On March 31, the Public Company Accounting Oversight Board released the 2024 inspection reports for the U.S. affiliates of the six global network accounting firms, BDO USA, P.C. (BDO), Deloitte & Touche LLP (Deloitte), Ernst & Young LLP (EY), Grant Thornton LLP (Grant), KPMG LLP (KPMG), and PricewaterhouseCoopers LLP (PwC).  In 26 percent of the 2024 engagements the PCAOB inspected for these six large firms, it found one or more Part I.A deficiencies – that is, deficiencies of such significance that it appeared that the firm did not obtain sufficient evidence to support its opinion.  This compares to a 34 percent deficient engagement rate for the six firms in 2023. See 2023 PCAOB Large Firm Inspection Reports, August 2024 Update.   (In this post, the percentage of inspected engagements in which the staff found one or more Part I.A deficiencies is referred to as the “deficient engagement rate” or DER).  For the Big Four firms only – Deloitte, EY, KPMG, and PwC -- the 2024 DER was 20 percent – six percent better than the 27 percent DER in 2023.

In the press release announcing the six inspection reports, the Board also announced the publication of a staff report, SPOTLIGHT: Staff Update on 2024 Inspection Activities, which describes the overall results of the 2024 inspection program in detail.  For all firms inspected in 2024, the Part I.A DER decreased to 39 percent in 2024, down from 46 percent in 2023. SEC Chair Williams characterized these results as demonstrating “real progress in protecting investors” and urged the audit profession “to build on this momentum.”

This post analyzes the 2024 inspection reports of the six U.S. affiliates of the global network firms (GNFs), compares them to last year’s results and to each other, and offers some observations. Audit committees should review their audit firm’s inspection report and discuss it with their engagement partner. The information in this post is intended to provide context for that discussion. 

Overview of 2024 Global Network Firm Results

As noted above, in 26 percent of the GNF audit engagements it inspected in 2024, the PCAOB found one or more Part I.A deficiencies.  The DER fell for all six firms. BDO experienced the greatest improvement, with its DER falling from 86 percent in 2023 to (a still high) 60 percent in 2024. Three firms had DERs above 25 percent  -- EY (28 percent; Grant 48 percent, and BDO 60 percent). See Tables 1 and 2. 

Deloitte’s inspection results were the best in the GNF group, followed closely by PwC. The Board found deficiencies in nine of the 63 Deloitte audits its inspected (14 percent). In 2023, the Board found deficiencies in twelve (21 percent) of 56 Deloitte engagements inspected.  PwC had ten deficient engagements (16 percent), a modest improvement over its 18 percent rate in 2023.  At the other end of the spectrum, BDO, as in 2023, had the highest percentage of deficient engagements. The Board found problems with 18 (60 percent) of the 30 BDO audits it inspected, down from 86 percent last year. The 86 percent DER in 2023 appears to be the highest ever experienced by one of these six firms.  

Each engagement in Part I.A of an inspection report may contain several audit deficiencies. Therefore, in addition to comparing their DERs, another way of assessing the firms’ inspection results is to compare the number of individual audit deficiencies the Board found.  See Table 3.  Deloitte was also the best performer by this metric, followed by PwC.  For Deloitte, the Board inspected 63 engagements and found 20 audit deficiencies – 0.3 deficiencies per inspected engagement and 2.2 deficiencies per engagement in Part I.A.  In PwC’s report, there were 0.5 deficiencies per inspection and an average of three deficiencies per Part I.A engagement. In contrast, for BDO the comparable numbers were 2.4 deficiencies per inspection and an average of four deficiencies per Part I.A engagement.  Grant had 2.2 deficiencies per inspection and 4.5 deficiencies per Part I.A engagement.     

