On July 23, the PCAOB made public a portion of the previously nonpublic section of Deloitte & Touche’s 2020 inspection report. This action indicates that, in the Board’s view, the firm did not satisfactorily address the quality control issue discussed in that portion of the inspection report within 12 months of the report date. Criticisms of a firm’s quality control system appear in Part II of a firm’s inspection report, and, under the Sarbanes-Oxley Act, Part II is nonpublic when the report is issued. If the firm does not satisfactorily address a quality control criticism within 12 months, the Board makes the criticism public.
The now-public quality control criticism in Deloitte’s 2020 inspection report is that Deloitte’s system of quality control did not provide reasonable assurance that Deloitte personnel would comply with the firm’s policies and procedures concerning independence-related regulatory requirements. Deloitte conducts periodic audits of a sample of its personnel to monitor compliance with firm policies and procedures with respect to reporting certain financial relationships. In the reviews Deloitte conducted during the 12 months ended August 31, 2020, the firm found that 25 percent of partners and principals and 39 percent of managing directors and managers who were audited had not reported financial relationships that were required to be reported under the firm’s policies. The inspection report states:
“This high rate of non-compliance with the firm’s policies, which are designed to provide compliance with applicable independence regulatory requirements, provides cause for concern, especially considering that these individuals are required to certify on a semi-annual basis that they have complied with the firm’s independence policies and procedures.”
The date of Deloitte’s 2020 inspection report is September 30, 2021. Therefore, release of this portion of the 2020 report indicates that Deloitte failed to persuade the PCAOB that, as of September 30, 2022, it had satisfactorily remediated the deficiency related to compliance with the firm’s independence-related reporting policies and procedures. 2020 is the third inspection year for which the PCAOB has found that Deloitte failed to remedy this deficiency. On January 24, 2023, the Board made public the same finding in Part II of Deloitte’s 2018 inspection report. See PCAOB Makes Public a 2018 Criticism of D&T’s Quality Control, February-March 2023 Update. The Board subsequently released the same finding in Part II of Deloitte’s 2019 inspection report.
Deloitte is not alone in failing – in the PCAOB’s view – to remediate this type of deficiency. During the past year, the Board has made substantially the same finding public with respect to each of the other three largest firms. See PCAOB Discloses Three 2019 Criticisms of EY’s Quality Control, July 2024 Update; PCAOB Discloses Non-Public Portions of 2018 and 2019 KPMG Inspection Reports, April 2024 Update; and 2019 Inspection PricewaterhouseCoopers LLP (portion of Part II made public on July 13, 2023). There is no public indication that any of these quality control lapses resulted in violations of the SEC’s or PCAOB’s independence requirements.
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