US accounting firms prepare for decrease in SEC audit inspections

US accounting firms are preparing for a decreased number of audit inspections by the Securities and Exchange Commission (SEC) amidst indications of a shift in oversight in the accounting sector. The SEC is laying emphasis on enhancing the monitoring of firms’ internal quality and control systems, heralding a potential reduction in audit inspections by related regulatory bodies.

Audit inspections are a crucial aspect of regulatory oversight in the accounting industry, spearheaded by the Public Company Accounting Oversight Board (PCAOB) under the oversight of the SEC. These inspections involve reviewing numerous audits conducted by major firms annually, with subsequent publication of reports detailing any deficiencies noted during specific engagements.

The Big Four firms – EY, KPMG, Deloitte, and PwC – underwent reviews of 63-64 audits in the past year, a slight increase from the 53-54 reviews conducted two years earlier. The deficiency rate, a metric used to assess audit quality, experienced a substantial spike in the wake of the Covid-19 pandemic, but has gradually decreased in recent years.

Accounting firms have communicated concerns regarding the evolving inspection framework, which they believe has started focusing excessively on minor audit issues that historically would not have led to punitive measures. The PCAOB, established over two decades ago after the Enron scandal, is tasked with setting audit standards for US-listed companies and ensuring compliance by accounting firms.

While regulatory guidelines necessitate the conduction of inspections, there is no stipulated minimum frequency for these assessments. SEC’s Chief Accountant, Kurt Hohl, highlighted the necessity for overdue reforms in the inspection process, particularly concerning the standards governing quality control systems of accounting firms. Acting Chair of the PCAOB, George Botic, advocated for a cautious approach to updating the current inspection program, emphasizing consultations with investors and stakeholders.

Limiting the publication of inspection findings could be detrimental, as it risks undermining the reputation of the PCAOB and eroding confidence in capital markets after benefiting from extensive transparency for over two decades. However, individual audit inspections will persist to ensure the effective functionality of quality management systems in practice.

PCAOB board member Christina Ho envisages a decline in the overall number of audit inspections under the SEC’s revised approach to oversight. As accounting firms gear up for this probable shift, they are closely monitoring regulatory developments and preparing to adapt to a potentially altered landscape of audit inspections in the financial sector.