Last week PCAOB released its 2019 inspection report for PwC. Of the 60 audits reviewed, Part I.A deficiencies were identified in 18 of them (a deficiency rate of 30%). For 2018 and 2017, PwC’s deficiency rate were 25% and 24% respectively.
| Year | 2019 | 2018 | 2017 |
| Total audits reviewed | 60 | 55 | 55 |
| Audits with Part I.A deficiencies | 18 | 14 | 13 |
| Deficiency rate % | 30% | 25% | 24% |
Part I.A deficiencies
Part I.A deficiencies break-down
| Year | 2019 | 2018 | 2017 |
| Both financial statement and ICFR audits | 13 | 10 | 9 |
| Financial statement only | 3 | 3 | 2 |
| ICFR audit only | 2 | 1 | 2 |
| 18 | 14 | 13 |
Deficiencies in financial statement audit include failure to perform sufficient testing related to an account, failure to obtain sufficient evidence due to overreliance on controls, and failure to evaluate data and assumptions in developing an estimate. Deficiencies in ICFR audit include nonidentification of controls related to significant account, nontesting of design and operating effectiveness of controls, and failure to test the accuracy and completeness of data used in controls.
Following are the audit areas with frequent Part I.A deficiencies. These are also some of the audit areas most frequently reviewed.
| Year | 2019 | 2018 | 2017 |
| Revenue and related accounts | 9 | 4 | 8 |
| Income taxes | 4 | 0 | 0 |
| Allowance for loan losses | 3 | 1 | 1 |
| Investment securities | 3 | 2 | 0 |
| Inventory | 3 | 2 | 1 |
| Business combinations | 0 | 4 | 2 |
| Loans and related accounts | 0 | 3 | 1 |
Interesting to note here is the increase in deficiencies with respect to Revenue while Business Combinations which was a major area of deficiency in 2018 and 2017 having no deficiency in 2019.
Looking at the break-up by Industry sector, 14 audits were reviewed from the Information technology sector with deficiencies identified in 5 of them (36%!). Most of audits reviewed were within the $1 billion to $2.5 billion revenue range (16 of them). 5 issuers with revenues exceeding $50 billion were reviewed with deficiency identified in 1 of them.
Part I.B deficiencies
Following Part I.B deficiencies were identified:
| Non-Compliance | Reviewed | Deficiency |
| AS 1301, Communications with Audit Committees | 16 | 4 |
| PCAOB Rule 3211, Auditor Reporting of Certain Audit Participants | 32 | 7 |
| PCAOB Rule 3524, Audit Committee Pre-approval of Certain Tax Services | 12 | 1 |
| PCAOB Rule 3526, Communication with Audit Committees Concerning Independence | 12 | 1 |
For me, the key statement on the report was “In connection with our 2019 inspection procedures for three audits, the issuers revised their reports on ICFR, and the firm modified its opinions on the effectiveness of the issuers’ ICFR to express adverse opinions and reissued its reports. In addition, in connection with our 2019 inspection procedures for one audit, the issuer restated its financial statements, and the firm revised and reissued its report.” So some of the PCAOB observations were significant enough for PwC to go back to their client and revise its previously issued opinion.
Quick thing to note here is that in releasing the PwC 2020 Audit Quality report, Wes Bricker, PwC Assurance Leader mentioned that for 2020, only 1 of the 52 engagements reviewed has a Part 1.A deficiency. So be on the look out for the next year report (0.02% deficiency!!).
