Update on Trends and Issues in Audits of Internal Control Over Financial Reporting
Date: Aug. 6, 2016
Speaker: Jeanette M. Franzel, Board Member
Event: American Accounting Association Annual Meeting
Location: New York City
On Saturday, August 6, I participated in a panel session on Internal Control
over Financial Reporting (ICFR) at the Annual Meeting of the American Accounting
Association (AAA) and used these
slides.
The presentation provided an update on issues and trends in audits of ICFR
and related PCAOB inspection findings. I presented similar
information at the 2015 AAA annual meeting, which may be a helpful
reference when reviewing the 2016 presentation. In my presentation, the views
expressed are my own, and do not necessarily reflect those of the PCAOB Board or
staff.
Below is a brief summary of the information provided in my
2016 slide presentation.
U.S. Big Four Firm Audit Deficiencies
- For the U.S. Big Four firms, the level of audit deficiencies related to
ICFR improved in the 2014 inspections (generally performed in 2015) when
compared to the previous year, although the rate is still high at 30 percent
of the integrated audits inspected.
- A similar number of audit deficiencies were found in the 2014 inspections
compared to the previous year for an auditor's selection of controls for
testing that are important to the auditor's conclusion about whether the
company's controls sufficiently address the assessed risk of misstatement (AS
No. 5.39).[1]
Fewer deficiencies were found in 2014 when compared to the previous year in
testing design effectiveness (AS No. 5.42) and operating effectiveness of
controls that were identified for testing (AS No. 5.44).
- Although the lower number of
deficiencies in testing design and operating effectiveness of controls is
encouraging, the lack of progress in selecting the appropriate controls to
test is concerning. In cases where the auditor has not properly identified
important controls to test, the auditor doesn't even get to the stage of
testing the design and operating effectiveness of those controls.
- PCAOB
2015 inspection results for the U.S. Big Four firms show improvements in the
area of auditing ICFR and a trend of overall reductions in audit
deficiencies.
Percentage of Adverse Internal Control Opinions
An auditor's opinion on a company's ICFR is "adverse" when the auditor
reports at least one material weakness in ICFR, meaning that the company's ICFR
was ineffective.
- The number of adverse ICFR opinions has increased since 2010, climbing
from 3.4 percent of ICFR opinions in 2010 to 6.0 percent in 2014.
- The preliminary percentage of adverse ICFR audit opinions for 2015 is 5.4
percent, but that figure will likely increase as it is based on a preliminary
count of filings through July 20, 2016. For comparison purposes, the
preliminary percentage of adverse ICFR opinions for 2014 at a similar cut-off
point last year was 5.2 percent. That figure rose to 6.0 percent based on
subsequent filings.
Financial Restatement Activity of Public Companies and Other Issuers with
ICFR Opinions
- Consistent with prior years, the vast majority of public companies and
other issuers with restatements had "clean" ICFR opinion in that same fiscal
year.