Jossie Ward
Associate Editor
Loyola University Chicago School of Law, JD 2025
The Public Company Accounting Oversight Board (PCAOB) inspects the audits of U.S public companies, and according to former inspectors for the PCAOB the inspection process needs improvement. The SEC and the Sarbanes-Oxley Act empower the PCAOB to establish auditing standards through inspections and compliance reports. The former inspectors criticized the reports produced and call for a wider scope in the process, more details, and for the reports to be released in a timely manner. While the PCAOB is in the middle of a transformation under current PCAOB Chair Erica Williams, the transformation is largely focused on making inspections more efficient. Hopefully, the call to action by former inspectors will result in improved reports by inspectors. For investors, having more context on how the inspection went and being able to review how the PCAOB measures audit quality would allow them to make more informed decisions.
How do PCAOB inspections work?
The number of firms the PCAOB regularly inspects varies by year because there are changes in registered firms that issue audit opinions. Firms typically on the annual inspected firms list include the Big Four: Deloitte & Touche LLP (Deloitte), Ernst & Young LLP (EY), KPMG LLP, and PricewaterhouseCoopers LLP (PwC).The PCAOB inspects each registered firm either annually or triennially. However, if the registered firm provides audit opinions for over 100 issuers, the PCAOB inspects them every year. An inspection does not review all of the firm’s audits, and it is not designed to identify every deficiency or cover all areas of the selected audit. What occurs is the inspection teams review the auditors’ work papers and interviews the audit staff about the methods used.
PCAOB reports & findings
Inspection findings include deficiencies in auditing revenue recognition, allowance for loan losses, and review of internal controls. Any deficiencies identified through an inspection are evaluated for inclusion in the inspection report. PCAOB inspection reports are not intended to serve as an overall rating tool and should not be interpreted to imply the PCAOB has reached a conclusion about the firm’s quality control procedures. The PCAOB is responsible for inspecting audits, setting audit standards, and disciplines firms for violations. PCAOB Chair Erica Williams is leading the charge to improve efficiency and transparency in the process. Under Williams’s leadership, the PCAOB has been able to clear a backlog of inspection reports from prior years, approving in 2022 more than 280 reports. This is a 73% increase over the previous year.
The PCAOB study & other proposed changes
A study was conducted by over two dozen former inspectors who inspected the audits of American public companies for the last two decades. The experience of the inspectors spans from 2004 to 2021, so it covers up to when Williams took over as PCAOB Chair. The study participants did not dispute the inspections themselves. Instead, the study participants focused on deficiencies they personally identified were legitimate audit failures. The study concluded that the PCAOB produces inadequate training for its inspection staff and produces sanitized public inspection reports. Additional concerns have been raised by accounting professors, who suggest that the reports provided do not provide a complete picture of firm deficiencies, and a lack of consistent application of standards across auditing firms.
How will changes to inspections impact investors?
Under the current system, investors are given an incomplete picture of where public companies are in relation to compliance. With the current reports used by the PCAOB, investors are unable to determine how the investigation went or review how the PCAOB measures audit quality aside from reading the inspection reports. For investors not having substantive information about how the inspection went, they are unable to determine if their business is hurt. If they are able to make a determination it is only after receiving the report. In 2020, the PCAOB inspected 220 audits of public companies conducted by the Big Four. Almost two years after the 2020 inspection, the PCAOB released its findings to the public. Investors are forced to work with limited information provided years after the inspection of the audit occurs. For investors, the current reworking of the PCAOB and the potential expansion of what is provided could provide much needed clarity and could lead to the PCAOB become a valuable asset to investors.