Expect little improvement in the findings of audit regulators as they roll out the results of their 2011 inspection cycle. That's the warning from Jeanette Franzel, a member of the Public Company Accounting Oversight Board, in a recent address to the American Law Institute.

The board issued reports in 2011 on 2010 inspections showing big spikes in the number of audit deficiencies identified by inspectors. “Unfortunately, that spike in inspection findings has remained high in the 2011 reports we are issuing this year,” she said. “The findings are serious.”

So far, KPMG is the only major firm whose 2011 inspection report has been published, and it reads much like the report from the year before when inspectors noted a big increase in the number of problems audits. Following a risk-based approach, inspectors are targeting audit files where they consider problems to be most likely, so failure rates can't necessarily be generalized to the entire collection of audit work. However, KPMG's failure rate jumped from eight of 60 audits examined in 2009 to 12 of 54 audits examined in 2010. In the most recent year, inspectors flagged 12 of 53 audits called out for scrutiny.

The board flags audit deficiencies when it believes a failure is so significant that it appears auditors have not obtained adequate evidence to support their audit opinions. That might include, said Franzel, cases where the audit work was incomplete or not properly conducted, cases where financial statement information was contradicted by other available evidence, or cases where audit conclusions on material issues were based on management's views that auditors accepted without verification.

Common trouble spots include revenue recognition, fair value of financial instruments, management estimates, testing and evaluating internal controls, related party transactions, and the auditor's assessment and response to fraud risk, said Franzel, among others. She says inspectors especially find problems for smaller issues in the audit work related to a company's use of equity financing instruments to pay employees, vendors, or others. “Many of these agreements and instruments contain complex terms and conditions that impact the manner in which the instruments should be recorded and accounted for by the issuer,” she said.

The PCAOB earlier issued guidance for audit committees about how they can learn more about their audit firms' inspection reports beyond what appears in published reports. Franzel said the PCAOB has received questions from audit committees about how to understand what their auditors say about inspection results. “We directed this release to audit committees due to their important role in corporate governance through the oversight of financial reporting and the independent audit,” she said.