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PCAOB inspections show signs of improvement in audit quality

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Auditing firms appear to be making headway on fixing some of the problems identified by the Public Company Accounting Oversight Board.

The results will show up in the inspection reports released next year by the PCAOB detailing the results of 2024 inspections at the largest firms. 

“The 2024 inspections cover audit work that mostly occurred in 2023 and early 2024,” said PCAOB chair Erica Williams during a speech Tuesday at the AICPA & CIMA Conference on Current SEC and PCAOB Developments. “Because this board arrived in early 2022, the audit work that occurred in late 2023 and early 2024 just begins to address the direction and guidance provided under this board. PCAOB staff has indicated that they expect the results of these inspections to provide the first glimpse of progress made by firms in response to calls for improvement of audit quality under this Board.”

She sees that as a reflection of the PCAOB’s efforts to improve audit quality under her tenure. “Today, three years into this board’s tenure, our inspectors are seeing significant improvements from the largest firms,” said Williams. “Results will be reflected in the 2024 inspection reports. To be clear, it will take some time for firms to fully reverse this trend. However, this news signals that the work of this board is taking root.”

However, she acknowledged that problems continue to linger, including a rise in the number of restatements by public companies. She cited a Financial Times article this week that found “the number of U.S. companies forced to withdraw financial statements because of accounting errors has surged to a nine-year high.”

“Restatements are one variable to take into consideration,” said Williams. “And here too, with the increase in restatements, we are beginning to see the results of the slippage of audit quality in prior years. But again, our staff is already seeing improvements. Moreover, we expect even greater improvements when some of our standards, including QC 1000, are fully implemented by the firms.”

PCAOB chair Erica Williams speaking at the AICPA Conference on Current SEC and PCAOB Developments

PCAOB chair Erica Williams speaking at the AICPA Conference on Current SEC and PCAOB Developments

The Securities and Exchange Commission approved the PCAOB’s new QC 1000 quality control standard in September.

“We believe QC 1000 will set the foundation for quality audits for the future,” said Williams. “A firm’s QC system influences virtually all firm activities. When QC systems operate ineffectively, investors are put at risk. But, when QC systems operate effectively, quality audits performed in accordance with applicable professional and legal requirements are likely to follow — leaving investors better protected. It strikes a balance by introducing a risk-based approach that can be applied by firms of varying sizes and complexity, while also imposing requirements to ensure each QC system is designed, implemented and operated with an appropriate level of rigor. Then it sets up a feedback loop, based on monitoring and remediation, designed to drive continuous improvement.”

She urged auditing firms not to lose focus and to continue to make progress on behalf of investors. Williams noted that the PCAOB staff recently conducted a study and found that audit firm culture can have an impact on audit quality for better or worse. Longer partner tenure also seems to correlate with fewer significant audit deficiencies highlighted in Part I.A of the inspection reports. 

After her speech, Williams and other members of the PCAOB were interviewed onstage by Center for Audit Quality CEO Julie Bell Lindsay. PCAOB board member George Botic said he believes the PCAOB is well aligned with the SEC on capital formation. Another board member, Christina Ho, said she believes there’s an opportunity to provide a higher level of transparency about the severity of the Part I.A deficiencies. The board members were also asked about their expectations for the SEC under Paul Atkins, who was named as the new chair by President-elect Trump to succeed Gary Gensler, who plans to step down on January 20, the date of Trump’s inauguration. 

Ho is expecting a more moderate approach and said she is looking forward to working with the new SEC chair. She was also asked about a report by a third party advisory group for the PCAOB on the use of emerging technologies for auditing. She said the report has been delivered to the board and believes the recommendations in it should be made public. 

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IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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