PCAOB Chair Warns of Rise in Audit Deficiency Rates, Calls for Improved Quality

The Public Company Accounting Oversight Board (PCAOB) recently released a report previewing the inspection results for 2022, revealing a troubling trend in audit deficiency rates. According to the report, approximately 40% of the audits reviewed in 2022 are expected to have one or more Part I.A. deficiencies, marking a significant increase from previous years. PCAOB inspectors found that audit firms failed to obtain sufficient appropriate evidence to support their opinions, signing audit reports without completing the required verification of financial statements.

Part I.A findings are considered serious and raise concerns about audit quality. The rise in deficiencies affected nearly every category of the 157 audit firms inspected in 2022, including global network firms both in the U.S. and internationally. PCAOB Chair emphasized that a 40% deficiency rate is unacceptable and demands immediate attention from the auditing profession.

The PCAOB is committed to holding firms accountable and has demonstrated a willingness to bring enforcement cases against auditors when necessary. The board conducts hundreds of inspections each year to ensure audit quality and investor protection. At the same time, the PCAOB is calling on audit committees to play an active role in holding audit firms accountable on behalf of investors.

In response to the rising deficiency rates, the report includes questions audit committees should ask their audit firms, aiming to foster accountability and transparency in the auditing process. Key questions include whether the audit engagement has been inspected by the PCAOB and the results of those inspections, and what steps the audit firm is taking to address increased inspection findings.

Investors also have a role to play in promoting audit quality. They can engage with investor relations and audit committees of the companies they invest in and encourage them to seek out firms with proven track records on quality.

The PCAOB has taken steps to empower investors and audit committees with more transparent information, including new information about independence in inspection reports and tools to compare deficiency rates across audit firms.

Ultimately, the responsibility for correcting audit deficiencies lies with auditors. However, accountability from their clients can serve as a powerful incentive for auditors to find solutions and improve audit quality.

While there may not be a one-size-fits-all solution to the increase in deficiencies, the PCAOB calls on audit firms to design and implement strategies to restore and enhance audit quality.

As internal auditors consider the implications of the PCAOB's report, there are several key takeaways to consider:

• Audit deficiency rates have increased significantly, and this trend demands immediate attention from the auditing profession.
• Audit committees have a critical role in holding audit firms accountable and should ask relevant questions to ensure audit quality.
• Investors can use their influence to encourage companies to seek out firms with strong track records on quality.
• The PCAOB's transparency initiatives provide valuable information for stakeholders and can help drive improvements in audit quality.
• Auditors must take responsibility for addressing deficiencies and implementing measures to enhance audit quality.

In conclusion, the rise in audit deficiency rates is a cause for concern, but it also presents an opportunity for auditors and audit committees to work together to improve audit quality and maintain the trust of investors. By addressing the root causes of deficiencies and implementing effective solutions, auditors can ensure the accuracy and reliability of financial reporting, which is crucial for investors making informed decisions about their investments.