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PCAOB chief chides auditors for blaming failures on talent shortage

Nov. 8, 2023

The quality of audits has trended “in the wrong direction for the second year in a row,” PCAOB Chair Erica Williams said.

Dive Brief:

Public Company Accounting Oversight Board Chair Erica Williams chided auditors for blaming a rise in flawed audits on a talent shortage and deplored how deficiencies marred two out of five audits reviewed by board inspectors last year.

Confronted with the errors, “some firms point to the continuing effects of COVID-19, including the ‘Great Resignation’ and heightened competition for talent,” Williams said Tuesday in a speech.

“Three years after the pandemic began, these challenges are no longer new, and firms should have a strategy to meet them,” Williams said. “Now is the time for solutions, not excuses,” she said, adding “firms must correct the problems that led to deficiencies in their audits.”

Dive Insight:

Under the leadership of Williams since January 2022, the federal overseer of auditing firms last year doubled the number of enforcement orders compared with 2021 and imposed record penalties. Williams has also tightened audit standards and expanded inspections.

Inspectors anticipate that 40% of the audits they reviewed last year will have one or more deficiencies where the auditor failed to gather evidence supporting its opinion, a 6 percentage point increase compared with 2021, Williams said.

Board inspectors annually vet 800 audits in more than 30 jurisdictions worldwide.

This year PCAOB is on track to inspect more than 60 firms outside the U.S. covering more than 200 engagements, Williams said. Last year the board for the first time secured access for inspections in China.

“We are seeing audit quality for both domestic and international firms trend in the wrong direction for the second year in a row,” Williams said.

PCAOB inspections — including preparation, execution and resolution — stand in need of an upgrade, according to a study based on interviews of 25 former board inspectors.

“We identify opportunities for improvement in the inspection process by uncovering structural, procedural and habitual shortcomings within the PCAOB as viewed by inspectors,” the researchers said in a recently released study.

“Issues include ongoing deficiencies in training, siloing of inspection teams by firm, the lack of consistency in applying auditing standards across different types of firms, the equal weighting of Part I comment forms with varying degrees of significance and the lack of advancement opportunities,” according to the researchers.

The PCAOB hires many of its inspectors from auditing firms and fields them without sufficient training assessment of audits, according to the study released last month.

“In addition, inspectors view ongoing training in accounting principles, technology and audit methodology as inadequate,” the researchers said.

The PCAOB applies a “double standard,” holding the so-called Big Four audit firms to a higher standard than smaller firms and those based overseas, according to the researchers, who interviewed inspectors whose work spanned the years from 2004 until 2021.

A study of PCAOB inspections runs into several obstacles, including “the PCAOB’s secretive culture, restrictive policies and inspectors’ real or perceived employment risks for sharing their opinions with outsiders,” the researchers said, noting that board members, auditors and investors “continue to call for increased transparency.”

Williams said that the PCAOB in July provided tools on its website for comparing inspection data. It aims to increase transparency regarding its inspections as part of an effort “to make more relevant, reliable and useful information available for investors, researchers and others.”

“And we are calling on audit committees to use this and all the information available through PCAOB inspection reports to ask tough questions on behalf of their investors and hold audit firms accountable for high-quality results,” she said.

[CFO Dive]

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