In 2024, as in past years, a substantial number of Part I.A deficiencies related to audits of internal control over financial reporting (ICFR). Inspectors found ICFR audit deficiencies in 21 percent of the integrated audits they inspected, down from 27 percent in the 2023 GNF inspections. Similarly, 21 percent of all inspected engagements were found to have a financial statement audit deficiency. Sixty-eight percent of audit engagements described in Part I.A of the 2024 inspection reports of the six GNFs included an ICFR deficiency and 80 percent included a financial statement audit deficiency. AS 2201, An Audit of Internal Control Over Financial Reporting that is Integrated with An Audit of the Financial Statements, was the most frequently cited auditing standard by a wide margin.  See Table 4.  “Did not perform sufficient testing of the design and/or operating effectiveness of controls selected for testing”  was the most frequently cited audit deficiency. See Table 5.

Part I.B of an inspection report describes instances of non-compliance with PCAOB standards or rules that do not relate directly to the sufficiency or appropriateness of the evidence supporting an audit opinion. The 2024 inspection reports of the six GNFs include 161 Part I.B deficiencies, compared to 149 in 2023.  See Table 6.  The most-frequently cited PCAOB standard or rule in Part I.B was AS 1301, Communications with Audit Committees, and the most common Part I.B finding was the failure to make one or more required communications to the audit committee. See Tables 7 and 8. 

Part I.C of an inspection report describes instances of potential non-compliance with rules related to auditor independence.  The 2024 inspection reports of the six GNFs describe 559 instances of potential non-compliance with the independence rules, of which 518 were firm self-reported and 41 were identified by the PCAOB.  The most common potential independence issue was a financial relationship with an audit client (e.g., instances where either a partner in the same office as the engagement partner or an individual who provided 10 or more hours of non-audit services to the client had an investment relationship with the client).  See Tables 9 and 10.   As the PCAOB points out, disclosure in Part I.C of an instance of potential non-compliance with the independence rules does not necessarily mean that the Board or the firm has concluded that the firm was not objective and impartial throughout the audit and professional engagement period.  In the 559 instances of apparent non-compliance described in Part I.C of the six reports, if the firm involved was the principal auditor, it evaluated the potential non-compliance and determined that its objectivity and impartiality were not impaired.

Summaries of 2024 Global Network Firm Inspection Reports

Below are summaries of the 2024 inspection reports of each of the six U.S. GNF affiliates: 

• BDO USA, P.C.  The PCAOB reviewed 30 BDO public company audits, 18 of which were integrated audits of both the financial statements and ICFR.  In 18 of the 30 audits (60 percent), the PCAOB identified deficiencies of such significance that it appeared that the firm had not obtained sufficient appropriate audit evidence to support its opinion. This compares to BDO’s 86 percent DER in 2023. In one of the 18 deficient engagements, the firm’s opinion and the public company’s report on ICFR effectiveness were determined to be incorrect and were subsequently revised Seven of the 18 engagements in Part I.A included deficiencies related to both the audit of the financial statements and the audit of ICFR; ten included only a financial statement audit deficiency; and one included only an ICFR audit deficiency. The PCAOB described 72 audit deficiencies (2.4 deficiencies per inspection) associated with 82 auditing standards (2.7 standards per inspection) in the 18 engagements in Part I.A.  In Part I.B of the inspection report, the PCAOB identified 29 instances of noncompliance with PCAOB standards or rules that did not relate directly to the evidence the firm obtained to support an opinion.  In Part I.C, the Board described five instances it identified of potential non-compliance with independence rules and seven instances the firm identified.

• Deloitte & Touche LLP.  The PCAOB reviewed 63 Deloitte public company audits, 50 of which were integrated audits of both the financial statements and ICFR.  In nine of the 63 audits (14  percent), the PCAOB staff identified deficiencies of such significance that it appeared that the firm had not obtained sufficient appropriate audit evidence to support its opinion. This compares to Deloitte’s 21 percent DER in 2023. Five of the nine engagements in Part I.A included deficiencies related to both the audit of the financial statements and the audit of ICFR, two included only a financial statement audit deficiency, and two included only an ICFR audit deficiency.  The PCAOB described 20 audit deficiencies (0.3 deficiencies per inspection) associated with 24 auditing standards (0.4 standards per inspection) in the nine engagements in Part I.A.  In Part I.B of the inspection report, the PCAOB identified 18 instances of noncompliance with PCAOB standards or rules that did not relate directly to the evidence the firm obtained to support an opinion. In Part I.C, the Board described 15 instances it identified of potential non-compliance with independence rules and 106 instances that the firm identified.

