US regulator reports rising number of flawed audits

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US regulators have seen a jump in the number of flawed audits carried out by global accounting firms, according to figures released on Monday night that point to the difficulties of high staff turnover and hybrid work.

The Public Company Accounting Oversight Board said that its inspectors found deficiencies in 30 per cent of audits carried out by the US businesses of the global network firms — the Big Four of Deloitte, PwC, KPMG and EY, plus Grant Thornton and BDO — last year. That was up from 21 per cent of audits inspected in 2021.

There was an even bigger increase in failures in the work of the firms’ non-US businesses, where the deficiency rate rose to 31 per cent from 17 per cent.

“Although we do not perform analyses to determine the root causes of the deficiencies our inspectors identify, many firms do,” the PCAOB said in a report. “Certain firms have indicated that this deterioration of audit quality may in part be attributable to higher-than-normal staff turnover, use of less experienced staff in general, and the ongoing impact of Covid-19 and related remote work.”

The PCAOB has the power to inspect the audit of any company listed in the US, regardless of where its auditor is based. It said it had reviewed 710 audits last year as it stepped up its work to enforce US standards.

The Financial Times reported last week that EY was expecting a 38 per cent deficiency rate in inspections of work carried out by its non-US businesses, up from 21 per cent in 2021. The PCAOB report suggested that this increase would be somewhat higher than average, although EY said its figures were preliminary and they will be confirmed only after PCAOB inspection reports have been finalised.

In Monday’s report, the PCAOB said its inspectors also found increasing numbers of flaws in the work of smaller audit firms, which tend to have smaller companies as clients and typically have a higher deficiency rate than the global firms. More than half of the audits inspected at these firms failed to meet US standards in 2022, although the increase was not as pronounced as among the global firms.

Overall, about 40 per cent of the audits reviewed in 2022 had one or more deficiencies, the PCAOB said, in which the audit firm failed to obtain sufficient appropriate evidence to support its audit opinion. The overall figure is up 6 percentage points from 2021, which was five points higher than the deficiency rate in 2020.