PCAOB: Audits Getting Sloppier

The overall quality of audit work has been poor for years and is only getting worse, according to a recent report from the Public Company Accounting Oversight Board.

The report detailed the preliminary findings of the PCAOB’s annual inspection of hundreds of audits from 2022. The PCAOB said it expected about 40% of the audits that it reviewed contain at least one Part I.A deficiency. Such deficiencies indicate the firm performing the audit couldn’t justify the opinion provided regarding the clients’ financial reporting. The share of audits with these major deficiencies identified during the agency’s review has grown steadily from 29% in 2020 and 34% in 2021. Meanwhile, factoring in lesser deficiencies, the PCAOB reported that it found flaws in about 60% of the audits reviewed.

The most troubling offenders, according to the PCAOB, were the firms that fall under the heading of global network firms. Notably, this group includes the so-called Big Four accounting firms of Deloitte, Ernst & Young, KPMG and PwC.

Fortunately, the PCAOB is offering a fix to help auditors raise their grades. Earlier this year, it proposed to change accounting standards to give auditors more responsibility to take concerns about noncompliance to a company’s board of directors.

“By requiring auditors to identify and communicate noncompliance sooner, the proposed amendments, if adopted, would encourage companies to take more timely remedial actions and thereby reduce investor harm caused by legal and regulatory penalties,” the PCAOB said in a release accompanying the proposal. “Another potential benefit would be to lower the likelihood that financial statements are materially misstated due to noncompliance with laws and regulations.”

Apparently, the accounting industry considers the proposed rules too onerous. An industry group representing the Big Four reached out to amass support against the measure from corporate directors during the comment period for the proposal, which ended August 7. The group warned that if the PCAOB’s new rule took effect, it would translate into higher fees going forward.

But what if the real problem is there aren’t enough accountants, not that they’re doing bad work? For example, some financial statement issuers have started citing a shortage of accountants as contributing to weaknesses in their internal controls. With fewer people pursuing accounting degrees and more accountants aging out of the workforce, the sector’s labor supply is shrinking.

Ironically, the shortage comes at a time when it looks as though demand for the services of accountants is about to boom. The PCAOB seems likely to approve the proposal to raise the stakes for auditors to identify and call out noncompliance. Additionally, the Financial Accounting Standards Board has given the go-ahead on new requirements for companies to provide greater levels of detail in public disclosures about the segments of their businesses.

So, for any college students out there who are picking a major, keep in mind that accountants will probably be hot commodities on the job market soon.

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