PCAOB: Audit Firm Reporting Deficiency Rates Continue to Climb, Big Four Performance Stabilizes
The PCAOB's 2023 annual inspection report shows that audit firm reporting deficiency rates continue to rise, but the deficiency rates of the Big Four accounting firms (PwC, Deloitte, EY, and KPMG) remained stable at 26%, with a decrease in the concentration of deficiencies, indicating improvements in their quality control systems. PCAOB Chair Erica Williams stated that the overall deficiency rate remains unacceptable, and firms need to redouble their efforts to enhance audit quality.
Key Takeaways
- The Public Company Accounting Oversight Board (PCAOB) said the rate of deficiencies in audit firm reports continues to rise, but the Big Four accounting firms were stable and some other firms improved.
- "A notable feature of inspection trends in recent years has been the increase in audit firm deficiencies," the PCAOB said in its report. "In 2023, these negative trends continued overall."
- The PCAOB, reviewing its 2023 inspections of 2022 financial reports, said audit firms with the highest deficiency rates "are strongly influencing the overall deficiency rate."
Digging Deeper
The PCAOB found Part 1.A deficiencies—evidence that an audit firm failed to obtain sufficient evidence to support its opinion on a company's financial statements or internal control over financial reporting—in nearly half (46%) of the engagements it inspected. The data excludes inspections of broker-dealers.
Meanwhile, the Big Four—PwC, Deloitte, EY, and KPMG—held their deficiency rate steady at 26% in the 2023 inspections, after it jumped from 12% in 2020 to 26% in 2022. The PCAOB said the Big Four's Part 1.A deficiencies "appear to be more isolated events than in the past, when we often saw the same or related types of deficiencies across multiple audits."
These more isolated deficiencies suggest the firms have improved their quality control systems in recent years, the PCAOB said. "These results are encouraging," the PCAOB said. "Staff hope that the decline in the concentration of deficiencies, combined with an overall reduction in the number of criticisms of the Big Four's quality control systems, signals improvements in those systems that may lead to lower audit deficiency rates in the future."
PCAOB inspectors typically find more Part 1.A deficiencies in reports from firms inspected for the first time. For example, among non-affiliated triennial firms inspected for the first time last year, inspectors found Part 1.A deficiencies in 96% of them. The PCAOB inspects these firms every three years.
"Repeat and pervasive deficiencies remain," the PCAOB said, including insufficient testing of estimates, data, or reports used to support audit conclusions. Audit firms also often fail to adequately test company controls.
"These inspection results show some small signs of movement in the right direction," PCAOB Chair Erica Williams said in a statement. "However, the overall deficiency rate remains unacceptable, and firms must do better," she said. "Now is the time to redouble efforts to improve and deliver the audit quality investors deserve."