Regulator reports notable decline in audit quality

Audit quality has declined, according to a new report from the Public Company Audit Oversight Board (PCAOB). The regulator found “a collective increase in the number of audits with deficiencies” during annual audit firm inspections in 2021.

The report also found that the auditing deficiencies are an ongoing problem. The issues included leaving out critical audit matters (CAMs) that are material to financial statements, non-compliance with PCAOB standards, and failing to test company controls.

The PCAOB report also found that one-third of the audits it reviewed in 2021 lacked “appropriate audit evidence” to support the audit firm’s opinion of the client company’s financial statements and reporting. In November, the PCAOB released a report that identified 21 firms with deficiencies in their work.

“Higher deficiency rates in 2021, coupled with the fact that the PCAOB is also seeing an increase in comment forms for 2022, are a warning signal that the audit profession needs to sharpen its focus on improving audit quality and protecting investors,” PCAOB Chair Erica Y. Williams said in a statement.

This is the first year many audit firms in the study were required to comply with CAMs reporting regulations. The report found that firms missed some of the matters that should have been included in the CAMs reporting. The PCAOB found fewer errors in audits performed by firms in their second year of reporting CAMs.

The regulator offered several “good practices” for improving audit quality. For example, the PCAOB recommended bringing in outside subject matter experts to perform independent reviews in order to improve communication around CAMs with audit committees, and building communications tracking systems to make sure that nothing is overlooked.

It also encouraged the use of new technological tools, such as expanding digital financial holding monitoring and automating auditor financial holdings analysis, to prevent conflicts of interest. The PCAOB recommended audit firms review disciplinary actions, including monetary sanctions, for independence violations.

The PCAOB inspected a total of 690 audits from 141 audit firms for the report, with an emphasis on sectors and industries “experiencing particularly significant disruptions or financial reporting risks during the Covid-19 pandemic.”—DA