Each year, the U.S. members of the six large global network accounting firms issue audit quality reports. These reports describe the firm’s commitment to audit quality, its performance on various self-selected audit quality-related metrics, and its plans to maintain and enhance the caliber of its audit performance. See CAQ’s Guide to Audit Quality Reports, April 2023 Update. These reports seldom attract public attention. However, while each firm undoubtedly prepares its report with a view to putting the firm’s performance and commitment to audit quality in the best light, these reports provide useful information and insight into how the firms view audit quality. Because of their responsibility for the selection, evaluation, and retention of audit firms, audit committees are a key target audience for these reports.
During the past several months, the four largest firms have issued their 2023 audit quality reports.
Deloitte: 2023 Audit Quality Report: Setting the standard of excellence (December 2023).
Ernst & Young: Our commitment to audit quality (November 2023).
KPMG: FY23 Audit Quality Report (undated, released in January 2024).
PwC: Our focus on audit quality: 2023 Audit Quality Report (undated, released in September 2023).
BDO and Grant Thornton have not yet issued their 2023 audit quality reports. The 2022 reports for these firms (and a high-level preview of the 2023 BDO report) are however available:
BDO: 2022/2021 BDO Audit Quality Report: Preserving Trust Through Agility and Innovation and BDO USA’s Audit Quality Journey: Preview of Our 2023 Audit Quality Report.
Grant Thornton: Audit quality & transparency report 2022 (released August 7, 2023).
Report Content
Each report is primarily a narrative discussion of the firm’s commitment to audit quality and of how it seeks to achieve its quality objectives. The topics discussed in the 2023 reports vary from firm to firm, but include such matters as –
A message from leadership regarding the firm’s commitment to audit quality.
A statement of the firm’s culture and values, including the firm’s commitment to ethics, and compliance with independence requirements.
Discussion of how the firm defines audit quality and the ways in which it emphasizes quality in the performance of audit engagements.
Description of how the firm monitors audit quality and the results of internal and external inspections.
Recruiting, retention, and training of audit personnel, including commitment to workforce diversity.
The role of technology in auditing, including the use of artificial intelligence.
The firm’s view of future auditing challenges and how it intends to address them.
How the firm seeks to understand and incorporate into its practice the needs and interests of stakeholders, including whether and how the firm obtains independent input on governance or audit quality issues.
The firm’s governance structure, including identification of senior audit practice leadership.
Audit Quality Metrics
Each report also contains metrics -- quantitative data relevant to audit quality performance. Since the reports are not subject to any common standard or content requirements, and since audit quality is not a defined concept, these metrics are not consistent across firms. However, some measures are common to most of the reports.
Below is an overview of eight of these common metrics, as presented in the 2023 audit quality reports of the four large firms that have released 2023 reports. Unless otherwise stated, all figures below are for 2023, although in most cases firms also present metrics for prior years to permit comparison and trend analysis. The reports do not describe in detail how particular metrics were computed; therefore, measures with similar names may not necessarily be comparable across firms.
PCAOB Inspection Results
PCAOB inspection results are publicly available on the PCAOB’s website. See 2021 PCAOB Large Firm Inspection Reports, January 2023 Update. Each of the firms includes as a metric the number (or percent) of audits in Part I.A. of their 2021 PCAOB inspection report. (Part I.A. describes engagements that the PCAOB found to have one or more deficiencies of such significance that the firm had not obtained sufficient appropriate evidence to support the audit opinion). While 2022 PCAOB inspection reports had not yet been issued at the time that the 2023 audit quality reports were published, two firms also state the number of Part I.A. engagements that will be in their 2022 inspection report.
Deloitte: In 2021 inspections, the PCAOB found Part I.A. deficiencies in 13 percent of 54 audits inspected. In 2022 inspections, the PCAOB found Part I.A. deficiencies in 17 percent of 53 audits inspected.
Ernst & Young: In 2021 inspections, the PCAOB found Part I.A. deficiencies in 12 (21 percent) of 56 audits inspected. In 2022 inspection, the PCAOB found Part I.A. deficiencies in 25 (46 percent) of 54 audits inspected.
KPMG: In 2021, the PCAOB found Part I.A. deficiencies in 14 of 54 audits audit inspected.
PwC: In 2021 inspections, the PCAOB found Part I.A. deficiencies in two of 56 audits inspected.
Use of Specialists
To address challenging or complex audit areas, firms typically assign personnel with specialized skills and knowledge to assist in assessing risk and designing and performing audit procedures.
Deloitte: Specialists represented 17 percent of total public company audit hours. IT specialists (10.7 percent of total audit hours) were the largest contributors.
Ernst & Young: U.S. specialists generated 18.7 percent of U.S. public company audit hours. IT specialists (12.5 percent of total audit hours) were the largest contributors.
KPMG: Information on utilization of specialists not provided.
PwC: Specialists provided 17.1 percent of audit hours. (This includes hours incurred by acceleration center audit team members that performed work under the direct supervision of the specialist. The report states that acceleration centers, which are in the US, India, Argentina, Mexico, Malaysia, and the Philippines, “represent a global talent pool of people who work seamlessly with other team members to complete audit procedures for both public and non-public audits.”)
Restatements
A measure of audit quality is the frequency with which financial statements on which the firm has expressed an opinion are subsequently restated. Firms may present this metric as the percentage of audited financial statements that were not restated.
