PCAOB Staff Report Highlights Increased Audit Deficiencies in Engagement Quality Reviews

A recently released staff report from the Public Company Accounting Oversight Board (PCAOB) has brought to light a concerning trend in audit deficiencies related to engagement quality reviews (EQRs). According to the report, in 2022, 42% of the firms inspected by the PCAOB received quality control criticisms linked to EQRs, marking a notable increase from 37% in 2020. The report, titled "Inspection Observations Related to Engagement Quality Reviews," emphasizes the importance of the EQR process, where an independent reviewer assesses significant judgments made by the audit engagement team.

In response to this rising issue, the staff report offers guidance and best practices for auditors to help prevent such deficiencies. It also raises essential questions that audit committees may consider when engaging with external auditors.

PCAOB Chair Erica Y. Williams highlighted the significance of engagement quality reviews as a safeguard for investors during the audit process. She expressed concern about audit firms falling short in their EQR responsibilities and urged both audit firms and audit committees to carefully review the report to fulfill their duty of safeguarding investors from inadequately supported audits.

The staff report emphasizes several key reminders regarding engagement quality reviews. Auditors are reminded that EQR reviewers should not have served as the engagement partner during the two preceding audits before the one subject to the EQR. EQR reviewers are also discouraged from making decisions on behalf of the engagement team or assuming any of the team's responsibilities.

Despite the prevalence of deficiencies in EQRs, the report also acknowledges that numerous audit firms, ranging from large global network firms to sole proprietorships, are actively taking steps to enhance their quality control systems. These efforts, directed at improving audit quality, span various areas:

1. Workload and Expertise Monitoring
2. Timely and Increased Involvement of EQR Reviewers for Key Audit Milestones
3. Increased Accountability
4. Development of New and Revised Audit Tools and Guidance
5. Formation of Root Cause Task Forces

For audit committees, the report provides a series of questions to consider during discussions with auditors. These questions cover topics such as EQR policies and procedures, the experience of EQR reviewers, and the examination of significant judgments.

The PCAOB's staff report underscores the critical role that EQRs play in ensuring the integrity of audit processes and maintaining investor confidence in financial reporting. It encourages auditors to uphold the highest standards and audit committees to engage in comprehensive discussions to improve the quality and reliability of audits.