Public Company Accounting Oversight Board chair Erica Williams warned accountants that PCAOB inspectors have been uncovering an increasing number of problems at auditing firms.
During a virtual keynote session Thursday at Baruch College’s financial reporting conference in New York, Williams pointed to growing trends in significant audit deficiencies highlighted in the Part 1.A of the PCAOB inspection reports.
“We found that audits with Part 1.A deficiencies increased 5% in our 2021 inspections to 34%, compared to 29% in the 2020 inspections, and that means that a third of the audits we inspected had deficiencies of such significance that PCAOB staff believe that audit firms fail to obtain sufficient and appropriate audit evidence to support their opinions on public companies’ financial statements or internal controls over financial reporting,” she said. “Additionally, comment forms for both U.S. and non-U.S. firms increased further during our 2022 inspections. The final inspection reports for the 2022 inspections have not yet been released, but what we do know is that the comment forms usually result in inspection findings in our reports. That means that the 2022 reports are likely to have even more deficiencies than the 2021 reports. Together these facts present a really troubling warning sign.”
She acknowledged that the 2023 inspections are still underway, and it would be too early to comment on those results. “But the good news is that auditors can take actions to reverse this troubling trend,” she added. “That’s why I’ve called on audit firms to take actions necessary to improve audit quality because at the end of the day, quality audits protect people and that’s what this is all about.”
Williams said some firms had told the PCAOB about the problems they encountered over the past year, including the impact of the COVID-19 pandemic on remote auditing, while the Great Resignation and the war for talent are making it difficult to maintain stable audit teams and provide training to new hires.
“But these factors are no longer new, and no one should be caught off guard by the challenges that they present,” said Williams. “Firms have a responsibility to design and implement solutions to restore and maintain audit quality; 34% of audits with at least one with at least one Part 1.A finding cannot be explained away by the pandemic, and some of the audit efficiencies that were identified have been recurring for many years, well before COVID-19. Those include auditor independence, which is a critical element of an audit firm’s quality control system, and is essential to an audit firm’s credibility with investors.”
The PCAOB unveiled this week a new section of its audit inspection reports devoted to audit independence, she pointed out (see story). Williams noted that the board has also made enforcement a key goal in its strategic plan.
“The PCAOB imposed our highest annual enforcement penalties ever in 2022, and we’ve doubled the number of enforcement actions that have been brought from the previous year,” she said. “The numbers in 2022 clearly speak for themselves.”
She noted that the PCAOB named a new director of its division of enforcement and investigations, former prosecutor Robert Rice, in March. “Bob has decades of experience holding wrongdoers accountable and will be invaluable to our continuing efforts to keep investors protected,” said Williams. “Those who break the rules should know that we won’t be constrained to the types of cases that we’ve brought in the past, and we won’t be limited to the number of penalties that have been assessed before. They should know that we will seek admissions of wrongdoing in appropriate cases.”
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