WASHINGTON — The Public Company Accounting Oversight Board said it saw worrying trends in the quality of audits industrywide in 2022.
The findings could raise alarm from policymakers, increase scrutiny on audits or even potentially elicit regulatory actions toward firms. According to a Monday
The PCAOB, established as a nonprofit corporation by the Sarbanes-Oxley Act of 2002, functions as an independent regulatory body responsible for overseeing public company audits.
Though PCAOB does not independently identify causes of audit quality trends, the board said many comments it received from firms attributed the decline in audit quality to the ripple effects of the pandemic on the workforce.
"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 report said that in particular, 2022 saw a significant rise in what's known as "Part I.A deficiencies" related to the auditors' work — those the board considers significant enough to impair a firm's ability to defend its opinion on its financial statements.
"The percentage of audit engagements reviewed that are expected to be included in Part I.A of an inspection report is higher in 2022, in nearly all firm categories, than in 2021," the report stated. "PCAOB staff expects approximately 40% of the audits reviewed will have one or more Part I.A deficiencies, up from 34% in 2021 and 29% in 2020."
The board says this trend of rising deficiencies is especially pronounced within a category of firms —
The report preview also highlighted a rise in a secondary category of infraction: Part I.B deficiencies — or those related to areas where auditors failed to comply with standards resulting in subpar audit performance. In 2022, the board estimates approximately 46% of the audits reviewed were expected to have one or more of these deficiencies, up from 40% in 2021 and 26% in 2020. The agency says these were largely due to an increase in critical auditing errors, documentation and failures in audit committee communications.
The report did not make note of a third type of deficiency — Part I.C deficiencies — which denote a firm's potential noncompliance with the securities laws or with PCAOB rules related to maintaining independence.
In light of the identified deficiencies, the PCAOB release encouraged audit firms to implement proactive practices, including risk assessment procedures, practice aids for auditors, emphasizing consistency in applying standards, bringing in experts with specialized skills and ensuring timely supervision and review to enhance audit quality.
The report's findings may have implications for the credibility and reliability of financial statements for public firms, including some of the nation's largest banks. It could potentially lead to increased regulatory scrutiny and litigation risks, and impact the trust and confidence of investors and stakeholders.
Erica Y. Williams, chair of the PCAOB, wrote in
"Last year we doubled the number of enforcement orders compared with 2021," she wrote. "We hope boards of directors and audit committees will use PCAOB inspection reports to hold audit firms accountable for high-quality results and ask tough questions on behalf of their investors."
With regard to the firms' excuses for poor audit quality, the board chair is not convinced. She says many of the issues that continue to linger originated far before COVID-19.
"COVID-19 can't simply explain away a 40% deficiency rate. Many of the deficiencies PCAOB inspectors identified have recurred for years, well before the pandemic," Williams said. "Now is the time for solutions, not excuses."