• Ernst & Young LLP.  The PCAOB reviewed 64 EY public company audits, 59 of which were integrated audits of both the financial statements and ICFR.  In 18 of the 64 audits (28 percent), the PCAOB staff identified deficiencies of such significance that it appeared that the firm had not obtained sufficient appropriate audit evidence to support its opinion. This compares to EY’s 37 percent DER in 2023. In two of the 18 deficient engagements, the firm’s opinion, and the public company’s report, on ICFR effectiveness were determined to be incorrect and were subsequently revised; in one of those audits, the issuer also restated its financial statements, and the firm revised and reissued its report on the financial statements. Eleven of the 18 engagements in Part I.A included deficiencies related to both the audit of the financial statements and the audit of ICFR, four included only a financial statement audit deficiency, and three included only a deficiency in the ICFR audit. The PCAOB described 80 audit deficiencies (1.3 deficiencies per inspection) associated with 86 auditing standards (1.3 standards per inspection) in the 18 engagements in Part I.A.  In Part I.B of the inspection report, the PCAOB identified 23 instances of non-compliance with PCAOB standards or rules that did not relate directly to the evidence the firm obtained to support an opinion.  In Part I.C, the Board described eight instances it identified of potential non-compliance with independence rules and 107 instances that the firm identified.

• Grant Thornton LLP.  The PCAOB reviewed 27 Grant public company audits, 19 of which were integrated audits of both the financial statements and ICFR. In 13 of the 27 audits (48 percent), the PCAOB staff identified deficiencies of such significance that it appeared that the firm had not obtained sufficient appropriate audit evidence to support its opinion. This compares to Grant’s 54 percent DER in 2023. Six of the engagements in Part I.A included deficiencies related to both the audit of the financial statements and the audit of ICFR, five included only a financial statement audit deficiency, and two included only an ICFR audit deficiency. The PCAOB described 59 audit deficiencies (2.2 deficiencies per inspection) associated with 60 auditing standards (2.2 standards per inspection) in the 13 engagements in Part I.A.  In Part I.B of the inspection report, the PCAOB identified eleven instances of noncompliance with PCAOB standards or rules that did not relate directly to the evidence the firm obtained to support an opinion. In Part I.C, the Board described five instances it identified of potential non-compliance with independence rules and 105 instances that the firm identified.

• KPMG LLP.  The PCAOB reviewed 64 KPMG public company audits, 58 of which were integrated audits of both the financial statements and ICFR.  In 13 of the 64 audits (20 percent), the PCAOB identified deficiencies of such significance that it appeared that the firm had not obtained sufficient appropriate audit evidence to support its opinion.  This compares to KPMG’s 26 percent DER in 2023. Seven of the engagements in Part I.A included deficiencies related to both the audit of the financial statements and the audit of ICFR, one included only a financial statement audit deficiency, and five included only an ICFR audit deficiency.  The PCAOB described 49 audit deficiencies (0.8 deficiencies per inspection) associated with 53 auditing standards (0.8 standards per inspection) in the 13 engagements in Part I.A.  In Part I.B of the inspection report, the PCAOB identified 39 instances of noncompliance with PCAOB standards or rules that did not relate directly to the evidence the firm obtained to support an opinion.  In Part I.C, the Board described no instances it identified of potential non-compliance with independence rules and 49 instances that the firm identified.

