In September 2023, the Public Company Accounting Oversight Board’s inspection staff launched an initiative to examine whether audit firm culture and audit deficiency levels were linked. This initiative included interviews, analysis of inspection results, and review of materials related to firm quality control systems at the six large global network audit firms. See PCAOB Staff Report on Audit Firm Culture Offers Considerations for Firms Looking to Improve Audit Quality (PCAOB Press Release, December 5, 2024). While the initiative is continuing (see PCAOB Outlines 2025 Inspection Priorities and Questions Audit Committees Should Ask Their Auditor in this Update), the staff has published a report on the findings of the culture study. Spotlight: Insights on Culture and Audit Quality (Culture Report) discusses the impact of centralization, remote work, messaging from audit firm leaders, and other cultural factors on audit quality.
Audit committees may find the Culture Report useful as background in evaluating their audit firm’s commitment to audit quality. The report could serve as a source of discussion topics to raise with the company’s engagement partner or with candidates when considering retention of a new audit firm. Below is a synopsis of some of the main themes in the Culture Report.
Why Culture Is Important for Audit Firms
The Culture Report defines “culture” as a set of shared attitudes, values, goals, and practices that characterize an organization.” Culture influences an organization's reputation, team management, and productivity. “Healthy cultures enable an organization to thrive, while unhealthy cultures can lead to underperformance or worse.” Audit firm leaders are responsible for ensuring that their professionals maintain independence, integrity, and professional skepticism while pursuing growth and profitability. An audit firm's culture contributes to its ability to deliver quality audits, and misalignment between leadership's words and actions can detract from audit quality.
Aspects of Quality Control That May Affect Audit Firm Culture
An audit firm's quality control (QC) system is critical for maintaining audit quality. QC systems encompass the audit firm's organizational structure, policies, and procedures to ensure compliance with professional standards. The Culture Report identifies four key QC topics that affect audit firm culture -- governance and leadership, resources, engagement performance, and information and communication.
Governance and Leadership.
Governance and leadership are foundational for a QC system. Audit leadership shapes firm culture and sets the overall tone. Leaders must exemplify the desired culture through their actions. Effective governance and leadership involve establishing core values related to integrity and audit quality, emphasizing these values in communications, using employee surveys to gather feedback, and holding professionals accountable for audit quality.
Focus on Leadership’s Commitment to Integrity and Audit Quality. If less experienced personnel see managers taking shortcuts or making exceptions, they may believe this is the way to advance. Conversely, firm personnel trained to act with integrity and uphold ethical standards reinforce each other. Audit leaders who fail to demonstrate professional conduct or fail to support firm personnel in making tough decisions will fail as gatekeepers. In general, audit firm leaders have increased their communications with firm personnel and have emphasized the importance of “performing quality audits, exercising professional skepticism, upholding audit firm values, and acting with integrity.”
Focus on Professional Skepticism. Establishing the right tone at the top is essential for fostering professional skepticism, which involves a questioning mind and critical assessment of audit evidence. Leadership must empower less experienced personnel to exercise skepticism. Audit firms should emphasize professional skepticism in communications, provide practical guidance, offer training, and consider professional skepticism in performance management.
Focus on Strategic Decisions and Actions. An audit firm's operating strategy, including investments in people and technology, organizational structure, and globalization, affect audit quality. Audit firms should have strategic plans that emphasize audit quality. Investments in audit platforms, software, technology, and standardization of templates and workpapers are common strategies to drive improved audit quality.
Resources.
Audit leadership should prioritize audit quality in hiring, retention, and promotion practices. Audit firms should ensure that candidates for advancement have the necessary qualifications and that performance evaluations consider audit quality.
Focus on Resource Management. Audit firm resource management includes policies and procedures for advancement, evaluation, and addressing audit quality events. Audit firms should have documented competencies, evaluate performance regularly, and consider audit quality in performance ratings. Negative audit quality events should be assessed, and action plans should be implemented and monitored.
Focus on Hiring and Retention. Audit firms should have policies and procedures to ensure new hires possess the appropriate characteristics to perform competently. Recognition and rewards programs should be designed to address increased turnover and retain talent. Audit firms should consider the impact of acquisitions and hiring from other firms on culture and audit quality. “Based on information gathered during our interviews, we recognized that the audit firms with the highest percentage of respondents that started their careers in the respective audit firm had the lowest deficiency rates over the last three years. In contrast, the audit firms with the lowest percentage of respondents that started their careers in the respective audit firm had the highest deficiency rates over the last three years.”
Engagement Performance.
An audit firm's culture depends on policies and procedures that provide reasonable assurance that work performed by firm personnel meets professional standards. This includes all phases of engagement design and execution, as well as engagement quality reviews.
Focus on Responsibility and Accountability. Audit firms should have processes to assess responsibility for inspection findings. This includes reviewing documentation, interviewing engagement team members, and implementing consequences for those responsible. Lack of accountability can result in repeated deficiencies. “[W]hen audit firms disagree with PCAOB findings, it often results in a lack of accountability for that finding and remedial processes to ensure it is not repeated.”
