The Public Company Accounting Oversight Board released inspection reports for all 2023 annually inspected firms Thursday, including the six U.S. global network firms. The report found some improvements in the Big Four, but problems persist among smaller firms.
The timing of the release of the reports was much earlier than in previous years, thanks to ongoing efforts to accelerate the process.
The inspection reports came accompanied by a new staff Spotlight publication, offering an overview of staff observations from the 2023 inspections. Staff observations include the fact that while overall deficiency rates continued to increase in the aggregate — with 46% of the engagements reviewed having at least one Part I.A deficiency — "We have begun to see the aggregate deficiency rate at the Big Four firms level off, as well as improvements in the deficiency rates at several of the other annually-inspected firms."
The Spotlight report also explores how outliers influence the overall average, among other observations. For example, the report on BDO USA seems to stand out with an 86% Part I.A audit deficiency rate. Twenty-five of the 29 audits reviewed by the PCAOB in 2023 were included in Part I.A of the report due to the significance of the deficiencies identified. The identified deficiencies primarily related to the firm's testing of controls over, and/or substantive testing of, revenue and related accounts, inventory, and business combinations.
"We recognize the important role we play in protecting the interest of investors and the integrity of the capital markets and are therefore steadfast in our commitment to audit quality as our highest priority," wrote BDO USA CEO Wayne Berson and assurance national managing principal William Eisig in response to the report. They pointed to the firm's report on its 2023 audit quality journey where it details the investments it's making to improve the quality of its audits.
Grant Thornton had a 54% Part I.A deficiency rate. Fifteen of the 28 audits reviewed by the board in 2023 were included in Part I.A of this report due to the significance of the deficiencies identified. The identified deficiencies primarily related to the firm's testing of controls over and/or substantive testing of revenue and related accounts and inventory.
"The Public Company Accounting Oversight Board's annual inspections process is a critical input to our ongoing commitment to audit quality, which is at the foundation of all we do," the firm said in a statement. "At Grant Thornton LLP, we remain dedicated to enhancing our quality-related initiatives. This includes consistent and meaningful investments in technology and innovation. We're also focused on continually implementing new policy and process updates, rigorous trainings and heightened quality controls to further our audit quality efforts."
The firm offered links to more information on its audit quality initiatives and its most recent Audit Quality and Transparency Report.
Among the Big Four, for Deloitte & Touche LLP, 12 of the 56 audits reviewed by the PCAOB in 2023 were included in Part I.A of the report due to the significance of the deficiencies identified. The identified deficiencies primarily related to the firm's testing of controls over, and/or substantive testing of, revenue, inventory, investment securities, insurance-related liabilities, and allowance for credit losses/allowance for loan losses. That translated into a 21% Part I.A audit deficiency rate.
At PricewaterhouseCoopers LLP, the Part I.A deficiency rate was the lowest among the Big Four at 18%. Ten of the 57 audits reviewed in 2023 were included in Part I.A. The identified deficiencies primarily related to the firm's testing of controls over and/or substantive testing of revenue and related accounts and goodwill and intangible assets.
At Ernst & Young LLP, 22 of the 59 audits reviewed in 2023 were included in Part I.A. The identified deficiencies mainly related to the firm's testing of controls over and/or substantive testing of revenue and related accounts, business combinations, and inventory. That translated into a 37% Part I.A deficiency rate, the highest among the Big Four.
"We recognize that we are on a multiyear transformation journey and have more work to do to continue to drive improvements in audit quality," EY U.S. chair and managing partner Julie Boland and U.S. vice chair of assurance Dante D'Egidio wrote in response to the report.
At KPMG LLP, 15 of the 58 audits reviewed in 2023 were included in Part I.A. The identified deficiencies primarily related to the firm's testing of controls over and/or substantive testing of investment securities and revenue and related accounts. That translated into a 26% Part I.A audit deficiency rate.
"When we look at the U.S. Big Four firms (this excludes their non-U.S. affiliates), which as of December 31, 2023, collectively audit approximately 80% of the market capitalization, aggregate Part I.A deficiencies held steady at 26% in 2023 after previously jumping from 12% in 2020 to 16% in 2021 and 26% in 2022," said the report. "Similarly, the percentage of audits reviewed with multiple Part I.A deficiencies was nearly stagnant, at 21% in 2022 and 20% in 2023, after previously jumping from 9% in 2020 to 13% in 2021 to 21% in 2022. Aggregate Part II criticisms at the U.S. Big Four firms also fell for the first time in three years."
The PCAOB also published new charts on its website illustrating much of the data in the U.S. GNF and U.S. annual non-affiliate firms inspection reports for the first time as part of its ongoing efforts to increase transparency in inspection data and make it easier for stakeholders to understand and compare inspection results both across firms and over time. The charts build on the May 2023 transparency improvements for inspection reports and the July 2023 release of new features allowing PCAOB website visitors to easily filter and compare thousands of audit firm inspection reports.
Some of the highest rates at these firms included B F Borgers CPA PC, which had a 100% Part I.A audit deficiency rate and has been suspended from public audits. Marcum LLP, which was recently acquired by publicly traded Top 100 Firm CBIZ, had an 81% Part I.A audit deficiency rate, in part due to its heavy involvement in the SPAC market for audits. Baker Tilly US had a 67% Part I.A audit deficiency rate. At Moss Adams LLP, there was a 42% Part I.A audit deficiency rate. WithumSmith+Brown, PC had a 40% Part I.A audit deficiency rate. On the low side, Cohen & Co., Ltd. had an 11% Part I.A audit deficiency rate, and Crowe US LLP had only a 7% Part I.A audit deficiency rate.
"These inspection results point to some small signs of movement in the right direction," said PCAOB Chair Erica Williams in a statement. "Still, overall deficiency rates are unacceptable, and firms must do better. Now is the time to double down on efforts to improve and deliver the audit quality investors deserve."
The report found that audit quality at triennially inspected firms is not improving quickly enough. "Over half of the NAF triennially inspected firms in 2023 that were previously inspected had no notable changes to Part I.A deficiency rates when compared to the firm's prior inspection," said the report. "We also observed an increase in the expected Part I.A deficiency rate at 26 of the 82 NAF triennial firms that were previously inspected. We observed decreases in the expected Part I.A deficiency rates for five of the 82 NAF triennially inspected firms in 2023 that were previously inspected. While there are various distinct possible reasons for the Part I.A findings, including mergers between firms, increases in the number of issuer audits conducted by the firms, and an inspection focus on regional banks, the increase in Part I.A deficiencies requires immediate attention by the applicable firm."
"Making inspection information accessible and actionable for PCAOB stakeholders is a top priority and a means to improve audit quality," said Christine Gunia, director of the PCAOB's Division of Registration and Inspections, in a statement. "We will continue to search for new ways to bring our insights to investors, audit committees, and others."
