Is US Auditing Falling Short on Quality?

When it comes to auditing in the U.S., things are heating up, with the Public Company Accounting Oversight Board (PCAOB) caught in the middle of a simmering standoff. A rising chorus of voices, including influential senators and auditors, are butting heads over what defines “quality” in auditing and whether the current standards measure up. The stakes couldn’t be higher, raising the big question: is there an audit crisis, or are we just experiencing growing pains in a world of heightened scrutiny? As they say, “I’ll be the judge of that!” — let’s dig into the heart of this clash to see if the results live up to the scrutiny.  

Are Audit Deficiencies a True Measure of Quality? 

It all started with some eye-opening numbers from the PCAOB’s recent inspection reports. Over 40% of audits reviewed in the past two years were flagged as “deficient,” a statistic that PCAOB Chair Erica Williams deemed “unacceptable.” Williams didn’t mince words; she called on companies to consider these rates carefully when selecting auditors, suggesting that the high deficiency rate points to the need for more rigorous audit practices. In her view, deficiencies, even minor ones, represent cracks in the system that could lead to financial reporting errors if not addressed. 

But not everyone on the PCAOB board shares her alarm. Christina Ho, a board member with years of audit experience under her belt, has publicly questioned the use of deficiency rates as a definitive marker of audit quality. Ho argues that deficiency rates tell only part of the story. According to her, a more meaningful measure is the frequency of financial restatements—instances where companies have had to correct errors in their financial statements. After all, it’s the restatements that directly impact investors’ trust. 

In short, while Williams wants to measure quality by the rigor of audit procedures, Ho believes that focusing on the real-world impact, like actual financial errors, provides a clearer picture. It’s like the difference between how clean a restaurant kitchen looks and whether diners actually get sick. So, who’s got the right recipe? 

Senators Jump In: Pressure, Politics, and Accountability 

As if the debate within the PCAOB wasn’t enough, Senators Elizabeth Warren and Sheldon Whitehouse have entered the fray. Last month, they penned an open letter aimed at both Williams and Ho, expressing concern over what they perceive as mixed messages from the PCAOB. The senators questioned Williams’ stance on improvements in audit quality, given the high deficiency rate, and they weren’t thrilled with Ho’s approach either. They argued that Ho’s perspective downplays the significance of deficiency findings and might, in their view, threaten public trust. 

The letter didn’t just create headlines; it underscored the tricky balancing act for PCAOB board members, who serve at the pleasure of the Securities and Exchange Commission (SEC). In an unusual public response on LinkedIn, Ho addressed the senators’ critique, even hinting at her job’s precarious nature as a single parent advocating for evidence-based policymaking. Ho’s post added a personal twist to an already heated debate, asking, “Senators, why are you persecuting me?” 

The senators’ involvement raises a broader question: should political pressure play a role in shaping audit oversight? And what happens when public accountability and regulatory independence collide? As the saying goes, politics is a contact sport. 

Deficiency Rates vs. Restatements 

The heart of the matter comes down to one question: how should we measure audit quality? For Williams, the answer is clear: deficiency rates may be an imperfect measure, but they offer a window into audit rigor. In her view, deficiencies suggest potential weaknesses that could slip under the radar, eventually leading to misstatements. After all, if auditors aren’t catching issues in their inspections, what might they miss in real-time audits? 

On the other side, Ho has a supporter in Jeffrey Johanns, a former PwC partner and an auditing professor at the University of Texas. Johanns has noted that while 46% of audits were flagged for deficiencies, only 5% of these cases actually led to restatements at the six largest audit firms. He argues that restatements—where financial records are corrected due to significant errors—are the true indicators of issues that impact investors. According to Johanns, the restatement rate for U.S.-listed companies is at a 20-year low, reinforcing his stance that deficiency rates alone may not paint an accurate picture of audit quality. 

So, should we be concerned about deficiencies if they rarely lead to restatements? It’s a bit like asking whether a high number of fender benders in a neighborhood automatically means there’s an accident epidemic. Williams believes the answer is yes, as every deficiency reveals room for improvement, while Ho and Johanns argue for a focus on actual outcomes. 

What’s Next for the Audit Industry? 

The implications of this debate stretch far beyond boardroom disagreements. If deficiency rates are prioritized as the ultimate measure of audit quality, audit firms might face increased regulatory pressures, leading to higher compliance costs and a shift in how they conduct audits. On the flip side, if the industry leans towards financial restatements as the primary measure, firms might continue certain practices as long as they don’t lead to blatant financial errors. This approach might leave less obvious, yet equally important, weaknesses unaddressed. 

In a nuanced argument, Williams insists that audit quality isn’t a “one-size-fits-all” matter and warns against relying on overly simplistic metrics. She believes deficiency rates are an essential component of holding audit firms accountable. Ho, however, alongside her supporters, pushes for an outcome-based standard, where quality is measured by the tangible effects on financial statements and investor trust. 

Will the PCAOB Find Common Ground? 

As this public feud unfolds, the PCAOB and the SEC find themselves managing a complex terrain. They face a challenging question: how can they hold audit firms accountable without setting unrealistic or misguided expectations? The future of audit regulation may depend on finding a middle ground that incorporates both procedural rigor and outcome-driven metrics. 

While the debate rages on, what’s clear is that the standards by which we judge audits could change in the near future. If PCAOB policies evolve to prioritize deficiency rates, audit firms may be forced to revamp their processes to meet these heightened expectations. Conversely, if the focus shifts toward tangible outcomes like financial restatements, audit practices might maintain more flexibility—but at what cost? 

The ongoing discourse around audit quality, fueled by high-profile voices and public scrutiny, will likely shape the future of audit regulation in the U.S. Whether the PCAOB leans toward a strict procedural stance or embraces an outcome-focused approach, its decisions will impact investor trust, regulatory compliance, and even the financial industry’s ability to inspire confidence in public markets. 

The PCAOB’s choices today will reverberate tomorrow, determining how the U.S. audit profession can maintain its relevance and reliability. Will they rise to the occasion, or will the debate only deepen the divide? As one might say, stay tuned, because this showdown is far from over. Enjoying our stories so far? Then don't forget to subscribe to our weekly newsletter for industry insights delivered to your inbox every week!