December 12, 2022

Financial Reporting: PCAOB Report Says Audits with Deficiencies Increased in 2021

According to a recent PCAOB Staff Report, public company auditors didn’t have a great year in 2021. The report says that, according to preliminary inspection data, the number of audits with deficiencies is expected to increase.  Here’s an excerpt with some details:

We observed an increase in the percentage of engagements reviewed with at least one “comment form” (the initial communication to audit firms of observed deficiencies from our inspections, which generally result in Part I.A or Part I.B inspection observations). We expect approximately 33% of the audits we reviewed will have one or more deficiencies that will be discussed in Part I.A of the individual audit firm’s inspection reports, up from 29% in 2020.

In addition, we expect that approximately 40% of the audits we reviewed will have one or more deficiencies discussed in Part I.B of the individual firm’s inspection reports, up from 26% in 2020. Some audits have both Part I.A and Part I.B deficiencies, such that we expect that approximately 55% of the engagements we reviewed will have one or more Part I.A and/or Part I.B deficiencies, compared to 44% in 2020.

A lot of these problems aren’t minor foot-faults. If an issue makes its way into Part I.A. of an inspection report, it means that the PCAOB’s Staff concluded that the deficiencies were significant enough that the auditor, at the time it issued its report, did not have sufficient appropriate evidence to support its opinion on the company’s financials or ICFR. Deficiencies identified in Part 1.B. of the report are less significant and include the Staff’s observations concerning instances of noncompliance with PCAOB standards or rules that don’t relate directly to the sufficiency of the evidence supporting the auditor’s opinion.

The report provides specific data on audit areas where deficiencies were found as well as trend data concerning recurring deficiencies for 2019 through 2021. It also discusses common areas where deficiencies were found in 2021 inspections and highlights “good practices” that the Staff observed relating to ICFR, accounting estimates related to business combinations, critical audit matters, auditor independence, supervision of audits and engagement quality review.

John Jenkins