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Accounting firms expect US regulators to reduce the number of audits they inspect after the Securities and Exchange Commission signalled it would rethink oversight of the industry.
The SEC said it would prioritise regulation of accounting firms’ internal systems, opening a window for companies to lobby for changes to an inspection regime they argue is too focused on minor audit infractions.
“The inspection process has taught firms a lot about their audits and improved audit quality but the programme is 20-plus years old,” said Dennis McGowan, vice-president for professional practice at the Center for Audit Quality, which represents large accounting firms.
The Public Company Accounting Oversight Board, a body controlled by the SEC, inspects dozens of audits carried out by the big accounting firms each year and publishes a report on the deficiencies it finds at each one. At the Big Four — EY, KPMG, Deloitte and PwC — it examined 63 or 64 audits last year, up from 53 or 54 two years earlier.
The deficiency rate, which the PCAOB has touted as a guide to audit quality, leapt after the Covid pandemic, but has been coming down in the past two years. Audit firms complained privately that the increase was partly the result of inspectors looking for minor errors that would not previously have attracted penalties.
The PCAOB was created two decades ago after the Enron scandal to write audit standards for US-listed companies and to check that accounting firms were following them. Inspections are mandated by Congress, but the law does not set a minimum number.
Kurt Hohl, SEC chief accountant, told an industry conference this month that reform of the inspection process was “overdue”, since the standards governing audit firms’ quality control systems had evolved.
International regulators have created detailed new rules governing how accounting firms should manage their audit businesses, which include oversight and quality control measures.
The PCAOB last year also approved new rules on how firms operating in the US should monitor audit quality, though their implementation has been delayed and could be revised.
Focusing inspections on quality control systems rather than individual audits would “shift accountability to the leadership of the firm and their systems and processes, and less on individual engagement teams”, Hohl said. “There’s a lot of stress in the environment for teams that get inspected.”
The policy shift should lead to fewer individual audits being selected for assessment in the case of most firms, McGowan said.
“If audit quality is higher today than it was 20 years ago, then maybe there’s fewer individual engagements that need to be selected,” he said.
George Botic, who has been acting PCAOB chair since July while the SEC considers a bigger shake-up of the board, said the organisation should tread carefully in revising the inspection programme, adding that it should seek input from investors and other stakeholders to make sure it meets their needs.
Under the Sarbanes-Oxley law that created the organisation, only the results of individual audit inspections need be made public. Inspections of a firm’s system of quality management are only published much later if it fails to remediate any problems found within a year.
If the SEC policy shift results in fewer inspection findings being made public, it “runs the risk of losing something that I think the PCAOB’s reputation and the capital markets have benefited from extensively over two-plus decades”, Botic said.
Individual audit inspections will always be required as one way of checking quality management systems are working in practice. “There’s a certain number of files that one has to do,” he said. “We can debate what that number might be. Any significant pullback, we’d want to have a lot of outreach around that before we do that.”
Christina Ho, a PCAOB board member who has backed accountancy firms’ positions in recent policy disputes, said she expected the number of audit inspections to fall under the new SEC regime.
“Inspecting staffing levels could and should be cut more,” she said at a PCAOB meeting on December 19.
