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PCAOB sees improvements in largest audit firms

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The Public Company Accounting Oversight Board’s inspection staff found noticeable improvements in the deficiency rates of the six largest global auditing firms, according to a report Monday.

In 2024, the PCAOB observed a tangible decrease in Part I.A deficiency rates, on average, across all inspected firms, as well as a substantial improvement, in the aggregate, among the largest firms it inspects annually. The improvement follows increased efforts by the PCAOB to encourage firms to reverse the trend of rising deficiency rates following the pandemic. 

“We challenged the audit profession to do better for America’s investors, and these significant improvements demonstrate real progress in protecting investors,” said PCAOB chair Erica Williams in a statement. “Still, our work is far from over, and I urge the audit profession to build on this momentum.”

For all inspected firms, the aggregate Part I.A deficiency rate decreased to 39% in 2024, down from 46% in 2023. For the Big Four U.S. firms (Deloitte, EY, KPMG and PwC), which as of Dec. 31, 2024, collectively audit about 80% of the market capitalization of public companies, the aggregate Part I.A deficiency rate decreased to 20% in 2024, down from 26% in 2023.

The aggregate Part I.A deficiency rate for the six U.S. global network firms (BDO USA, Deloitte, EY, Grant Thornton, KPMG and PwC) decreased to 26% in 2024, from 34% in 2023.

Results at the eight annually inspected U.S. non-affiliated firms held steady, decreasing to 52% in the aggregate in 2024, compared to 53% in 2023 (when the eight inspected firms were Marcum, RSM US, Crowe, Withum, Moss Adams, Baker Tilly US, B F Borgers and Cohen & Company, Ltd., though BF Borgers was suspended last year and Marcum was acquired by CBIZ). While the same firms are not inspected year-to-year, the PCAOB saw improvements at the non-affiliated firms and global network triennially inspected firms. Aggregate deficiency rates at NAF triennially inspected firms decreased from 67% in 2023 to 61% in 2024, and GNF triennially inspected firms decreased from 35% in 2023 to 26% in 2024.

Williams has called on firms to improve their audit quality since she became chair of the PCAOB in 2022, and the PCAOB has been focusing on encouraging auditing firms to address their high deficiency rates coming out of the pandemic. Some of the initiatives include publishing more information, resources and tools to help firms improve their audit quality; increasing transparency; engaging regularly with audit firms; providing focused support to smaller firms; publishing implementation guidance for new PCAOB standards; prioritizing guidance and communication regarding remediation submissions for quality control deficiencies; engaging directly and regularly with U.S. audit committees; and increasing the PCAOB’s focus on the effect of firm culture on audit quality.

The PCAOB began seeing deficiency rates leveling off at the largest firms last year when it released its 2023 inspection results for them. On Monday, the PCAOB released separate inspection reports for the six largest firms. 

At BDO USA, P.C, 18 of the 30 audits reviewed in 2024 were included in Part I.A of the report due to the significance of the deficiencies identified, a 60% deficiency rate. The identified deficiencies mainly related to BDO’s testing of controls over and/or substantive testing of revenue and related accounts, goodwill and intangible assets, and business combinations. However, that represented an improvement over BDO USA’s 2023 results, when 25 of the 29 audits reviewed by the PCAOB in 2023 were included in Part I.A, an 86% Part I.A deficiency rate.

At Deloitte & Touche LLP, nine of the 63 audits reviewed by the PCAOB in 2024 were included in Part I.A of the report due to the significance of the deficiencies identified, for a 14% Part I.A deficiency rate. The identified deficiencies mainly related to Deloitte’s testing of controls over and/or substantive testing of revenue, allowance for credit losses, and leases. That too was an improvement for Deloitte, where in its 2023 report, 12 of the 56 audits reviewed by the PCAOB in 2023 were included in Part I.A of the report, translating into a 21% Part I.A audit deficiency rate.

At Ernst & Young LLP, 18 of the 64 audits reviewed by the PCAOB in 2024 were included in Part I.A of this report due to the significance of the deficiencies identified, a 28% Part I.A deficiency rate. The identified deficiencies primarily related to EY’s testing of controls over and/or substantive testing of revenue and related accounts, inventory and long-lived assets. That again was an improvement over 2023’s inspection report for EY, when 22 of the 59 audits we reviewed in 2023 are included in Part I.A, for a 37% deficiency rate.

At Grant Thornton LLP, 13 of the 27 audits reviewed by the PCAOB in 2024 were included in Part I.A of this report due to the significance of the deficiencies identified, a 48% Part IA deficiency rate. The identified deficiencies primarily related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts and inventory. While a 48% deficiency rate may seem high, it was better than the 54% rate on the 2023 inspection report for GT, when 15 of the 28 audits reviewed in 2023 were included in Part I.A.

For KPMG LLP, 13 of the 64 audits reviewed in 2024 were included in Part I.A of its report due to the significance of the deficiencies identified, a 20% Part I.A deficiency rate. The identified deficiencies mainly related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts and allowance for credit losses. That too was an improvement over the 15 of 58 audits reviewed in 2023 that were included in Part I.A of the 2023 report on KPMG, a 26% Part I.A deficiency rate.

For PricewaterhouseCoopers LLP, 10 of the 64 audits reviewed by the PCAOB in 2024 were included in Part I.A of the report due to the significance of the deficiencies identified, a 16% Part I.A deficiency rate. The identified deficiencies primarily related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts and the allowance for credit losses. That was comparable to the 2023 report for PwC, when 10 of the 57 audits reviewed by the PCAOB in 2023 were included in Part I.A of the report, an 18% Part I.A deficiency rate.

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Accounting

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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Accounting

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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Accounting

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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