On July 11, the Public Company Accounting Oversight Board released portions of the previously nonpublic section of Ernst & Young’s 2019 inspection report. This action indicates that, in the Board’s view, the firm did not satisfactorily address the quality control issues discussed in those portions 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 criticisms in EY’s 2019 inspection report relate to three topics:
Supervision of the Audit. The 2019 inspection report states that EY’s system of quality control does not provide reasonable assurance that supervisory activities, including engagement partner reviews of audit work, will meet the requirements of the Board’s auditing standards. This finding is based on the PCAOB inspection team’s identification of deficiencies that the engagement partner should have identified and appropriately addressed in eleven audits. In two of these audits, the engagement team had identified a significant risk, including in one case a fraud risk, in the area in which the inspection team found a deficiency.
Internal Inspection Program. The 2019 inspection report found that EY’s system of quality control related to monitoring did not provide reasonable assurance that the firm’s internal inspection program is suitably designed and is being effectively applied. The PCAOB’s inspection staff reviewed five audits that had also been inspected under the firm's internal inspection program. In two of these audits, the same areas were reviewed, and the PCAOB identified deficiencies that were not detected by the internal inspectors.
Policies for Financial Holdings Disclosures. The 2019 inspection report also found that EY’s system of quality control did not provide reasonable assurance that EY personnel would comply with the firm’s policies and procedures concerning independence-related regulatory requirements. EY conducts periodic sampling reviews to determine whether firm personnel are complying with internal requirements that they report certain financial relationships to the firm. In the reviews EY conducted during the period ended March 31, 2019, the firm found that 32 percent of the managers included in its sample had not reported financial relationships that were required to be reported under firm policies. The inspection report states: “These high rates of non-compliance with the firm’s policies, which are designed to provide compliance with applicable independence regulatory requirements, provide cause for concern, especially considering that these individuals are required to certify on a quarterly basis that they have complied with the firm’s independence policies and procedures.” This is the second consecutive year for which the PCAOB has found that EY failed to remedy this quality control deficiency. On October 17, 2022, the PCAOB made public the same finding which had also appeared in Part II of EY’s 2018 inspection report. See PCAOB Gives EY a Partial Fail on 2018 Remediation, September-October 2022 Update. In both cases, there is no indication that the firm violated the independence requirements.
The date of EY’s 2019 inspection report is December 17, 2020. Therefore, release of these portions of the inspection report indicates that EY failed to persuade the PCAOB that, as of December 17, 2021, it had satisfactorily remediated these quality control deficiencies.
Audit committees of EY clients may want to discuss with their engagement partner how the firm is addressing these matters, changes it has made since the PCAOB’s determination that the deficiencies had not been remediated, and how the company’s audit might be affected. In particular, the criticism of audit supervision raises issues that could potentially impact many audits.
Comments