Public Company Accounting Oversight Board (PCAOB) Chair Erica Y. Williams made the following statement today after the PCAOB released a staff report showing a year-over-year increase in the number of audits with deficiencies at audit firms that the PCAOB inspected in 2022.
From Chair Williams:
Last December, the PCAOB released findings that a third of the audits we inspected in 2021 had at least one Part I.A deficiency. At the time, I warned that our inspectors were also issuing an increased number of comment forms for the 2022 inspection cycle, which is often the first sign of deficiencies to come.
Yesterday, our inspectors released a new report previewing the inspection results for 2022 and confirming this troubling trend.
According to this report, PCAOB inspectors expect that when inspection reports are finalized later this year, approximately 40% of the audits they reviewed in 2022 will have one or more Part I.A. deficiency. That is up 6 percentage points over 2021, which increased 5 percentage points over 2020.
Part I.A findings are serious. They mean the audit firm failed to obtain sufficient appropriate evidence to support its opinion, and audit opinions were signed without completing the audit work required to verify the financial statements.
These deficiencies are up for nearly every category of the 157 audit firms the PCAOB inspected in 2022, including global network firms both in the U.S. and internationally.
Let me be clear: a 40% Part I.A deficiency rate is completely unacceptable.
The PCAOB will continue demanding firms do better and deliver the high-quality audits investors deserve.
We have demonstrated that we will not hesitate to bring enforcement cases against auditors where appropriate. And we will continue to carry out hundreds of inspections each year.
At the same time, we are also asking audit committees to hold audit firms accountable on behalf of investors.
Today’s report includes important questions audit committees should ask their audit firm, including:
- Has our audit engagement been inspected by the PCAOB? Were there any audit areas that required significant discussions with the PCAOB that did not result in a comment form?
- Has the engagement partner been inspected on other engagements? If so, what were the results of that inspection?
- What is the audit firm doing to address overall increased inspection findings?
Investors can also use their influence to engage with investor relations and the audit committees of the companies in which they invest and encourage them to seek out firms with proven track records on quality.
As you know, earlier this year, the PCAOB began including new information about independence and more in our inspection reports for the first time. Last week, we expanded the tools available on our website to make it easier to find and compare deficiency rates across audit firms. And the PCAOB will continue working to empower investors and audit committees with transparent information.
Ultimately, the responsibility falls on auditors to correct the problems that led to deficiencies in their audits. But accountability from their clients offers a powerful incentive to find solutions. Today’s report also includes some examples of good practices firms may use to help improve audit quality.
There is no one-size-fits-all answer as to why deficiencies increased. The causes likely vary from firm to firm. So, the solutions will vary as well.
Firms must design and implement solutions to restore and continue to improve audit quality.
Investors depend on high-quality audits to verify the financial reporting they use to make decisions about where to invest their hard-earned money. Auditors must deliver quality results worthy of their trust.