Focus on Centralization and Standardization. Centralized and standardized processes, tools, and templates help ensure consistent audit quality. Audit firms should implement tools for client acceptance, reviews of audit work, and other key areas. Consistent use of these tools and templates is crucial for maintaining audit quality. “We noted during the culture initiative that the degree of centralized and standardized processes, tools, and templates at the audit firms is important to ensuring consistent application and promotion of audit quality.”
Focus on Use of Shared Service Centers. Shared service centers (SSCs) provide resources and services to engagement teams, typically for standardized audit procedures. While SSCs can improve efficiency and standardization, there are concerns that the use of SSCs deprives newer personnel of opportunities to develop foundational skills. Audit firms should balance the use of SSCs with the need to develop the skills of firm personnel.
Information and Communication.
Inspection procedures examined firm policies and procedures related to the identification, capture, processing, and maintenance of information to support the operation of the firm’s QC system and
the performance of its engagements in accordance with applicable professional and legal requirements.
Focus on Communications. Audit firms should communicate their policies and procedures to firm personnel and external parties. Consistent messaging from audit leadership and engagement partners is essential for promoting audit quality.
Focus on Work Environment. The remote and hybrid work environment has impacted audit firm culture and the apprenticeship model. “Respondents also noted that remote and hybrid work at the audit firms led to potential learning challenges among entry-level firm personnel. In addition, many respondents cited learning challenges and a decrease in readiness of firm personnel on engagements due to not working in-person as often as before the pandemic, leading to a loss in the apprenticeship culture at the audit firms.”
Key Insights on Audit Firm Culture
Based on the staff’s work, the Culture Report offers six “key insights” into the relationship between firm culture and audit quality.
Audit firm culture can drive audit quality – positively or negatively.
The staff’s study “support[s] the idea that audit firm culture can impact audit quality, for better or worse * * * [and] that an audit firm’s personnel are the backbone of an audit firm’s culture.” Turnover can influence audit quality. Firms with “the highest percentage of respondents that started their careers in the respective audit firm had the lowest deficiency rates over the last three years.”
Centralization and standardization may be correlated with audit quality.
Audit firms with more centralization and standardization of audit processes, tools, and templates appear to have fewer deviations in their procedures and fewer PCAOB inspection deficiencies.
The remote/hybrid work environment affects audit firm culture.
The pandemic and the remote/hybrid work environment adversely impacted the apprenticeship training model, dissemination of culture, and the development of professional skepticism.
Audit firms need to promote a culture of accountability to support audit quality.
Audit firms “have room to improve” their cultures of accountability.
“We observed, for example, that negative audit quality events (e.g., internal and external inspection results, restatements, independence violations) at some audit firms are not sufficiently evaluated or attributed to firm personnel. Rather than accepting responsibility for negative audit quality events, respondents from all six audit firms pointed to the complexity of their audit clients as a reason for the increase in audit findings. A minority of respondents from five out of the six audit firms also pointed to external factors for the increase in audit findings – such as PCAOB inspections getting more difficult, despite, the fact that the PCAOB has historically inspected against our standards and continues to do so.“
Certain firm personnel may lack foundational skills.
Some interview respondents expressed concern about personnel competency and the appropriateness of engagement staffing. Some were also concerned that the use of SSCs undermines the ability of personnel to develop foundational skills. “This lack of experience in basic audit skills could lead to additional difficulties as those individuals progress in their careers.”
Audit leadership sends mixed messages.
Some respondents indicated that audit firm leaders send mixed messages about incentives and penalties for positive and negative audit quality events. Firms need to align factors that drive compensation adjustments with behavior that promotes audit quality and communicate that alignment to firm personnel.
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The PCAOB inspections staff plans to continue exploring the impact of audit firm culture on audit quality. Future steps include exploring such issues as—
Who is responsible for audit firm culture, and when does that responsibility begin?
Do recent scandals in the accounting or financial sectors deter future students from entering the profession?
Has there been more progress on resolving the accounting pipeline issues, including entry-level salaries?
How does audit firm growth, including a potential focus on selling and/or delivering non-audit services, influence the culture of the firm?
Audit Committee Takeaways
Most aspects of firm culture that the PCAOB staff identifies as affecting audit quality are not directly visible to audit committees. Engagement partners may, however, discuss some of these culture issues with the committee as part of describing the audit plan. For example, the use of SSCs to perform certain aspects of an audit is common at the largest firms. While SSCs contribute to efficiency, consistency, and audit quality, it might be interesting to explore with the engagement partner how he or she views their impact on the development of new staff members.
More generally, audit committees may want to consider using the Culture Report as a source for questions and discussion with their engagement partner as part of their annual evaluation of the firm. An understanding of how the firm views these topics could provide useful insight into how the firm addresses the relationship between its culture and its commitment to audit quality. As noted above, the Culture Report could also be useful when an audit committee is interviewing candidates in connection with a change in audit firms.
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