Accounting & Auditing | Legislative / Regulatory

Audit quality: Better … but not great

There's good news and bad news on the auditing front.

First, the good stuff: The quality of work performed by smaller auditors -- U.S. firms that perform 100 or fewer public-company audits -- is on the rise. The PCAOB reports that the deficiency rate at such firms fell between 2007 and 2010.

"Forty-four percent of the audit firms inspected from 2007 to 2010 had at least one significant audit performance deficiency, according to the PCAOB," the Journal of Accountancy reports. "That’s down from 61 percent from 2004 to 2006. Although the overall rate for 2007 to 2010 was 44 percent, it was 51 percent in 2010 alone. In 2011, the rate declined to 45 percent."

The PCAOB conducts these types of reviews every three years.

Now, the bad news: That deficiency rate? It's still way too high. That's also according to the PCAOB. “We continue to be concerned about the level and types of significant deficiencies in the triennial firm inspections,” says PCAOB board member Jeanette Franzel.

Here's more from

Most of the audit deficiencies in the study were found in auditing revenue recognition and other areas pertinent to smaller clients, such as share-based payments (like stock options or rights) and equity financing instruments. Because smaller audit clients often face difficulties in raising capital or accessing credit markets, share-based payments and equity financing instruments are more common, noted PCAOB board member Jay Hanson during the call. Such financing, he noted, may contain terms and conditions that increase the risk of material misstatements.

In other words, better isn't nearly good enough -- not in the eyes of the PCAOB, anyway.

How do we fix it? A good first step is always to recognize what's going wrong. It can't hurt to check out this list of common audit deficiencies, offered up by Accounting Today back in 2011.

In the meantime, check out the MACPA's upcoming audit-related programs:



Bill Sheridan