By Suzanne Cosgrove
The Public Company Accounting Oversight Board said Thursday that a preview of its 2021 inspection reports for 141 audit firms inspected annually and triennially shows a year-over-year increase in audit deficiency rates in 2021.
That trend is expected to have continued this year. PCAOB inspectors said comment forms -- the initial communications it sends to audit firms warning them of potential deficiencies observed during inspections – also rose in 2022.
“Higher deficiency rates in 2021, coupled with the fact that the PCAOB is also seeing an increase in comment forms for 2022, are a warning signal that the audit profession needs to sharpen its focus on improving audit quality and protecting investors,” PCAOB Chair Erica Williams said in a release.
“The PCAOB will continue our work to increase audit quality by modernizing our standards, enhancing our inspections, and strengthening our enforcement,” Williams added.
A focus on emerging risks. In 2021, the PCAOB target team’s focus included audit firms’ procedures concerning fraud, cash and cash equivalents, special purpose acquisition companies (SPACs) and de-SPAC transactions.
The team also responded to financial reporting and audit risks that were spurred by the pandemic, as most inspections involved the 2020 financial information of public companies with fiscal years ending in December 2020, the Board said. The World Health Organization formally declared the rapidly spreading COVID-19 virus a pandemic in March 2020.
Staffers significantly increased the percentage of audits selected randomly, “especially for the largest audit firms, as the effects of COVID-19 were unpredictable,” the report noted. “We also selected more nontraditional focus areas for inspection, again in part to measure the effects of COVID-19 on auditing.” Nontraditional focus areas included cash and cash equivalents, deposit liabilities, debts, accruals and foreign currency translations, the Board said.
CAM deficiencies impacted total. The report, “Staff Update and Preview of 2021 Inspection Observations,” stated many identified auditing deficiencies have been recurring for years. However, a significant portion of the rise was driven by deficiencies related to critical audit matters (CAMs), particularly those with fewer than 100 public company audit clients.
The effective date for requirements related to CAMs for companies other than large filers was December 15, 2020, which meant that many firms complied with CAM requirements for the first time, the PCAOB said. Among the CAMs-related deficiencies, most were instances in which auditor procedures to determine CAMs left out details that should have been analyzed as a potential CAM.
Addressing the recurring issues, the PCAOB said deficiencies in controls testing remain a common occurrence in both integrated audits and testing of controls in financial statement audits. “Despite improvements observed at certain firms, we continue to observe deficiencies related to testing ICFR (internal control over financial reporting) across firms,” the report stated.
Some positive results. The report also highlighted examples of “good practices” found among some firms that enhanced the audit firms’ systems of quality control and the overall quality of their audits.
Those practices included making it easier for an audit firm’s employees to import information from financial holdings directly into its internal tracking systems (a safeguard against conflicts of interest), the use and proper integration of specialists, robust risk assessments, and proper and timely responses to audit supervision, the Board said.