EY expects more failing grades from US audit inspectors

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EY’s auditors outside the US are failing a higher number of quality inspections by US regulators, according to company internal estimates, as US officials push to improve global standards, fearing they will be affected by the coronavirus pandemic. Will be

Last year, EY’s oversight of work for US-listed companies uncovered deficiencies in 38 percent of audits conducted by the firm’s overseas businesses, according to estimates described in the Financial Times.

That would be a huge jump from 2021, when 21 percent of audits sampled by the Public Company Accounting Oversight Board found deficiencies.

The figures do not include inspections conducted by EY’s US business — the largest in its global network — and could be reduced if the company successfully steps up concerns raised by the PCAOB before finalizing the inspection report. However, they indicate a trend since the pandemic that has the regulator worried.

PCAOB President Erica Williams said in a speech In December audit firms told their inspectors that “the combination of the COVID-19 pandemic, remote auditing, mass resignations and the war for talent has made it difficult to maintain stable audit teams and provide training to new employees”.

But he added: “These factors are no longer new, and no one should be intimidated by the challenges they present.”

The PCAOB has the power to oversee the audit of any company listed in the US, regardless of where its auditor is located. EY’s US auditors rely on overseas affiliates to examine the accounts of clients’ overseas subsidiaries. Inspectors have long found that audit work done by non-US businesses of the Big Four is more likely to have flaws than audit work done by the US branch.

Williams, who was appointed by the Biden administration with the aim of tightening PCAOB rules and increasing inspections, told the FT last year that overseas branches of large companies needed to match standards in the US.

In recent years, EY’s non-US branches have had fewer audit deficiencies than its rivals, according to an FT analysis of PCAOB data compiled by Ideagen Audit Analytics. It can take several months for the PCAOB inspection report to be finalized, so it may take some time to measure the decline in EY’s performance against its peers.

The PCAOB oversaw 37 audits conducted by EY’s non-US businesses last year, and EY anticipates that the increase in deficiencies will be largely consistent across the US, Europe and Asia-Pacific.

The firm said it “actively reviews audit quality results from both internal and external monitoring. The figures reported by the Financial Times are from the early stages of a process during which areas of additional focus are identified. The figures do not reflect the final conclusions drawn from that process.”

EY is also grappling with problems complying with rules requiring employees and partners to report their financial interests. The rules are designed to avoid an audit firm’s potential conflict of interest, and have become the focus of PCAOB inspectors.

The regulator this week publicly condemned EY’s Swedish arm after it found more than half of its managers had failed to make proper disclosures during audits in 2019, and the firm had failed to rectify matters quickly. PwC’s US business was censured last week for similar failures, which are publicized by the PCAOB only if they are not corrected within a year.

EY expects its Spanish branch to face a similar PCAOB censure in the near future, according to a person familiar with the findings. Four of its other businesses — in Germany, Denmark, Belgium and Chile — were pegged by inspectors last year for high levels of non-compliance with financial disclosure rules, according to internal EY discussions, and are expected to resolve the issues in the coming year. There will be an opportunity to