EY took a beating from audit regulators in its latest inspection finding, with the firm's failure rate jumping to 48 percent.

The firm's 2012 inspection report says inspectors from the Public Company Accounting Oversight Board studied 52 audit files and found serious problems in 25 of them. In nearly every problem audit -- 22 to be more specific -- inspectors said the firm failed to comply with Auditing Standard No. 5, which focuses on the audit of internal control over financial reporting. Inspectors also called out 10 cases where the firm failed to comply with one of its newer risk standards, Auditing Standard No. 13, which spells out how auditors are expected to respond to risks of material misstatement. The board also noted five cases where auditors failed to follow standards for auditing accounting estimates.

EY's failure rate in the prior two inspection cycles has been among the lowest of the major firms, or those that are inspected annually by the PCAOB. The firm's failure rate in 2011 was 36 percent, and its 2010 rate topped out at 21 percent. Only one other major firm, Deloitte & Touche, has seen its report published from the 2012 inspection cycle. Deloitte's failure rate of 25 percent represented an improvement over the firm's rate of 42 percent in 2011 and 45 percent in 2010.

Steve Howe, managing partner for the Americas at EY, says he sees the importance of the PCAOB inspection process. "We respect and benefit from this process as it aids us in continuously improving the quality of our work and fulfilling our responsibility to investors and other stakeholders," he said in a statement.

EY acknowledges most of the findings in the report relate to internal control, a common theme across the major firms that the board addressed in a comprehensive report in December. “Our firm has been taking substantial and specific steps to continue to improve ICFR auditing,” a spokesman for the firm said. “These efforts continue and include additional guidance related to the evaluation of the design and testing of controls, new or revised templates and audit forms, mandatory training for all audit professionals, enhanced quality reviews, and reinforcing the importance of this aspect of our work.”

PCAOB member Jeanette Franzel noted recently the board was finding “limited improvements” in its inspections in more recent cycles for which reports are not yet completed and published. It caused her to ponder how the board might alter its inspection process in the future to leverage improvements firms have made, although she offered no specifics.

Crowe Horwath, another firm whose latest inspection report showed a significant number of deficiencies relative to the number of audits inspected, issued a statement indicating the lag time in the publishing of inspection reports delays improvements to inspection results. Crowe's reports typically are the last or among the last reports published among the major firms. The latest report published for Crowe reflected its 2011 inspection results, yet the report was not released until late July 2013.

“When we became aware of the PCAOB inspectors' concerns during the inspection process last year, we quickly adjusted our audit procedures and implemented training to address those issues,” said Rick Ueltschy, managing partner at Crowe. “However, because of the lag time between when inspections are conducted and when the report is released, there is also lag time on when our adjustments to our processes may improve our inspection results. Even though similar themes were identified in the inspections of all the annually inspected firms, we are still not satisfied with the results.”

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