PCAOB Inspections: Is the 20% Deficiency Rate Among the Big Four Still Too High to Believe?
The Public Company Accounting Oversight Board (PCAOB) stands as a guardian of investor trust, overseeing audits of public companies and SEC-registered firms through its meticulous inspection program. Designed to ensure compliance with laws, rules, and standards, these inspections often unearth "deficiencies" that raise eyebrows—none more so than the reported 20% Part I.A deficiency rate among the Big Four audit firms in 2024. As someone who’s worked both as an auditor and in management, I struggle with this figure. The level of scrutiny applied to material issues by engagement partners, concurring partners, risk management experts, and national office experts is intense. A 20% rate feels inflated—3% aligns more with the rigor I’ve seen across many public company audits. So, what’s the PCAOB really telling us with this number?
The PCAOB’s inspection process isn’t a full audit autopsy. It targets high-risk, complex, or significant areas—think material misstatement hot zones—while also probing quality control systems. Deficiencies come in categories: Part I.A, the heaviest hitters, flag audits where firms lacked sufficient evidence to support their opinions on financial statements or internal controls over financial reporting (ICFR) at issuance. Part I.B covers procedural lapses, like weak fraud checks, and Part I.C hits independence or SEC rule breaches. A Part I.A finding is serious—it suggests the audit’s promise of reasonable assurance might be hollow, even if no misstatement is later found.
The 2024 data shows progress: the Big Four’s Part I.A deficiency rate dropped to 20% from 26%, part of a broader decline across all firms (39% from 46%). The PCAOB credits this to more in-person work, enhanced training, and stronger national office oversight. But 20% still means one in five audits from Deloitte, EY, KPMG, and PwC—firms with top-tier expertise—supposedly fell short on evidence. Are these deficiencies truly reflective of audit quality, or is the PCAOB’s lens too harsh?
Digging into the 20%, it’s not about widespread audit collapse. The PCAOB selects audits based on risk profiles and past issues. A Part I.A deficiency doesn’t mean the financials were wrong, just that the evidence trail wasn’t robust enough in the inspectors’ eyes. But if the Big Four’s firepower—think concurring partners, risk managers, and national office experts dissecting every material call—yields a 20% hit rate, either the standard is extremely high, or the PCAOB’s sample skews heavily toward problem areas. Yes, 3% feels more plausible given the diligence I’ve witnessed.
The PCAOB insists this isn’t acceptable—firms must keep improving. It’s pushing transparency, engaging firms, and even eyeing audit firm culture. Fair enough—investors need solid assurance. But if 20% of Big Four audits are “deficient,” what’s the signal? Are these firms slipping despite their resources, or is the PCAOB’s bar just so lofty? The truth likely lies in the middle: inspections amplify imperfections in tough audits, but 20% seems a stretch.