• PricewaterhouseCoopers LLP.  The PCAOB reviewed 64 PwC public company audits, 54 of which were integrated audits of both the financial statements and ICFR.  In ten of the 64 audits (16  percent), the PCAOB staff identified deficiencies of such significance that it appeared that the firm had not obtained sufficient appropriate audit evidence to support its opinion. This compares to PwC’s 18 percent DER in 2023. In one of the ten deficient engagements, the issuer concluded that its financial statements included misstatements and should be restated.  Three of the engagements in Part I.A included deficiencies related to both the audit of the financial statements and the audit of ICFR, four included only a financial statement audit deficiency, and three included only an ICFR audit deficiency.  The PCAOB described 30 audit deficiencies (0.5 deficiencies per inspection) associated with 33 auditing standards (0.5 standards per inspection) in the ten engagements in Part I.A.  In Part I.B of the inspection report, the PCAOB identified 41 instances of noncompliance with PCAOB standards or rules that did not relate directly to the evidence the firm obtained to support an opinion.  In Part I.C, the Board described eight instances it identified of potential non-compliance with independence rules and 144 instances that the firm identified.

Comparison of Global Network Firm Part I.A Results

Table 1 compares the overall results of the 2024 inspections of the six U.S. affiliates of the GNFs.  Table 2, which appeared in 2023 PCAOB Large Firm Inspection Reports, August 2024 Update, compares the results of the 2023 inspections of the six firms. 

Tables 1 and 2 focus on the percentage of inspected engagements that have at least one audit deficiency.  Other indicators of the relative performance of the six firms are the number individual audit deficiencies in each report and the number of citations to auditing standards associated with those deficiencies.  These metrics differ from the DER because an engagement included in Part I.A may involve more than one deficiency.  Table 3 compares the performance of the six firms based on the number of audit deficiencies in each inspection report and the number of auditing standards associated with those deficiencies.  In some cases, there is an element of judgment in determining the number of deficiencies in a Part I.A engagement description. 

Aggregate Part I.A Data on Auditing Standards, Deficiency Descriptions, and Audit Areas

Auditing standards cited in deficiencies. Table 4 lists the auditing standards most frequently cited as the basis for audit deficiencies in Part I.A of the 2024 GNF inspection reports.  Table 4 also shows the percentage of all deficiencies that were based on each auditing standard.  The same auditing standard may have been cited multiple times in an engagement described in Part I.A.  Table 4 only includes standards cited more than twice. 

Audit deficiencies.  In each inspection report, the PCAOB lists the most frequently identified audit deficiencies, divided between the most frequent deficiencies in financial statement (FS) audits and the most frequent deficiencies in ICFR audits.  Table 5 aggregates these frequent deficiency lists for the six GNFs.  Table 5 also indicates what percentage of the engagements in Part I of the six reports included these deficiencies.

Audit/financial statement areas.  For each inspection report, the PCAOB lists the audit areas with frequent Part I.A deficiencies.  For the six firms, on an aggregate basis, these areas (excluding those cited only once) are:

• Revenue and related accounts – 36 deficiencies.

• Inventory – 12 deficiencies.

• Allowance for credit losses/Allowance for loan losses – 10 deficiencies.

• Business combinations – 7 deficiencies.

• Goodwill and intangible assets – 6 deficiencies.

• Long-lived assets – 4 deficiencies.

• Investment securities –  3 deficiencies.  

• Leases – 2 deficiencies.

Global Network Firm Part I.B Results

Part I.B of an inspection report describes instances of non-compliance with PCAOB standards or rules that do not relate directly to the sufficiency or appropriateness of the evidence supporting an audit opinion.  In 2024, the PCAOB found an aggregate of 161 such deficiencies, compared to 149 in 2023.

Comparision of firm results. Table 6 presents the number of Part I.B deficiencies for each of the six GNFs and compares each firm’s 2024 Part I.B results to its 2023 report.  Year-to-year comparisons may provide general insight into Part I.B trends but should be interpreted with caution. It appears that the PCAOB does not review all inspected engagements for every type of Part I.B deficiency. Therefore, the number of Part I.B deficiencies in a firm’s inspection report is not directly comparable to the number in other firms’ reports or to the number reported in prior years. 

