How the PCAOB Staff Sees the 2024 Inspection Results

The Public Company Accounting Oversight Board’s inspections staff has released Spotlight: Staff Update on 2024 Inspection Activities (2024 Inspections Spotlight). This publication is a comprehensive discussion of the PCAOB’s 2024 public company audit inspection results. In 2024, the PCAOB inspected 171 PCAOB-registered public accounting firms.  In those inspections, the staff reviewed portions of over 800 public company audits.  For last year’s staff summary of the 2023 inspections program, see PCAOB Staff Explains the 2023 Inspection Results, August 2024 Update. 

The 2024 Inspections Spotlight begins with an Overview discussing key findings and PCAOB efforts to improve audit quality. Following that discussion, the report consists of four sections – 2024 Inspections Approach; Common Deficiencies; Observations Related to Quality Control Systems; and Areas with Recurring Deficiencies, 2022 to 2024 Inspections.  

Overview

In 2024, the PCAOB inspections staff observed “a tangible decrease in Part I.A1 deficiency rates” and “a substantial improvement, in the aggregate, among the largest firms.”  The 2024 Inspections Spotlight sets out five key highlights of the 2024 inspection results:

• Overall Part I.A Deficiency Rate: For all 171 inspected firms, the aggregate Part I.A deficiency rate decreased to 39 percent in 2024, down from 46 percent in 2023.

• Big Four U.S. Firms: The aggregate Part I.A deficiency rate for the Big Four U.S. firms decreased to 20 percent in 2024, from 26 percent in 2023.

• U.S. Global Network Firms (GNF): The aggregate Part I.A deficiency rate for the six U.S. GNF firms decreased to 26 percent in 2024, from 34 percent in 2023.

• U.S. Non-Affiliated Firms (NAF):  The aggregate deficiency rate for the eight annually inspected firms that are not global network members decreased slightly to 52 percent in 2024, compared to 53 percent in 2023.

• Triennial Firms:  The aggregate deficiency rates for NAF triennially inspected firms decreased from 67 percent in 2023 to 61 percent in 2024.  For triennially inspected non-U.S. affiliates of GNF firms, the deficiency rate decreased from 35 percent in 2023 to 26 percent in 2024.

As to the reasons for improved results in 2024, the staff cites four “drivers of improvement”:

• More in-person work. Firms continued with policies requiring engagement teams to work on-site together for a portion of their work week.

• More focused training. Firms increased the training of less experienced staff.

• More resources. Firms strengthened national office resources dedicated to audit quality.

• Better supervision and review. Firms implemented programs or policies to increase supervision and review.

The 2024 Inspections Spotlight also discusses steps the PCAOB has taken to improve audit quality.  These includes such initiatives as publishing information and actionable recommendations to help firms improve; providing guidance of the remediation of audit quality deficiencies identified in inspection reports; encouraging communication between audit firms and the PCAOB during the remediation process; and engaging directly with audit committees “as we share a common goal of driving quality audits through effective oversight of external auditors.”

2024 Inspections Approach

This section discusses how the Board selected firms and engagements for inspection. In 2024, the inspection program emphasized audits of:

• Regional banks and mutual funds with Level 3 investments (i.e., investments that are not valued based on readily available market information) or other specific audit challenges.

• Public companies engaged in mergers and acquisitions or business combinations.

• Public companies in the information technology sector with complex revenue recognition.

• Public companies that require industry-specific or sector-specific accounting.

• Public companies that held significant assets that may have declined in value, such as collateralized commercial real estate debt.

• Public companies with material digital asset holdings or significant digital asset transactions.

For the largest firms, which are inspected annually, most engagements are selected for review based on  factors that suggest increased audit risk.  However, the inspection staff also selects some annually inspected firm engagements at random.  In 2024, 18 percent of annual firm audit engagements were random selections, 77 percent were risk-based, and 5 percent were target team selections.  Nineteen percent of the randomly selected engagements resulted in an audit deficiency that was included in Part I.A of an inspection report, while 37 percent of risk-based inspections resulted in a Part I.A deficiency.

In addition to selecting specific engagements for review, the PCAOB deployed a target team to review certain emerging audit risks across many engagements.  In 2024, the target team focused on:

• Initial audits by a successor auditor.

• Risk assessments.

• Auditor assessments of the company’s use of artificial intelligence.

• Biotech startups.

• Audit firms’ use of shared service centers.

• Cash flow statements, segment reporting, and earnings per share.

For a summary of the Board’s most recent discussion of the work of target teams, see 2023 PCAOB Target Team Report: Crypto, Multi-Location Audits, and Significant Transactions, September-October 2024 Update. 

Once an engagement is selected, the staff identifies portions of the audit for review. In 2024, considerations that affected focus area selection included:

• Recurring deficiencies.

• Evaluating audit evidence obtained by the auditor.

• Auditor’s understanding of the company and its environment.

• Use of other auditors.

• Going concern.

• Critical audit matters.

The staff also selects non-traditional focus areas for review to observe how the auditor performs procedures in areas that are “less complex, and more routine.”  During 2024, 2023, and 2022, 10 percent, 15 percent, and 14 percent, respectively, of non-traditional focus areas inspected resulted in a Part I.A deficiency, mostly in the areas of accruals, debt, equity, and expenses. 

The industry sectors that accounted for the highest percentages of inspected engagements in 2024 were Financials (19 percent), Information Technology (17 percent), Health Care (14 percent), and Industrials (14 percent). The sectors with the fewest inspections were Real estate and Utilities, each of which accounted for one percent of total inspections.

