EY expects more failing grades from US audit inspectors

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EY’s auditors outside the US are failing a higher number of quality inspections by American regulators, according to the firm’s internal estimates, as US authorities push to improve global standards they fear were hit by the coronavirus pandemic.

Inspections of EY’s work for US-listed companies uncovered deficiencies in up to 38 per cent of the audits carried out by the firm’s overseas businesses last year, according to estimates described to the Financial Times.

That would be a big jump from 2021, when 21 per cent of audits sampled by the Public Company Accounting Oversight Board contained deficiencies.

The figures do not include inspections of audits carried out by EY’s US business — the largest in its global network — and could be lower if the firm successfully pushes back against concerns raised by the PCAOB before inspection reports are finalised. However, they hint at a trend since the pandemic that has alarmed the regulator.

PCAOB chair Erica Williams said in a speech in December that audit firms had told its inspectors that “the combination of the Covid-19 pandemic, remote auditing, the Great Resignation, and the war for talent have made it difficult to maintain stable audit teams and provide training to newer hires”.

But she added: “These factors are no longer new, and no one should be caught off guard by the challenges they present.”

The PCAOB has the power to inspect the audit of any company listed in the US, regardless of where its auditor is based. EY’s US auditors rely on overseas colleagues to check the accounts of clients’ foreign subsidiaries. Inspectors have long found that audit work carried out by the non-US businesses of the Big Four firms is more likely to have flaws than that carried out by the US arm.

Williams, who was appointed by the Biden administration with the aim of toughening enforcement of the PCAOB’s rules and beefing up inspections, told the FT last year that overseas arms of the big firms needed to match standards in the US.

In recent years, EY’s non-US arms have had fewer deficient audits than those of its rivals, according to an FT analysis of PCAOB data collated by Ideagen Audit Analytics. PCAOB inspection reports can take months to finalise so it could be some time before the deterioration in EY’s performance can be measured against its rivals.

The PCAOB inspected 37 audits carried out by EY’s non-US businesses last year, and EY estimated that the increase in deficiencies would be largely consistent across the Americas, Europe and Asia-Pacific.

The firm said it “actively reviews audit quality results from both internal and external monitoring. The figures reported by the Financial Times are from a preliminary stage of that process, during which areas for additional focus are identified. The figures do not reflect the ultimate conclusions drawn from that process.”

EY is also wrestling with problems getting staff and partners to comply with rules requiring them to report their financial interests. The rules are designed to avoid potential conflicts of interest for an audit firm, and have become a focus of PCAOB inspectors.

The regulator publicly censured EY’s Swedish arm this week after finding that more than half of its managers failed to make proper disclosures when they were audited in 2019, and that the firm had failed to quickly rectify matters. PwC’s US business was censured last week for similar failings, which are only publicised by the PCAOB if they are not remedied within a year.

EY is expecting its Spanish arm will face a similar PCAOB censure in the near future, according to a person familiar with the findings. Four other of its businesses — in Germany, Denmark, Belgium and Chile — were judged by inspectors last year to have high levels of non-compliance with financial disclosure rules, according to internal EY discussions, and will have an opportunity to remedy the issues over the coming year.