Part I.B auditing standards and rules.  Table 7 lists the PCAOB auditing standards and rules most frequently referenced in Part I.B deficiencies in the six reports.  Table 7 only includes deficiencies cited more than twice. 

Part I.B deficiencies.  An auditing standard or rule may encompass more than one type of deficiency.  Table 8 sets forth descriptions of the non-audit deficiencies most frequently described in Part I.B of the 2024 GNF inspection reports.  These descriptions are not always consistent across all six reports.  For example, some reports disaggregate the types of audit committee communications that were not made, while others combine several types of communication failures in a single deficiency description. 

Global Network Firm Part I.C Results

Part I.C of an inspection report discusses instances of potential non-compliance with SEC or PCAOB auditor independence rules. Part I.C describes both instances of potential noncompliance that the PCAOB identified and instances that the firm self-reported during its inspection.  Across the six GNFs, the Board identified 41 instances of potential independence rule noncompliance, 15 of which were at Deloitte. The six firms self-reported 518 such instances, 144 of which were at PwC.  

Comparison of firm results. Table 9 presents the Part I.C instances of potential non-compliance with the independence rules for each of the six firms.  In reviewing Table 9, readers should be aware that each inspection report contains the following warning:  

“While we have not evaluated the underlying reasons for the instances of potential non-compliance,  the number, large or small, of firm-identified instances of potential non-compliance may be reflective of the size of the firm, including the number of non-U.S. associated firms in the global network; the design and effectiveness of the firm’s independence monitoring activities; and the size and/or complexity of the issuers it audits, including the number of affiliates of the issuer. Therefore, we caution against making any comparison of these firm-identified instances of potential non-compliance across firms.” 

Part I.C deficiencies.  Each inspection report describes the most common instances of potential independence non-compliance in the firm-reported cases.  Table 10 lists these firm-identified independence issues on an aggregate basis, combined with those identified by the PCAOB. Because the descriptions in each inspection report include only the most common firm-identified instances, Table 10 does not reflect all 559 potential instances of non-compliance.  

Audit Committee Takeaways

1.     For companies that are audited by one of the six GNF U.S. affiliates, the audit committees may want to consider the following highlights of the six 2024 inspections in preparation for discussing the audit firm’s inspection results with the company’s engagement partner:

a.     If inspection results measure audit quality, then audit is improving at the six global network firms. The overall Part I.A DER (i.e., percentage of inspected engagements included in Part I.A of the inspection report) for the six firms fell from 34 percent in 2023 to 26 percent in 2024.  By this measure, all six firms improved their performance in 2024.  At the Big Four as a group – DT, EY, PwC, and KPMG – the DER declined to 20 percent from 26 percent in both 2023 and 2022.  The number of individual audit deficiencies per inspected engagement also improved substantially, falling almost 40 percent for the six GNFs as a group.

b.     While the disparities between the six firms’ inspection results are still large, they decreased in 2024.  There was a 46 percent difference in DERs between the firm with the lowest rate (Deloitte at 14 percent) and the firm with the highest rate (BDO at 60 percent).  While this is a significant difference, it is the smallest gap between the top and bottom firms in at least the past three years and reverses a trend of widening differences. In the 2023 inspections, the gap was 68 percent and in 2022 and 2021 it was 57 percent and 49 percent, respectively.  Similarly, the PCAOB found 0.3 deficiencies for every Deloitte audit it inspected and 2.4 deficiencies – eight times more -- for every BDO audit. But this measure is also going in the right direction:  In 2023, the ratio of lowest firm to highest firm deficiencies per inspection was ten to one.

