PCAOB sees slight improvement in audits, but problems continue

The Public Company Accounting Oversight Board uncovered fewer issues in the audits inspected in 2020, although deficiencies remained high, according to a new report.

The PCAOB posted a preview Monday of its inspection observations for 2020, based on inspections of 153 audit firms and 617 audits for fiscal years ending in 2019 and the first half of 2020. While the inspectors didn’t uncover as many problems last year as in previous years, the number of deficiencies is still too high.

Last year, auditing firms as well as PCAOB inspectors had to resort to doing many of their audits and inspections remotely during the pandemic, which could also help explain why the number of findings was relatively low last year. In addition, the board has relaxed its inspection policy in recent years, although the Securities and Exchange Commission and its new commissioner, Gary Gensler, moved this year to replace the PCAOB board members, which may signal a tougher regulatory and inspection environment for auditors in the future.

Courtesy of the PCAOB

Even so, the current inspections staff hinted that the level of problems at audit firms is still too high. “We continue to identify a number of deficiencies that recur from year to year,” said the report. “For the majority of the annually inspected audit firms, we identified fewer findings in 2020 compared to our 2019 inspections. In our triennially inspected audit firms, some improvements were noted, although deficiencies continue to remain high. We also observed a number of good practices that we believe may be effective in enhancing audit quality.”

Among the good practices listed in the report were incremental steps in response to the COVID-19 pandemic, including increased training and assistance, emphasis on consultations, and modified client acceptance and continuance procedures. The report also cited real-time monitoring of in-process audit engagements, greater supervision of the work performed by specialists, the use of practice aids to help engagement teams identify risks for each factor relevant to management’s estimation processes, monitoring of the workload and expertise of engagement quality reviewers, the hiring of qualified and experienced third-party engagement quality reviewers when necessary, and industry-focused training and work programs for industry-specific risks and issues as good practices.

On the negative side, the PCAOB inspectors found continuing deficiencies in internal controls over financial reporting, auditing of revenue and related accounts, accounting estimates, inventory, critical audit matters, and auditor independence.