US Regulator Finds ‘Unacceptable’ Deficiency Rates At Audit Firms

Quis custodiet ipsos custodes; who watches the watchmen? In the US audit industry, that would be the Public Company Accounting Oversight Board. And it does not like what it sees.

The PCAOB called out an “unacceptable” level of deficiencies at the country’s biggest auditors alongside the release of its latest inspection results Thursday.

Bad Audit-tude

The audit profession was one of those most adversely impacted by COVID-19, and it has yet to recover. As income declined, so too did performance. A mass exodus of auditors, often overworked and underpaid, didn’t help: Some 300,000 US accountants left their jobs between 2019 to 2021, according to Bureau of Labor Statistics data. There aren’t enough people entering the field to bridge the gap, and given the essential role number-crunching plays in the markets, commentators have gone so far as to suggest the industry woes threaten capitalism itself.

The PCAOB, which has the power to review the audit of any US-listed company, performed 287 checks of audits carried out by the six largest firms in the country, as well as a smattering of inspections of smaller auditors’ work. The findings showed an industry still reeling from the unusual world that was the early 2020s:

• PCAOB found deficiencies in 46% of audits last year, up from 40% in 2022. Deficiencies occur when an auditor fails to collect enough evidence to support part or all of their conclusion.
• Among the six largest firms, 86% of audits carried out by BDO were found to contain deficiencies, as well as 54% of audits at Grant Thornton. The so-called Big Four Auditors fared better, with 38% of audits carried out at Ernst & Young containing deficiencies, 26% at KPMG, 21% at Deloitte, and 18% at PwC — though only EY and KPMG’s rates fell.

No Pajamas: “While there is no single reason for the aggregate increase in deficiencies, it’s clear the Covid pandemic influenced audit quality,” the organization — not a government agency, but a nonprofit whose rules are approved by the SEC — said. One thing that the PCAOB said has helped improve audit quality is requiring staff to show up to the office, at least for part of the week.