Auditors need to get more skeptical and supervisors need to get more engaged when it comes to crucial, high-risk financial reporting areas, according to a recent report from audit regulators.

The Public Company Accounting Oversight Board said audit deficiencies persist in many cases because auditors aren’t skeptical enough, especially at the highest levels in the auditing reporting chain. Certain deficiencies led the PCAOB to have doubts about the sufficiency, rigor, and effectiveness of audit supervision, especially from engagement managers, engagement partners and concurring partners. The board raised concerns about the level of professional skepticism and objectivity, even in some of the larger audits that have been inspected.

The PCAOB published the report to summarize four years worth of observations inspecting the eight largest audit firms, which are inspected annually. It found there are still shortfalls in key audit areas such as revenue recognition, fair value, management’s estimates, determination of materiality, and audit scope.

PCAOB Chairman Mark Olson told an audience of accountants and auditors at a conference of the American Institute of Certified Public Accountants that inspectors found some recurring themes as they reviewed audits of all shapes and sizes. Most notably, auditors fail too often to look for terms in sales contracts or test estimated total costs to complete long-term contracts to verify revenue recognition. Inspectors also frequently flagged problems in planning audits and evaluating audit results, he said.

“In some cases, the deficiencies appear to have been caused at least in part by the failure to apply the right degree of professional skepticism, which is always critical to the conduct of a quality audit,” Olson said. “In fact, some of the deficiencies occurred in some of the larger audits, where one may assume that the depth of experience and expertise of the audit team should not be an issue.”

The summary report says inspectors pulled personnel files for partners that had racked up significant negative inspection results and developed concerns about how partners were evaluated and compensated, finding little to suggest audit quality was a factor. Inspectors found “concurring review partners or internal inspectors were not held accountable for failing to identify significant deficiencies in audits they reviewed and where partners’ quality ratings were affected significantly by the results of client satisfaction surveys or the profitability of their audits and their ability to increase revenues,” the report says.

Inspectors also found technical personnel too often reported through folks in charge of growing audit practices, raising concerns about objectivity. Olson said firms have responded to those criticisms, aligning audit partner compensation with audit quality and changing reporting structures to minimize the likelihood that economic considerations would impact audit considerations. The board also has a standard in development that would address the engagement quality review.

The report notes some audit areas have shown marked improvement since the beginning of the inspection process, especially the confirmation of accounts receivable and the auditing of income tax accounts. The board also notes while there are still concerns about auditors’ use of analytical procedures, the concerns have narrowed to only a handful of issues rather than the overall failure to apply governing standards discovered at the outset of the inspection process four years ago.

“You can be assured that PCAOB inspectors will continue to focus on the significant areas where they have encountered deficiencies, as well as new areas that emerge as economic conditions and accounting and auditing guidance continue to evolve,” Olson said.

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