The U.S. Public Company Accounting Oversight Board (PCAOB) says that smaller U.S. audit firms are getting better, but that they continue to suffer from a concerning level of significant deficiencies.
The PCAOB released a report summarizing its findings from its latest round of inspections of firms that audited less than 100 public companies. It found a reduced rate of reported “significant audit performance deficiencies” — which result in the audit firm lacking sufficient evidence to support its opinion — compared with the previous review of these firms completed in 2007 (these smaller firms are only required to be reviewed every three years).
According to the report, 44% of the audit firms inspected during the 2007-2010 period had at least one “significant audit performance deficiency” compared to 61% in the previous period (2004-2006). It also reports that, of firms that received their second inspection this time around, 36% had at least one such deficiency in their second inspection, compared to 55% in their initial inspection.
Despite the decrease in the rate of significant audit performance deficiencies noted in second inspections, the persistence of such deficiencies in audits is “of concern” to the board, it notes. “The board has issued this report to highlight areas where audit firms can focus their attention to enhance the quality of their audits,” said James Doty, PCAOB chairman. “We also encourage firms to identify and address the root causes of any audit performance deficiencies identified during the inspections process.”
Of the individual audits inspected between 2007 and 2010, 28% had at least one significant audit performance deficiency compared to 36% of the audits inspected between 2004 and 2006, it notes. Areas with frequent inspection findings include: revenue recognition; share-based payments and equity financing instruments; fair value measurements; business combinations and impairment of intangible and long-lived assets; and, related party transactions; among other issues.