It was the morning of February 2, 2021 and I had just learned that Punxsutawney Phil saw his shadow, meaning six more weeks of winter here in Cleveland (fun fact, I once went to Punxsutawney for the unveiling of Phil’s shadow when I was in college and it was a once in a lifetime experience!). As I searched for warm places to rent a house on the beach, I received an email in my inbox from the PCAOB announcing they had released 12(!) new inspection reports for annually inspected firms. I quickly turned my attention to the reports and after reading through a few of them, I felt some irony in the fact that they were released on Groundhog Day because many of the findings are consistent with prior years.
Since 2002, the Sarbanes-Oxley Act authorizes the PCAOB to inspect registered public accounting firms. Firms that issue 100 audit reports (or less) are generally inspected at least once every three years and firms that issue more than 100 audit reports are inspected annually. When selecting audits for review, the PCAOB uses both risk-based and random methods of selection. Most selections are based on the PCAOB’s internal evaluation of audits believed to have a heightened risk of material misstatement, including those with challenging audit areas, and also other risk-based characteristics, including the issuer and specific firm considerations.
The recently released 2019 inspection reports (which generally inspect 2018 audits) related to the following annually inspected firms (listed in alphabetical order):
- BDO USA, LLP (BDO)
- Cohen & Company, Ltd. (Cohen)
- Crowe LLP (Crowe)
- Deloitte & Touche LLP (DT)
- Ernst & Young LLP (EY)
- Grant Thornton LLP (GT)
- KPMG LLP (KPMG)
- MaloneBailey, LLP (Malone)
- Marcum LLP (Marcum)
- Moss Adams LLP (Moss Adams)
- PricewaterhouseCoopers LLP (PwC)
- RSM US LLP (RSM)
Inspections identify whether there are deficiencies in how the firm performed its audits and whether there are weaknesses in its quality controls over public-company auditing. Certain of the deficiencies identified are of such significance that it appears (in the opinion of the PCAOB inspection team) that the audit firm, at the time it issued its audit report, had not obtained sufficient appropriate audit evidence to support its opinion (these are referred to as Part I.A deficiencies in the inspection report). We’ve summarized the Part I.A deficiencies for the last three years below.
Overall, the average Big 4 firm deficiency rate for 2019 was 22% (compared to 25% in 2018). As you can see, three of the four firms decreased their deficiency rate from 2018! The average Non-Big 4 firm deficiency rate for 2019 was 31%, which was slightly worse than the 2018 average deficiency rate of 26%. I do want to give a shoutout to Cohen who has a zero percent deficiency rate (in both 2019 and 2018)!
For each deficiency noted, the inspection report references the relevant audit standard(s). We compiled the 2019 deficiencies in the annually inspected firm reports by each audit standard based on the number of times that the standard is cited in Part I.A and the following represent the top 5 areas (for both Big 4 and Non-Big 4 firms):
|Ranking||Big 4 firms||Non-Big 4 firms|
|1||Internal controls over financial reporting||Internal controls over financial reporting|
|2||Response to the risks of material misstatement||Response to the risks of material misstatement|
|3||Audit sampling||Evaluating audit results|
|4||Auditing accounting estimates||Auditing fair value measurements|
|5||Audit evidence||Audit evidence|
Do you know we offer an Accounting and Auditing Update collection, which includes a 2-hour self-study Audit Update course? In this course we dive into PCAOB inspection report trends and focus areas, including recent changes to auditing standards (such as estimates and the use of specialists). Let us know if you might be interested! And while you’re at it, make sure to download our FREE PCAOB eBook, which analyzes PCAOB inspection reports of the annually inspected firms over the past ten years (with all these new reports I guess it’s time for another edition!).
Additionally, the inspection reports detail the financial statement accounts (areas) in which a deficiency was noted in Part IA. The following represent the 2019 top 5 accounts (areas) for both the Big 4 and Non-Big 4 firms:
|Ranking||Big 4 firms||Ranking||Non-Big 4 firms|
|1||Revenue recognition||1||Revenue recognition|
|2 (tie)||Investment securities||2 (tie)||Business combinations|
|2 (tie)||Inventory||2 (tie)||Allowance for loan losses|
|4||Allowance for loan losses||4||Income taxes|
|5||Business combinations||5 (tie)||Investment securities|
We also have online, eLearning courses covering each of these top 5 areas. Visit our course catalog to refresh your knowledge on any of these topics!
We believe it is good practice for all firms, regardless of size, to analyze audit deficiencies detailed in PCAOB inspection reports, make necessary changes to their audit procedures, and improve the quality of their training. And we’re always here to help you achieve that! Good luck on your next inspection cycle!
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This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.