PCAOB 2020 Inspection Results: Deficiency Rates Fall
GAAP Dynamics girl looking at computer PCAOB 2020 Inspections

PCAOB 2020 Inspection Results: Deficiency Rates Fall

Each year the GAAP Dynamics team takes a deep dive into the Public Company Accounting Oversight Board’s (PCAOB) inspection report results. Why do we do this every year? Well, you can learn a lot about the current state of audit quality from these reports and they can be quite interesting reading material for this bunch of nosy ex-auditors! This blog post explores the results of the PCAOB’s 2020 inspections for annually inspected firms.

Who is required to be inspected?

If an accounting firm audits a publicly traded company or securities broker-dealer registered with the Securities and Exchange Commission (SEC), it is subject to regular PCAOB inspections. These inspection reports are made public and can be obtained directly from the PCAOB’s website. To perform our analysis, we simply downloaded the reports and started reading!

The vast majority of these accounting firms are inspected at least once every three years — so called “triennially inspected firms.” However, if an accounting firm audits more than 100 public companies or registered broker-dealers, it is subject to annual PCAOB inspections. Our analysis focused on the annually inspected U.S. firms.

The results

66 audits, or 20%, of the audits reviewed by the PCAOB in the 2020 inspection cycle contained at least one deficiency. Let’s take a moment to look at how this is calculated, because it can get a little tricky. The PCAOB inspects both U.S. audit firms and non-U.S. audit firms; our analysis is based on the U.S. audit firms that are inspected on an annual basis only. In 2020, the PCAOB selected 510 audits for inspection. Of these 510 audits, 328 were performed by annually inspected U.S. audit firms. Out of these 328 audits inspected in 2020, 66 of them had at least one deficiency.

So, is that a good or bad deficiency rate? A deficiency rate of 0% would be ideal, but that isn’t realistic. The 2020 deficiency rate of 20% reflects a downward trend when compared to 25% in 2019 and 26% in 2018.

We took our analysis a step further and looked at deficiency rates on an individual firm basis and they varied widely, from a low of 0% to a high of 64%! The average deficiency rate for Big 4 firms was 12% and 33% for Non-Big 4 firms. The 2020 inspection cycle results represent a decline in average deficiency rate for Big 4 firms from 22% in the 2019 cycle and an increase in average deficiency rate for Non-Big 4 firms from 31% in 2019.

State of audit quality and top problem areas

The 2020 inspection cycle resulted in a combined average deficiency rate of 26%. When compared with a rate of 37% in 2010, this means audit quality is definitely improving, however, there’s always room to improve further. Firms can continue to work to reduce deficiencies by focusing on common audit problem areas.

Annually the PCAOB releases their Staff Update and Preview of Inspection Observations. The 2020 report noted the following areas of common deficiencies:

Internal controls over financial reporting has been one of the top deficiency areas dating back to 2015, so that wasn’t a surprise. Revenue and accounting estimates are full of complexities and are also recurring areas containing deficiencies, however, critical audit matters, or CAMs, was a new addition to the list. Take some time to review the PCAOB’s report to learn about the common deficiencies noted within each of these top problem areas here.

The way forward

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 quality control systems. GAAP Dynamics has eLearning courses on many of these topics as well as a course that focuses specifically on improving audit quality.

Additionally, the PCAOB publishes their Staff Overview for Planned Inspections each year to highlight the areas they plan to focus on in upcoming inspections. These focus areas are often driven by the top problem areas in the prior year’s inspections results and risks as a result of the economic environment and new standard setting activities. The 2022 overview was just published at the end of June. Areas of focus include:

  • Fraud and other risks
  • IPOs and M&A activity
  • Audit firms’ execution challenges
  • Broker-Dealer specific considerations
  • Independence
  • Use of service providers in the confirmation process
  • Critical audit matters
  • Audit areas with continued deficiencies
  • Firms’ quality control systems
  • Technology

Be sure to check out the 2022 overview to learn more about why each of these are focus areas for the PCAOB.  As always, we’re here to help with any questions you may have! Let's talk!

About GAAP Dynamics  

We’re a DIFFERENT type of accounting training firm. We don’t think of training as a “tick the box” exercise, but rather an opportunity to empower your people to help them make the right decisions at the right time. Whether it’s U.S. GAAP training, IFRS training, or audit training, we’ve helped thousands of professionals since 2001. Our clients include some of the largest accounting firms and companies in the world. As lifelong learners, we believe training is important. As CPAs, we believe great training is vital to doing your job well and maintaining the public trust. We want to help you understand complex accounting matters and we believe you deserve the best training in the world, regardless of whether you work for a large, multinational company or a small, regional accounting firm. We passionately create high-quality training that we would want to take. This means it is accurate, relevant, engaging, visually appealing, and fun. That’s our brand promise. Want to learn more about how GAAP Dynamics can help you? Let’s talk!

Disclaimer  

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.

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