Dive Brief:

• The number of audits containing flaws identified by the Public Company Accounting Oversight Board rose year-over-year in 2021, with the U.S. watchdog’s staff expecting 33% of the reviewed audits to have at least one serious deficiency, meaning at the time the audit reports were issued there was not enough evidence to support the auditor’s opinion, the PCAOB said Thursday in a release on its annual “Spotlight” report on its inspection observations. That share is up from 29% in 2020. 

• In reviewing 558 and 132 of U.S.-based and non-U.S. based companies respectively, the most common financial statement problems related to issues of revenue, inventory, expected credit losses, and equity and equity-related transactions, PCAOB said. 

• “Higher deficiency rates in 2021, coupled with the fact that the PCAOB is also seeing an increase in comment forms for 2022, are a warning signal that the audit profession needs to sharpen its focus on improving audit quality and protecting investors,” PCAOB Chair Erica Y. Williams said in a statement. The PCAOB flags potential problems to auditors via comment forms.

Dive Insight:

The annual report’s release and Williams’ warning coincides with stepped up regulatory scrutiny of auditors and calls for some reforms. The report’s findings should not be news to executives familiar with the current reporting climate and other issues such as staffing shortages within the accounting profession, according to Omar Roubi, an instructor of accounting at the University of Colorado Denver Business School. 

“There is a talent issue the profession is facing as a whole, not just auditing teams. Firms are understaffed and overworked, which can lead to a decrease in the quality of audits and engagements. Auditing firms need to increase their focus on pre-audit procedures and training of their teams to mitigate this lack of talent,” Roubi wrote in an emailed response to questions. “That being said, I am sure the volume or percentage of audit deficiencies is an eye opener for everyone.”

CFOs and their companies can take some proactive steps to make sure they don’t run into problems with their audits or financial reporting. Companies should be in constant contact with their auditors and keep them apprised of any big changes or new risks within the business, Roubi said. Financial executives should also advocate for investments in internal control processes and procedures and ensure they are enforced, he said. 

“Tone at the top matters, as we are seeing with recent disasters at Theranos and FTX, to name a few,” Roubi wrote.

Some big name auditors have also been involved in recent instances of wrongdoing. This week the PCAOB announced $7.7 million in fines and sanctioned KPMG firms in the U.K., India and Colombia for several alleged violations, including exam cheating, signing off on blank work papers and improper use of an unregistered auditing firm.

Earlier this year the Securities and Exchange Commission (SEC) fined Ernst & Young $100 million for cheating by its auditors on ethics exams and for withholding evidence of wrongdoing from the agency’s Enforcement Division.

The SEC has oversight of the PCAOB, which in turn oversees the accounting firms that audit public companies. Congress established the auditing watchdog after the Enron accounting scandal under the Sarbanes-Oxley Act of 2002.