Audits of public companies by firms around the world continue to show high levels of significant deficiencies in areas such as internal control testing and fair value measurement, according to the International Forum of Independent Audit Regulators.

IFIAR members who conducted audit inspections found deficiencies in 47% of audits of 948 public companies by 122 audit firms, the organization said in its 2014 Survey of Inspection Findings. Forty-one percent of financial institution audits had deficiencies.

The highest number of audit deficiencies were in the areas of internal controls (205 deficiencies, or 24% of audits with at least one defiency), fair value measurement (178/20%), and revenue recognition (114/14%), all of which, IFIAR noted, are among the core building blocks of audited financial statements.

“We continue to see high levels of inspection deficiencies in vital areas of public company audits,” IFIAR chair Lewis H. Ferguson, a board member of the U.S. Public Company Accounting Oversight Board, told Accounting Today. “This is a problem for investors and stakeholders around the world.”

The report found that audit firms’ own quality control systems had the highest number of inspection findings in the areas of engagement performance, independence and ethics requirements, and human resources.

Audit inspectors “cited the failure to establish policies and procedures for engagement quality control reviews that provide an objective evaluation of the significant judgments made by the engagement team and conclusions reached,” the report notes.

An underlying cause of audit deficiencies is “insufficient exercise of professional skepticism during performance of the audit,” IFIAR said, recommending that audit firms pursue initiatives to improve audit quality and the consistency of audit execution across their national firms and international audit firm networks.

“This includes reviewing staffing structures to ensure that sufficient and appropriate expertise and experience is available for increasingly complex entities and audits that require significant judgments,” the report said.

Most of the survey results are consistent with IFIAR’s prior surveys, but the organization does not provide a year-over-year analysis of the quality of audit performance.

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4 responses to “Nearly Half of Public Company Audits Found Defective”

  1. Boy I wish I had a blank check to do my audits. Then I could cover every conceivable item I could ever have thought of. Trained professionals develop a skill level that allows them to make judgments about where their is a risk and where there is not. So exactly how many of these deficient audits resulted in a restatement of anything of any consequence. First we shoot all the lawyers, then we get rid of the PCAOB. And then business can get back to running a business and not looking for the academic police chasing them around.

    • Interesting points, although the last time the audit profession regulated itself, business as usual as you call it, led to Enron and other accounting scandals.

      However I agree with you, our regulation is redundant and cumbersome, but it should be streamlined not removed.

  2. This article clearly points out the lack of acumen and training for auditors. The auditing process is a joke. Materiality and market driven managements have damaged the process as well. Getting rid of lawyers and regulatory oversight will not solve this mess. It is time to make the public fully aware of the joke that is being foisted on them. This article is very important and will have even more meaning in the next economic downturn.

  3. The article as well as the comment show a great misunderstanding of what auditing is and how it is done. Auditing and Accounting are art not science just like medicine and just like medicine mistakes do make their way through the system. The only way to “ensure” that there are no mistakes would be to review every transaction from its origin to its conclusion, and even then there is the chance for error. Auditing is a “reasonable assurance” based on statistics that there are no material mistakes. Anything more would be cost prohibitive. And if an employee wants to hide something from the auditors, they most likely will be able to.

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