Common Deficiencies

This section discusses examples of common deficiencies in the audit of internal control over financial reporting (ICFR) and in the financial statement audit that result in Part I.A findings.  It also discusses frequently identified types of non-compliance with other PCAOB standards and rules that are the basis for Part I.B and I.C deficiencies.

• ICFR audits.  Examples of common ICFR audit deficiencies include deficiencies in risk assessment; selecting controls to test; testing of the design effectiveness of controls; testing management review controls; consideration of the impact of the company’s information technology on system-generated data and reports; roll-forward of controls tested at an interim date; using the work of internal or other auditors; and evaluating control deficiencies.

• Financial statement audits. The top five financial statement areas in which inspectors have found audit deficiencies are revenue and related accounts; inventory; accounts impacted by business combinations; investment securities; allowance for credit losses; and long-lived assets, goodwill, and intangible assets. Deficiencies often involved the auditing of accounting estimates, including fair value measurements.

• Non-audit deficiencies.  The most common Part I.B deficiencies (i.e., audit deficiencies that do not impact to the sufficiency of the audit evidence) related to audit committee communications and fraud (such as procedures for assessing fraud risk and performing procedures to address the risk of fraud). Critical audit matter reporting and the timely and accurate filing of Form AP were also frequent Part I.B issues for smaller firms. The 2024 Inspections Spotlight discusses these types of noncompliance and provides examples of deficiencies in each area.

• Independence. Deficiencies related to potential noncompliance with independence requirements are reported in Part I.C of an inspection report.  This “remains an area for improvement” since the level of deficiencies has been “fairly consistent year-to-year.”  The most common independence-related inspection comments concerned personal independence compliance testing, non-audit services, and tax services.  Potential violations of SEC independence requirements occurred primarily at smaller, triennially inspected firms. Some larger, annually inspected firms reported a high rate of noncompliance by firm personnel with internal reporting requirements for financial relationships.  The 2024 Inspections Spotlight notes that a “public company may be particularly interested in their auditor’s potential noncompliance with SEC and PCAOB independence rules, as the auditor independence requirements underpin the public company’s requirement to file financial statements audited by an independent registered public accounting firm.”

Observations Related To Quality Control Systems

Inspections include an assessment of the firm’s system of quality control (QC), including an evaluation of whether audit deficiencies indicate a defect in quality controls.  If individual QC defects indicate significant deficiencies in the firm’s QC system, Part II of the inspection report discusses those systemic issues as a QC criticism.

The 2024 Inspections Spotlight discusses five examples of common QC deficiencies: 

• Testing controls -- QC system does not provide reasonable assurance that control testing will comply with Board standards.

• Reliance on data or reports -- QC system does not provide reasonable assurance that the work performed to establish a basis for reliance on issuer-prepared data or reports will comply with Board standards.

• Supervision of the audit -- QC system does not provide reasonable assurance that engagement partner supervisory activities, including reviews of audit work, will comply with Board  standards.

• Engagement quality review (EQR) – QC system does not provide reasonable assurance that review procedures performed by engagement quality reviewers will comply with Board standards.

• Policies for financial holdings disclosures. monitoring -- QC system does not provide reasonable assurance that personnel will comply with firm policies and procedures with respect to independence-related requirements (such as reporting of financial relationships or investments).

QC criticisms in Part II of a firm’s inspection report and are nonpublic when the report is issued. If the firm fails to satisfactorily remediate the deficiency within one year of the report date, the Board makes the criticism public. In 2024, the Board made remediation determinations related to 101 firm inspection reports and reached a satisfactory determination for approximately 66 percent – and an increase from 60 percent in 2023. QC areas with an unsatisfactory determination most frequently related to EQR, policies for financial holdings disclosures and other independence matters, testing controls, supervision of the audit, and auditor reporting on Form AP of audit participants.

Areas With Recurring Deficiencies, 2022 To 2024 Inspections

The 2024 Inspections Spotlight presents three years of data on the ICFR audit and financial statement audit areas with recurring deficiencies.

• The most frequent ICFR deficiencies in 2024 comment forms were “testing controls with a review element” and “identifying and selecting controls to test.” These areas were also the top ICFR deficiency areas in 2022 and 2023. 

• The financial statement areas in which there were the most ICFR deficiencies in 2024 were Allowance for Credit Losses and Long-lived Assets.  Last year, Deposit Liabilities, Loans and Related Accounts, and Other Investments were the areas with the most ICFR deficiencies.

• In 2024, financial statement areas that generated the most comment forms (excluding those related to ICFR) were Other Investments, Allowance for Credit Losses, and Equity and Equity-Related Transactions. Other Investments has topped this list in each of 2022, 2023, and 2024.  

Audit Committee Takeaways

The 2024 Inspections Spotlight provides good background information for audit committees seeking to understand their audit firm’s inspection results and how they fit into the overall context of the 2024 inspections. Committees may want to review the Spotlight in conjunction with their auditor’s inspection report and as part of their preparation for discussion of the inspection with their engagement partner.  

The discussion in the 2024 Inspections Spotlight of common and recurring deficiencies may also provide insight into issues the PCAOB is likely to focus on in future inspections and into the audit areas most likely to generate deficiencies. Audit committees may want to discuss with their auditor how it plans to address these areas. The Spotlight may also aid audit committees in understanding their auditor’s risk assessment and resource allocation decisions.