A new staff report from the Public Company Accounting Oversight Board (PCAOB) shows a year-over-year increase in the number of audits with deficiencies at audit firms that the PCAOB inspected in 2022.
The report, ‘Staff Update and Preview of 2022 Inspection Observations’, presents aggregate observations from the PCAOB’s inspections of certain public company audits conducted by 157 audit firms in 2022. It confirms what PCAOB chair Erica Williams warned of in December 2022 when she said the PCAOB was seeing an increase in comment forms during 2022 inspections, following increased deficiency rates for 2021 inspections. Williams challenged firms to sharpen their focus on investor protection.
According to the report, PCAOB staff expects approximately 40% of the audits reviewed will have one or more deficiencies that will be included in Part I.A of the individual audit firm’s inspection report, up from 34% in 2021 and 29% in 2020.
Part I.A of the PCAOB’s inspection report discusses deficiencies, if any, that were of such significance that PCAOB staff believes the audit firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion on the public company’s financial statements and/or internal control over financial reporting.
Commenting on this, PCAOB chair, Erica Williams said: “These findings are absolutely unacceptable, and audit firms must make changes to turn things around and live up to their responsibility to investors.
“The PCAOB will continue demanding firms do better, conducting transparent inspections, and bringing strong enforcement actions where appropriate. We are also asking audit committees to hold firms accountable by posing tough questions to their auditors on behalf of investors.”
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The 2022 update and preview report also notes the following:
- PCAOB staff continued to identify auditing deficiencies that have recurred for many years.
- PCAOB staff expects that approximately 46% of the audits reviewed will have one or more deficiencies discussed in Part I.B of the individual firm’s inspection reports, up from 40% in 2021 and 26% in 2020. In Part I.B of the PCAOB’s inspection reports, PCAOB staff provides observations regarding instances of noncompliance with PCAOB standards or rules that do not relate directly to the sufficiency or appropriateness of evidence the audit firm obtained to support its opinion(s), such as critical audit matters, Form AP, and certain independence related deficiencies.
- Some audits have both Part I.A and Part I.B deficiencies, and so PCAOB staff expects that approximately 61% of the 710 audits the PCAOB reviewed in 2021 will have one or more Part I.A and/or Part I.B deficiencies, up from 55% in 2021 and 44% in 2020.
- In their inspections, PCAOB staff observed positive practices that the staff believes may be effective in enhancing a firm’s quality control system and audit quality generally. The report discusses these good practices, particularly in the context of risk assessment, use of practice aids, use of individuals with specialised skill or knowledge, and supervision and review.