Deloitte: Percentage of issuer audit clients’ (SEC registrants and registered investment companies) annual financial statements that were not restated was 99.9.
Ernst & Young: Twelve issuers (0.8 percent) disclosed restatements and reissued their financial statements (based on the number of SEC registrants and mutual fund issuers audited).
KPMG: Information on public company audit client restatements not provided.
PwC: 99.1 percent of reports on ICFR were not reissued or withdrawn. 99.6 percent of issuer audit client financial statements were not restated.
Number of Audit Professionals
In their audit quality reports, firms present a wide range of statistics on workforce size and composition, usually with a particular emphasis on diversity. The number of employees in the audit practice is a basic measure of audit practice size.
Deloitte: Information not provided on size of audit workforce.
Ernst & Young: 11,270 U.S. audit professionals (1,187 partners and managing directors, 2,555 senior managers and mangers, and 7,528 seniors and staff).
KPMG: 9,712 total personnel (1,276 partners/managing directors, 2,396 managers, and 6,040 associates).
PwC: 14,923 audit team members (1,121 partners/managing directors, 2,470 directors/managers, 2,635 senior associates, and 3,591 acceleration center full-time equivalents; see Use of Specialists, above, for a description of PwC acceleration centers.)
Leverage Ratio
The ratio of partners to staff is a measure of the availability of experienced, senior audit talent. It is also a determinant of firm profitability.
Deloitte: The ratio of partners, principals, and managing directors to all other Audit & Assurance professionals was 1 to 12.3. The ratio of partners, principals, managing directors, senior managers, and managers to seniors and staff was 1 to 2.4.
Ernst & Young: The ratio of partners and managing directors to staff through senior managers was 1 to 8.5. The ratio of senior managers and managers to seniors and staff was 1 to 2.9.
KPMG: Information on ratio of partners to staff not provided.
PwC: The ratio of partners/managing directors to all other audit team members (including acceleration centers) was 1 to 12.5; excluding acceleration centers, the ratio was 1 to 7.9. (See Use of Specialists, above, for a description of PwC acceleration centers.)
Partners and Managing Directors Involved in Quality or Audit Oversight
Each firm assigns some partners and other senior personnel to provide oversight and guidance on issues relating to audit quality. The ratio of these professional practice or quality management partners to the total audit partner population is a data point regarding the firm’s audit quality resources.
Deloitte: The ratio of partners, principals, and managing directors (PPMDs) in “technical roles” as part of the Quality & Professional Practice Network to total PPMDs was 1 to 10.4.
Ernst & Young: The ratio of “Quality Network and Professional Practice” partners and managing directors to all audit partners and managing directors was 1 to 6.
KPMG: Information on number of partners involved in audit quality oversight not provided.
PwC: The ratio of partner/managing directors serving in technical support roles to total partners/managing directors was 1 to 6.0.
Audit Staff Turnover
Audit firms typically experience turnover as personnel take advantage of the training and expertise gained in auditing to move to employment opportunities in other aspects of business and finance. Turnover can be an issue for audit quality since new hires require training and experience time to become familiar with the business of the clients to which they are assigned.
Deloitte: The voluntary turnover rate was 11 percent. The average tenure by rank level was 22.5 years for partners/managing directors, 10.6 years for senior managers, 5.6 years for managers, 3.1 years for seniors, and 1.2 years for staff.
Ernst & Young: The retention rate for senior managers and managers was 82 percent. The retention rate for seniors and staff was 78 percent. The retention rate for all ranks below partner (including managing directors) was 80 percent. (While not discussed in the EY report, presumably the turnover rate would be determined by subtracting the retention rate from 100.)
KPMG: The voluntary attrition rate was 10 percent for managers and 19 percent for staff.
PwC: The overall average annual voluntary turnover rate was 16.5 percent. By rank, the voluntary turnover rate was 15.6 percent for managing directors/directors/mangers, 21.1 percent for senior associations, and 13.4 percent for associates.
Continuing Professional Education
Since both accounting and auditing are constantly evolving, continuous professional education for audit staff personnel is an essential aspect of audit quality.
Deloitte: Average mandatory learning hours per person were 71.
Ernst & Young: Average hours of continuing professional education were 97.
KPMG: Average hours of continuing professional education by rank were: Partner/principal – 52 hours; Managing director – 51 hours; Senior manager/director – 46 hours; Manager – 52 hours; Senior associate – 43 hours; Associate – 51 hours.
PwC: Each audit professional completed an average of 87 training hours.
Comment: Audit committees should review their audit firm’s audit quality report as part of their evaluation of the firm’s performance and consideration of whether to continue to engage the firm. The reports may also serve as a basis for discussion among committee members and with the engagement partner regarding how the firm views audit quality and how its efforts to enhance quality may affect the company’s audit.
Similarly, audit committees that are considering retaining a new auditor should review the quality reports of the competing firms. While these reports contain a large amount of useful information, they are less useful as vehicles for comparing firms because the content is not the same across firms and metrics may be computed using differing methodologies. As discussed in PCAOB Adds Audit Quality Indicators to its Short-Term Agenda, May-June 2023 Update, the PCAOB is considering the feasibility of developing key indicators of audit quality and effectiveness. Such indicators could improve the comparability of firm quality reporting.
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