PCAOB Debuts New Inspection Report Format

This morning, the Public Company Accounting Oversight Board (PCAOB) issued the 2018 inspection reports for the six largest U.S. audit firms: Deloitte, EY, KPMG, PwC, BDO, and Grant Thornton. These reports are delivered in a new, redesigned format – marking the first time the PCAOB made substantial changes to these reports since they were first issued more than fifteen years ago.

“One of the Board’s top strategic priorities over the past two years has been to communicate more effectively with investors, audit committees, and other key stakeholders. Our inspection reports are one of the primary ways we communicate with the public about our oversight activities, and we have heard time and again through our external engagement that the reports can be improved. We are pleased to share our new report with the public and look forward to hearing feedback.”

– William D. Duhnke III, PCAOB Chairman

The redesigned format aims to enhance readability by streamlining the report’s content, as well as incorporating new charts and graphs – making the information more digestible and accessible for users.

The PCAOB explains, “in addition to the six reports issued today, reports for other annually inspected firms will adhere to this new format. All triennially inspected firms’ reports, beginning with the 2019 inspection reports, will utilize a similar format, but may not include all of the same data as the annually inspected firms’ reports due to the frequency of our inspections and the size and nature of those firms.”

Since 2005, the PCAOB has conducted inspections of public company audits to ensure the quality of the audits. Overall, the number of inspections has been declining over the years. However, the percentage of audits that were considered to be deficient has been relatively steady since 2012, remaining between 35 and 40%. On average, the PCAOB has found about two issues per deficient inspection. Keep in mind, inspections are not always random; often, the PCAOB selects audits on a risk-based approach.

In line with the Board’s strategic goals, the newly designed report also aims to increase transparency by including information not previously included in inspection reports.

The new report is comprised of five main parts, as defined by the PCAOB:

Introductory Sections: An executive summary, table of contents, and an overview of the report’s contents and our inspections approach.

Overview of the Inspection and Historical Data by Inspection Year: Information on the scope of our inspections and on the nature and extent of deficiencies identified.

Part I – Inspection Observations:

  • Part I.A: Deficiencies that were of such significance that we believe the firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion(s) on the issuer’s financial statements and/or ICFR.
  • Part I.B: Deficiencies that do not relate directly to the sufficiency or appropriateness of evidence the firm obtained to support its opinion(s) but nevertheless relate to instances of non-compliance with PCAOB standards or rules.

Part II – Observations Related to Quality Control: Criticisms of or potential defects in, the firm’s system of quality control. Part II deficiencies are not publicly disclosed when the report is first issued.

Appendix A – Firm’s Response to the Draft Inspection Report: The firm’s response to a draft of the report, excluding any portion granted confidential treatment.

For further guidance on the inspection reports and the information contained therein, the PCAOB has issued a Guide to Reading the PCAOB’s New Inspection. The guide highlights key changes to the report and assists stakeholders in reading it.

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