IN BRIEF
In the course of fulfilling its mandate to protect investors, the PCAOB has conducted inspections of public firm audits and collected this data in order to analyze whether audit deficiencies (and, conversely, audit quality) are rising or falling over time. Recent public pronouncements from the PCAOB’s leadership have voiced concern that audit deficiencies remain too high. Given this negative outlook, the authors dug deeper into the PCAOB’s data and find it paints a slightly different picture, one that suggests the PCAOB’s efforts at improving audit quality might be more effectively focused on smaller firms, as well as the international offices of larger firms.
***
On July 24, 2023, Erica Williams, then-chairperson of the Public Company Accounting Oversight Board (PCAOB), spotlighted some significant concerns regarding the auditing profession in a Wall Street Journal op-ed, “We Audit the Auditors, and We Find Trouble.” Specifically, she noted that audit quality—as measured by Type 1.A deficiencies found in PCAOB inspections of public company audits—had been trending downward for the second year in a row. At the time of her comment, the audit deficiency rate of 40% was up 6 percentage points from 2021, which was 5 points higher than the deficiency rate of 2020. By the end of the 2023 inspection cycle, the final deficiency rate went even higher (43.6%). (The underlying data can be downloaded from https://pcaobus.org/oversight/inspections/firm-inspection-reports.)
Results of this kind, Williams averred, were “completely unacceptable.” She reminded the audit profession that the “PCAOB hasn’t hesitated to bring enforcement cases against auditors when appropriate” and that “Now is the time for solutions, not excuses.”
While the PCAOB stakes out its position to protect investors via assurance of a responsible audit function, rumors in Washington suggest that the board’s independence, mission, and very existence may be under intense scrutiny. The ability of the PCAOB to maintain its $400 million budget and a degree of independence from the SEC may hinge on what it can show skeptics it has accomplished for the support it has received to date. As part of the new administration’s antiregulatory stance, a proposal originated by the House Financial Services Committee would eliminate the PCAOB and fold its responsibilities into the SEC (Soyoung Ho, “Former Board Members Speak out Against Legislative Effort to Eliminate PCAOB,” Thomson Reuters, May 16, 2025, https://tinyurl.com/y6t9z7au).
Given this negative portrayal of the direction of audit quality by PCAOB leadership and current concerns about the effectiveness of any regulatory function, it seems appropriate to conduct a deeper dive into PCAOB data to identify where its work of inspections suggests targeted improvements can be made to protect investors and further the public interest via informative, accurate, and independent audit reports. This article will use the PCAOB audit deficiency rate as a metric of “audit quality,” though it is understood that other metrics of audit quality (i.e., restatements, lawsuits, going concern opinions) are also significant and may provide different or contrary indications.
Looking at the Data
The author analyzed PCAOB data for audit inspections from January 1, 2009, through December of 2023. Data prior to 2009 was eliminated because that data did not include the number of “Big Four” audits inspected by the PCAOB. Because Big Four inspections typically account for about 40% of all PCAOB inspection activity, a dependable Type 1.A deficiency rate could not be calculated for inspection years prior to 2009. A Type 1.A deficiency indicates that the audit firm failed to obtain sufficient appropriate evidence to support its opinion.
Leaving off inspections prior to 2009, the base sample included 12,031 PCAOB inspections between 2009 to 2023 (note that the data here refers to the inspection year, not the date the PCAOB released the final report). Of this sample, Exhibit 1 shows that 4,944 (41.1%) PCAOB inspections were of Big Four firms, 1,313 (10.9%) were of “Mid-Tier” firms (RSM, BDO, and Grant Thornton), 1,450 (12.1%) were of other firms (non-Big Four, non-Mid-Tier) identified as being in the “Top 100” accounting firms based on revenue, and 4,324 (35.9%) were of all other firms (“2023 Top 100 Firms Plus Accounting Regional Leaders,” Accounting Today, https://tinyurl.com/yyzb58am). Furthermore, 2,464 inspections (20.5%) were of audits conducted by firms whose office was located outside of the United States (hereafter “international” offices) and 9,567 (79.5%) inspections were of audit work conducted by firm offices located within the United States. Finally, within the United States, 3,363 inspections (35.1%) were of Big Four firms and 6,204 (64.9%) of other firms (non-Big Four). Outside of the United States, most PCAOB inspections (1,581 or 64.2%) were of audits conducted by international Big Four offices while 883 inspections (35.8%) were of non-Big Four firms.
