What Are the Trends in PCAOB Inspections and the Reported Audit Deficiencies?

Abstract

<jats:p> Although the Public Company Accounting Oversight Board (PCAOB) inspections commenced in 2003, few studies have analyzed the recurring nature of audit deficiencies both within and across U.S. and non-U.S. firms. This study investigates longitudinal trends in PCAOB Part I audit deficiencies and compares these deficiencies between initial and subsequent inspections. We classify the audit deficiencies contained in the inspection reports into three categories relating to Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), and Internal Controls over Financial Reporting (ICFR). Using 1,551 inspections conducted over the period 2003–2017, we find that 67% of Part I audit deficiencies in the related reports pertain to GAAP and that triennially inspected audit firms have the highest occurrence of these deficiencies. On average, 22% of audit deficiencies relate to GAAS, with the highest incidence of these deficiencies attributable to annually inspected audit firms. Although ICFR has the least audit deficiencies (11%), we find a significant increase from 2009. We find no significant differences in the mean number of GAAP, GAAS, and ICFR audit deficiencies between first- and second-round inspections. However, we find a significant increase in the mean number of ICFR audit deficiencies between the third- to fifth-round inspections. The audit areas of “revenue recognition,”“inventory,” and “fair value measurements” (i.e., those requiring significant auditor judgment) are the most frequent audit deficiencies identified by the PCAOB. This study provides insights into the frequency and nature of audit deficiencies to stakeholders such as investors, auditors, audit committees, and users of financial statements. </jats:p>

PCAOB international inspections: Updates and extensions

“…• No statistically significant association between audit deficiencies and the country's liability standards. Prasad and Webster (2020) 376 inspection reports issued through 2017 for non-U.S. auditors in which audit deficiencies were cited. Also included 1,175 reports for U.S. auditors in which audit deficiencies were cited.…”

“…Finally, Prasad and Webster (2020) examined audit deficiencies in PCAOB reports for U.S. and non-U.S. audit firms for inspections performed from 2003 to 2017. The authors find that 52% of the inspections performed during that period discovered at least one audit deficiency, with the largest numbers of deficiencies discovered in inspections performed in 2012 (156 deficiencies) and 2013 (163 deficiencies).…”

“…One such factor is the number of resources to which the firm has access (Flasher & Schenck, 2019;Prasad & Webster, 2020). We use two measures of resources available to a firm.…”

“…Finally, Prasad and Webster (2020) examined audit deficiencies in PCAOB reports for U.S. and non‐U.S. audit firms for inspections performed from 2003 to 2017.…”

“…First, we contribute to the literature by analysing factors associated with audit deficiencies separately for principal‐auditor engagements and referred‐work engagements, a nearly unexplored area of research. Second, in response to calls by Bishop et al (2013), Lamoreaux (2016), Flasher and Schenck (2019), Prasad and Webster (2020) and others for additional research related to PCAOB inspections as more inspection reports become available, this study examines a larger number of PCAOB inspections reports (760) over a longer observation period (2006 to 2021), including inspection results across five rounds of inspections and addressing legal, economical and regulatory institutional factors. In addition, we extend recent studies (e.g., Prasad & Webster, 2020) through the use of multivariate analysis to investigate various relationships between reported audit deficiencies and several variables related to inspection characteristics, audit firm traits and country‐specific institutional factors.…”