U.S. accounting watchdog flags ‘unacceptable’ increase in audit deficiencies

By Chris Prentice

(Reuters) -The U.S. accounting watchdog has found an “absolutely unacceptable” level of serious deficiencies in public company audits it inspected in 2022, chair Erica Williams said in a statement on Tuesday.

The Public Company Accounting Oversight Board (PCAOB), which inspected 157 audit firms last year, said in a preliminary report that it expects about 40% of the audits they reviewed will have one or more deficiencies in which the auditor did not get enough evidence to support its opinion.

That was above the level of deficiencies the PCAOB spotted in 2021 and 2020, the report said. Issues included failing to examine the accuracy and completeness of data provided by companies, to appropriately sample transactions or to test companies’ assumptions such as growth rate, it said.

“High-quality audits are critical to keeping investors protected, and audit quality is not where it should be,” PCAOB chair Williams told reporters at a briefing about the findings.

The PCAOB, a nonprofit body that inspects public company audits, was created in the wake of the Enron-era securities fraud scandals of the early 2000s and is meant to monitor and oversee the audits of public companies to protect investors and ensure accurate, independent reports.

The board has taken on a more aggressive stance against misconduct and noncompliance under Democratic leadership, with Williams signaling a “renewed vigilance” in enforcement.

Still, the report was seen by some as evidence the watchdog has not yet gone far enough.

“What is the Chair, and PCAOB, prepared to do about it?” Daniel Taylor, an accounting professor at the University of Pennsylvania’s Wharton School of Business. “The PCAOB either needs to increase their enforcement, levy significantly higher penalties, or develop other methods to foster compliance.”