c.     ICFR audit deficiencies are still a major driver of audit deficiencies.  As in prior years, Auditing Standard No.2201, An Audit of Internal Control Over Financial Reporting That is Integrated with An Audit of the Financial Statements, was by far the most frequently cited auditing standard in Part I.A. deficiencies. Forty-seven percent of all deficiencies cited AS 2201, up slightly from 44 percent in the 2023 inspections. In addition, the two most common audit deficiencies in Part I.A of the six firms’ reports both related to the ICFR audit: “Did not perform sufficient testing of the design and/or operating effectiveness of controls selected for testing” and “Did not identify and/or sufficiently test controls over accuracy and completeness of data or reports that the issuer used in the operation of controls.”  Sixty-eight percent of engagements in Part I.A included at least one ICFR deficiency (compared to 67 percent in 2023). 

d.     Audit committee communications lapses dominated Part I.B non-audit deficiencies. Part I.B deficiencies increased from 149 in 2023 to 161 2024.  As in the past, it is not clear whether this increase reflects more underlying non-audit deficiencies or more PCAOB inspection focus on Part I.B issues.  The audit committee communications requirements were the most common source of these deficiencies: Auditing Standard 1301, Communications with Audit Committees, was cited more frequently than any other standard in the descriptions of Part I.B deficiencies.  The two most frequent Part I.B deficiencies were failure to make one or more required audit committee communications and reporting to the audit committee that no significant deficiencies were identified during the audit, even though an ICFR audit does not provide assurance that all deficiencies less severe than a material weakness have been identified.    

e.     Instances of Part I.C. independence-related potential non-compliance increased. In 2024, the six GNFs self-reported 518 instances of potential non-compliance with the independence rules, and the PCAOB uncovered 41 more instances.  This compares to 460 self-reported and 24 PCAOB-identified incidences in 2023.  The combined 2024 total was 559, up from 484 in 2023.  PwC had the highest combined total of Part I.C instances (152) while BDO had the fewest (12). In all instances of non-compliance described in Part I.C where the firm was the principal auditor, it determined that its objectivity and impartiality were not impaired. 

f.      Failure to obtain audit committee pre-approval of services was a frequent independence issue. The most common Part I.C instance of potential non-compliance with the independence requirements was the existence of a financial relationship, such as an investment in the audit client, with someone who was covered by the SEC’s independence rules.  However, the second most common type of instance was noncompliance with the requirement for audit committee pre-approval of services, and 33 of the 41 PCAOB-identified instances of potential non-compliance with the independence rules involved noncompliance with the audit committee pre-approval requirement.

2.     Audit committees seeking to understand their audit firm’s inspection results and how they fit into the overall context of the 2024 inspections may also want to review Spotlight: Staff Update on 2024 Inspection Activities.  This publication describes in detail the PCAOB’s 2024 public company inspection program and discusses the inspection staff’s views of the results. 

3.     In Spotlight: Staff Update and Preview of 2022 Inspection Observations, the staff suggested that audit committees consider asking these four questions in discussions with their independent auditors:

• Has our audit engagement been inspected, and, if so, would you share the results? Were there any audit areas that required significant discussions with the PCAOB that did not result in a comment form?

• Has the engagement partner been inspected on other engagements? If so, what were the results of that inspection?

• What is the audit firm doing to address overall increased inspection findings? (Although findings decreased in 2024, the committee might want to ask generally what the firm is doing to address deficiencies described in its inspection report.)

• Are there any audit procedures that are unnecessarily complicated or not “straight-forward” because management is not providing clear, supportable information? (While not related to inspection reporting, this question “may encourage effective two-way communication to assist in understanding matters relevant to the audit.)

4.      As noted in past Updates, the audit deficiency descriptions and auditing standard deficiency tables could serve as a discussion topic checklist.  Audit committees may also want to understand how the auditor addressed, or plans to address, engagement deficiencies highlighted in its report and whether the report will result in any changes in audit procedures that could affect the company’s audit.  Of course, if the company’s engagement was the basis for an inspection finding, the audit committee should understand in depth the cause of the deficiency, the impact on the audit, and how the auditor plans to remedy it and prevent a recurrence.