Summary – PwC saw an increase in deficiency rates in 2023 compared to 2022.

The Public Company Accounting Oversight Board (PCAOB) released the 2023 inspection reports in August for all of the big4 firms. In this series, we will go into details of the PwC report.

57 audits performed by PwC was reviewed by PCAOB. Looking at the selection method by PCAOB, 43 were risk-based selections, 10 random selections, and 4 target-team selections. Here is what PCAOB says on audit selection procedures –

The inspection team selects the audits and the audit areas, including non-financial areas such as independence, that it will review. The inspected firm has no opportunity to limit or influence the PCAOB’s selections. In selecting issuer audits for review, we generally use both risk-based and random methods of selection, and we generally focus our attention on audit areas we believe to be of greater complexity, areas of greater significance or with a heightened risk of material misstatement to the issuer’s financial statements, and areas of recurring deficiencies. The inspection team generally selects the audits most recently completed by the firm but may also select audits completed in prior years if, for example, there are no recently completed audits.

In regards to the industry profile of the audits reviewed, we can see that the financial sector had 12. Consumer discretionary had 8. This is a marked difference from 2022 where consumer discretionary audits reviewed were 11 while financial sector audits were 5.

Audits with Part I.A deficiency rates

Part I.A deficiency is defined as follows –

Part I.A: Deficiencies that were of such significance that we believe the firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion(s) on the issuer’s financial statements and/or ICFR.

For 2023, PwC had a deficiency rate of 18% compared to 9% in 2022. For the past three years, deficiencies have been showing an increasing trend. It makes one think. Why did PwC have a lower deficiency for audits performed in 2021 when its audit professionals were largely remote?

Audit Deficiencies Chart

The key thing to note is this statement within the inspection report “In connection with our 2023 inspection procedures for one audit, the issuer revised its report on ICFR, and the firm revised its opinion on the effectiveness of the issuer’s ICFR to express an adverse opinion and reissued its report.“

Looking at the trends over the years revenue continues to be an area of focus for PCAOB followed by Goodwill. PwC had no deficiencies in revenue and goodwill in the prior years. However, they had 3 deficiencies in this area for 2023. Revenue deficiencies related to “substantive testing of, and testing controls over, revenue, including arrangements with multiple performance obligations” while goodwill deficiencies related to “evaluating intangible assets for possible impairment or testing controls over the review of impairment indicators“.

Audit Deficiencies by Category (2021-2023)

In regards to compliance with independence rules, the PCAOB did not identify any instances of non-compliance. PwC through its internal independence monitoring activities had identified 75 instances of violation across 51 issuers.

Overall, we do see an increase in deficiency rates for PwC. When compared to other audit firms, those deficiency numbers are not excessive. Shows that quality initiatives is an ongoing activity and needs to regularly revamped and reinvented.