EXHIBIT 1
PCAOB Inspection Activity (January 2009-December 2023), by Firm Type and Office Location
Exhibit 2 shows PCAOB inspection activity over the past 15 years along with the Type 1.A audit deficiency rate for each year. Consistent with Williams’ criticism, the deficiency rate rose steadily from 2020 (28.4%) to 2023 (43.7%). But Exhibit 2 also reveals the 2020 deficiency rate is likely a COVID-era anomaly inasmuch as the 28.4% rate is the second lowest recorded in the 2009–2023 period, with only 2009 (at 25.6%) exhibiting a lower rate. Setting aside 2020, the deficiency rate has ranged between 31.7% and 43.7% (with a mean of 37%) since 2010, with limited evidence of a discernible trend.
EXHIBIT 2
Number of PCAOB Inspections and Type 1.A Deficiencies Found, 2009–2023
Exhibit 2 also indicates that the number of inspections has generally declined over the fifteen-year period, falling from 1,123 in 2009 to 710 in 2023. Given the increased complexity of financial standards and auditing guidelines, it appears that the PCAOB is spending significantly more time on each inspection. Evidence of increased time devoted to each audit is found in PCAOB budget data. In 2009, the PCAOB conducted 1,123 inspections with 501 employees (2.2 inspections per employee per year). In 2023, the PCAOB completed 710 inspections with 926 employees (0.77 inspections per employee per year). Assuming each inspector worked 2,080 hours per year, the average time per inspection nearly tripled, from 928 hours to 2,713 hours between 2009 and 2023. The average hours per inspection since 2020 (2,687) is 35% higher than between 2009 and 2019 (1,994). The combination of increased reporting complexity, greater demands of audit work, and elevated PCAOB inspection hours may contribute to our understanding of the increase in audit deficiencies being found. Other data points beyond deficiencies can be found in later PCAOB inspection reports. For example, since 2016 the reports indicated that 57% of deficiencies found include problems with both internal control over financial reporting and financial reporting itself, 25% are solely about financial reporting, and 18% are solely regarding internal controls. Other data points, including industry of issuer, length of time the lead partner had responsibility for the audit, and tenure of the firm with the client began in 2016 but only for larger firms.
Breaking Down Inspection Results by Firm Size
Exhibit 3 indicates that firm size is a contributing factor in PCAOB inspection outcomes. Exhibit 3 shows that, while deficiency rates have been rising since 2021 for all firm size categories, Big Four firms report markedly lower deficiency rates than other firm size categories since 2019. Specifically, the Big Four deficiency rate in 2023 (28.2%) is significantly less than Mid-Tier firms (63.8%), Top 100 firms (55.3%) or other firms inspected (59.0%). Collectively, the Big Four deficiency rate is currently less than half that of non-Big Four firms.
EXHIBIT 3
Type 1.A Deficiency Rate by Firm Size, 2009–2023
Other patterns shown in Exhibit 3 are worthy of note. For example, aside from 2009, Top 100 firms had lower deficiency rates than any other firm size category until 2016. By contrast, the smaller “other” category of firms experienced consistently high deficiency rates throughout the 2009–2023 period.
Big Four breakout.
