Audit Deficiencies by Accounting Giants Grew in Latest Inspections, U.S. Regulator Says

With the exception of KPMG, the deficiency rate rose at the Big Four.. Photographer: Tannen Maury/Bloomberg News
With the exception of KPMG, the deficiency rate rose at the Big Four.. Photographer: Tannen Maury/Bloomberg News

Summary

The U.S. units of the Big Four had an average 25% deficiency rate in their 2021 audits of public-company financials, up from 16%, according to the PCAOB’s most recent data.

Several U.S. accounting giants had greater deficiencies in their audits of public companies’ 2021 financial statements compared to the previous year, according to annual inspection reports released Wednesday by the Public Company Accounting Oversight Board.

The regulator, which compiles its findings with a lag, inspected 215 audits conducted by the Big Four accounting firms in the U.S.—Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers—down from 220 a year earlier. The firms had an average deficiency rate of about 25%, up from roughly 16% a year earlier.

The PCAOB inspects portions of selected U.S. public-company audits to evaluate firms’ state of compliance and assess the controls they use to test the quality of their work. A deficiency means the audit firm failed to obtain sufficient evidence to back up its opinion.

The PCAOB has been working to clear a backlog of inspections, but thus far its reports are arriving at a two-year remove.

With the exception of KPMG, the deficiency rate rose at the Big Four. KPMG’s rate held steady at 26%, based on 54 audits.

EY, Deloitte and PwC had previously disclosed these figures in their U.S. audit-quality reports. EY’s U.S. unit had a deficiency rate of 46% based on the 54 audits the PCAOB reviewed, well up from 21%. Its audit shortcomings largely related to the testing of controls over revenue and related accounts, business combinations and inventory, the PCAOB said. In its December audit-quality report, EY called its 46% rate “unacceptable" and said it didn’t reflect the firm’s high standards.

Deloitte and PwC’s U.S. units had rates of 17% and 9% on 53 and 54 audits in 2021, respectively, up from 13% and 4% a year earlier.

These deficiency rates are “unacceptably high," PCAOB Chair Erica Williams said, referring to the inspection reports for the Big Four and another 10 firms. Looking at firms beyond just the Big Four, the PCAOB said in July that it expected deficiencies in 40% of public-company audits covering 2021, up from 34% in 2020 and 29% in 2019.

But preliminary inspection results for 2022 audits show a “modest improvement" in audit quality at some of the U.S. divisions of global accounting firms, Williams said on Wednesday.

“It will take time for the quality-control improvements to take root, and firms will need to be diligent to ensure they translate into improvements in engagement performance," she said.

The firms have said they are working to further strengthen audit quality. PwC is continuing to invest in its audit approach, people and technology, a U.S. spokeswoman said. In September, its U.S. unit said it would stop providing certain consulting work to its audit clients to avoid potential conflicts of interest.

KPMG remains focused on continuously improving its audit approach, a U.S. spokesman said. EY’s U.S. unit began an in-depth review of its audit practice after facing its 2021 rate, a spokesman said. “We have taken several transformative actions to enhance audit quality and improve inspection results and are strengthening our foundation to drive consistent execution across our practice," he said.

Deloitte didn’t immediately respond to requests for comment.

Write to Mark Maurer at mark.maurer@wsj.com

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