Big Four Auditing Deficiencies Level Off in Latest Inspections
The firms’ U.S. units collectively had a deficiency rate of 26%, the same as a year earlier, with the PCAOB chair calling the overall results still unacceptable
PricewaterhouseCoopers and Deloitte experienced greater deficiencies in their audits of public companies’ 2022 financial statements compared with the previous year, while the overall rate of Big Four accounting firms’ shortcomings stabilized, according to the latest annual inspection reports.
The Public Company Accounting Oversight Board last year inspected 230 audits conducted by the Big Four firms in the U.S.—Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers—up from 215 a year earlier. The firms collectively had an average deficiency rate of about 26%, the same as a year earlier. PCAOB Chair Erica Williams said the findings from the inspections released Thursday, which covered audits of 2022 financials, were still unacceptable.
The Big Four averaged a rate of 20% over the previous five years, reports show.
The regulator 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.
Deloitte and PwC’s U.S. units had rates of 21% and 18%, respectively, both up from 17% and 9% a year earlier. EY continued to have the highest deficiency rate among the Big Four in the U.S., at 37%, down from 46% the year prior, which marked a surge from 21% the year before that. KPMG’s rate fell to 26% from 30%.
KPMG said it is proud of its efforts to enhance audit quality. “Our focus remains on investing in our system of quality control, people and technology to support the capital markets,” a KPMG spokesman said.
Some of Deloitte’s deficiencies involved the identifying of controls related to a significant account. Certain PwC deficiencies pertained to the testing of data or reports used in substantive testing.
Deloitte continues to make substantial investments to boost audit quality and meet investors’ evolving needs, a spokesman said. PwC is continuously seeking to improve its “culture of quality, transparency, integrity and independence,” a spokeswoman said.
EY’s audit shortcomings largely related to how the firm addresses the risk of a material misstatement and tests controls over the accuracy and completeness of data or reports used in the operation of controls.
Following the 2022 inspection finding that EY’s deficiency rate rose sharply, the firm has said it revamped its audit practice by simplifying and standardizing its approach and building centralized teams to provide audit support on various topics.
“While we have seen improvement in our inspection findings in the 2023 report, the majority of our transformation initiatives occurred during the 2023 audit cycle,” an EY spokeswoman said, adding that the firm expects its inspection results to show continued progress in part due to related investments.
Grant Thornton and BDO, two global accounting and consulting networks outside of the Big Four, saw their U.S. deficiencies climb to an even greater degree, an average of 70% based on a combined 57 audits. Grant Thornton’s rate rose to 54% from 31%, and BDO’s climbed to 86% from 66%.
BDO has made numerous investments to strengthen the quality of its audits over the past two years, a spokeswoman said. Grant Thornton said it remains dedicated to its quality-related initiatives.
Traditionally, Grant Thornton, which in May sold a stake to a group led by private-equity firm New Mountain Capital, and BDO have had higher deficiency rates than that of the Big Four, based on a smaller pool of audits selected for review. The firms averaged 39% over the previous five years.
BF Borgers, which was banned from public-company work by the Securities and Exchange Commission in May for alleged fraud, received a 100% deficiency rate for the third straight year. The firm’s biggest client was Trump Media & Technology Group until the Truth Social owner fired it following the SEC claims.
“These inspection results point to some small signs of movement in the right direction,” PCAOB’s Williams said in a statement, referring to the reports for the Big Four and 10 other firms. “Still, overall deficiency rates are unacceptable, and firms must do better. Now is the time to double down on efforts to improve and deliver the audit quality investors deserve.”
The reports arrive just six months after the previous batch as the PCAOB works to release the findings closer to when the inspections occurred.
BF Borgers didn’t immediately respond to a request for comment. Deloitte is a sponsor of CFO Journal.