases the resulting overreliance on controls when performing substantive testing. The Part I.B deficiencies in 2022 related to retention of audit documentation, audit committee communications, risk assessment, management representation letters, critical audit matters, and Form AP. The Part I.C deficiencies in 2022 related to financial relationships, employment relationships and nonaudit services. 

"The rate of findings identified in the report does not reflect our high standards and is unacceptable to us," wrote EY's U.S. chair and managing partner Julie Boland and U.S. vice chair of assurance Dante D'Egidio in response to the report. "As leaders, we set clear expectations for audit quality, and we foster a culture of integrity and accountability. To underscore that point, we recently appointed a Chief Ethics and Compliance Officer who reports directly to the US Chair and Managing Partner. Our expectations are clear: we execute every audit with objectivity, independence and integrity in accordance with professional standards. In response to the issues raised in the report, we performed an in-depth review of our audit practice and developed a comprehensive action plan that we are confident will improve and sustain audit quality in both the short and long-term."

Last year, EY laid off thousands of employees after a failed spin-off of its consulting firm. The PCAOB recently found fault with half the audits inspected by EY's firm in Canada as well.

At Deloitte & Touche, nine of the 53 audits reviewed by the PCAOB in 2022 were included in Part I.A of the report due to the significance of the deficiencies identified by PCAOB inspectors (down from seven out of 54 in the previous year's report). The identified deficiencies mainly related to Deloitte's testing of controls over and/or substantive testing of revenue and long-lived assets. The most common Part I.A deficiencies in 2022 related to performing substantive testing to address a risk of material misstatement, identifying controls related to a significant account or relevant assertion, and testing an estimate. 

The Part I.B deficiencies in 2022 related to retention of audit documentation, audit committee communications, risk assessment, and critical audit matters. The most common Part I.C deficiencies in 2022 related to financial relationships, employment relationships, non-audit services, and audit committee preapproval.

"Our pursuit of audit quality is at the center of our culture of continuous improvement," wrote Deloitte & Touche chair and CEO Dipti Gulati and Deloitte CEO Jason Girzadas in response to the report. "In order to drive continuous improvements, we are digitizing the audit, transforming the way we work, and fostering the development of our people, to fulfill our role of providing high-quality audit and assurance services to the capital markets."

For PricewaterhouseCoopers, five of the 54 audits reviewed in 2022 were included in Part I.A of this report due to the significance of the deficiencies identified (up from two out of 56 in the previous year's report). The identified deficiencies primarily related to the firm's testing of controls over and/or substantive testing of business combinations and the allowance for credit losses.

The most common Part I.A deficiencies in 2022 related to identifying controls related to a significant account or relevant assertion, performing substantive testing to address a risk of material misstatement, and testing the design or operating effectiveness of controls selected for testing. The Part I.B deficiencies in 2022 related to audit committee communications, the firm's audit report, and Form AP. The most common Part I.C deficiencies in 2022 related to audit committee preapproval, financial relationships, and nonaudit services.

"We recognize the inspection process provides a valuable opportunity to further enhance the quality of our audits," wrote PwC US senior partner Tim Ryan and vice chairs Wes Bricker and Kathryn Kaminsky in response. "We continue to support the PCAOB in its mission and are committed to furthering the public interest through the preparation of informative, accurate and independent audit reports."

PwC sent a separate statement to Accounting Today. "We value all feedback — whether from the PCAOB, our own identification or our Global Network — as it helps inform how we reinforce our foundation for audit quality," said a PwC spokesperson. "Quality is our top priority, which is why we continue to invest in our audit approach, people and technology. As a part of our commitment, we were a first mover across the audit profession in voluntarily committing to a series of bold actions to further enhance the quality of and confidence in the information that drives the capital markets. We recognize and accept our responsibility to lead change to meet growing stakeholder expectations because confidence in independent auditors is critical."

At KPMG, the results were unclear as the report redacted the exact number of the 54 audits reviewed in 2022 that were included in Part I.A of the report due to the significance of the deficiencies identified by the PCAOB (in the previous year's report, the number was 14 out of 54, the most among the Big Four). They related to KPMG's testing of controls over and/or substantive testing of long-lived assets, equity and equity-related transactions, and business combinations. The most common Part I.A deficiencies in 2022 related to testing of the design and/or operating effectiveness of controls selected for testing, testing related to a significant account or disclosure or to address an identified risk, and in some cases the resulting overreliance on controls when performing substantive testing.

The Part I.B deficiencies in 2022 related to retention of audit documentation, risk assessment, auditor tenure, Form AP, and audit committee communications. The most common Part I.C deficiencies in 2022 related to audit committee preapproval, indemnification clauses, financial relationships, and nonaudit services.

"We continue to design actions and make decisions to promote audit quality that align with the root causes of matters identified during the PCAOB inspection process," wrote KPMG chair and CEO Paul Knopp and vice chair of audit Scott Flynn in response to the report. "These actions include, among others, strategically upskilling our auditors, making meaningful investment to develop audit technology, deploying that technology throughout the firm, as well as, designing and operating our system of quality control to sustainably and continually enhance audit quality. We are confident our ongoing investments will drive a more timely, streamlined, and technology-focused audit process that better enables our auditors to identify and respond to risks in the financial reporting process."

The PCAOB declined to comment on the redactions in the KPMG report. The firm omitted its PCAOB inspection results from its own audit quality report that it released in January.

KPMG said in a statement, "We are proud of our efforts to continue enhancing audit quality and remain focused on continuously improving our audit approach. We are confident our investments in our people and technology, including and especially AI, will further empower our auditors to identify and respond to risks in the audit."

The report disclosed 15 audits with deficiencies, out of a total of 54 audits inspected. The firm is still going through an appeals process about one issuer and that was redacted from the report.

The PCAOB also released a mixed bag of inspection reports Wednesday on several other major firms, including BDO USA, where 19 of the 29 audits reviewed in 2022 were included in Part I.A. Grant Thornton, where eight of the 26 audits reviewed in 2022 were included in Part I.A, Crowe, where only one of the 15 audits reviewed in 2022 was included in Part I.A, RSM US, where four of the 17 audits reviewed in 2022 were included in Part I.A, Marcum LLP, where 14 of the 25 audits reviewed in 2022 were included in Part I.A, Baker Tilly US, where 10 of the 12 audits reviewed in 2022 were included in Part I.A, and the fast-growing B F Borgers, where all 11 audits reviewed in 2022 were included in Part I.A of the report due to the significance of the deficiencies identified. BF Borgers frequently topped the rankings only a few years ago among audit firms in terms of new clients won from other firms.