As indicated in Exhibit 1, 41% of all PCAOB inspections in the fifteen-year period under review were of Big Four firm audits. Exhibit 4 reveals that, while their deficiency rates set the standard for the market, Deloitte and PwC have both experienced slowly rising deficiency rates since 2020 (to current levels of 22.2% and 24.5%, respectively). By contrast, KPMG—which had the highest deficiency rates among the Big Four between 2014 and 2021—has been steadily improving since 2018, currently reporting it lowest deficiency rate since 2010 (at 28.6%). The deficiency rate at EY recently increased significantly, jumping from 16.9% in 2020 to 42.9% in 2022, thereafter declining to 37.8% in 2023 (Blake Oliver, “Why EY Has the Worst Big Four PCAOB Deficiency Rate,” The Accounting Podcast, Nov. 7, 2024, https://tinyurl.com/ywfnznnb). The uptick led EY to disengage from 84 audit clients between January 1, 2023, and August 15, 2023, shedding $215 million in fees to “revamp its audit practice and improve the quality of its work” (Mark Maurer, “EY Sheds US Audit Clients in Response to Shortfalls,” The Wall Street Journal, August 23, 2024, https://tinyurl.com/42yw8eup).
EXHIBIT 4
Type 1.A Deficiency Rate at Big Four Firms, 2009–2023
Mid-Tier breakout.
As shown in Exhibit 1, 10.9% of all 2009–2023 PCAOB inspections were of Mid-Tier firm audits. Exhibit 3 shows that the Mid-Tier group had the highest deficiency rate among the different size groups in 2023 (at 63.8%). Exhibit 5 reports the deficiency rates among the three Mid-Tier firms (i.e., RSM, BDO, and Grant Thornton), showing that all three firms have experienced rising deficiency rates since 2021. BDO stands out as a negative outlier, particularly in 2023 with 25 Type 1.A deficiencies found in 29 inspections (86.2%). In June 2024, BDO responded to its poor showing by appointing a new chief operating officer as well as a new chair to oversee the firm’s efforts to improve its audit practice and technology, as well as adding a second independent member to its audit quality advisory council (Michael Cohn, “BDO’s New COO and Chair Plan Improvements,” Accounting Today, July 8, 2024, https://accountingtoday.com/news/bdos-new-coo-and-chair-plan-improvements). Likewise, RSM, disappointed with its 2023 deficiency rate of 47.1%, established an audit quality advisory board composed of three independent members responsible for evaluating the effectiveness of quality control and system of quality management matters within the firm’s assurance practice (Paige Hagy, “RSM Forms Audit Quality Board,” Accounting Today, January 21, 2025, https://tinyurl.com/54trvz4y). One can only speculate about the cause of Mid-Tier firms’ difficulties, but certainly taking on more than they can chew can be a consideration.
EXHIBIT 5
Type 1.A Deficiency Rate at Mid-Tier Firms, 2009–2023
Firm Size and Inspection Frequency
Frequency.
There were fourteen firms that, as of 2023, had audits inspected annually by the PCAOB for at least the past three years, though only Big Four and Mid-Tier firms had been inspected every year for the entire 2009–2023 time period (Crowe, Marcum, Withum, Baker Tilley, Moss Adams, Mazars, and Cohen and Company make up the remainder of this group). Exhibit 6 compares the deficiency rates of the fourteen currently annually inspected firms to firms inspected triennially. It shows that, since 2015, annually inspected firms have experienced notably lower deficiency rates than triennially inspected firms. Indeed, the 2023 deficiency rate for annually inspected firms is, in absolute terms, 23.9 percentage points lower than their triennial counterparts.
EXHIBIT 6
Type 1.A Deficiency Rate at Annually and Triennially Inspected Firms, 2009–2023
Firm size and inspection frequency.
Exhibit 7 highlights Type 1.A deficiency rates based on both the frequency of inspection and firm groupings by size. Among annually inspected firms, it shows that Global Network Firms (GNF; this includes the Big Four, BDO, and Grant Thornton) are found to have an average deficiency rate (31.7%) well below that of non-GNFs (36.2%). Among triennially inspected firms, the Top 100 firms have an average deficiency rate (32.5%) well below all “other” firms (42.2%). It should be noted that, while the average performance of the triennially inspected Top 100 compares well to the annually inspected counterparts, the results are highly variable. As shown in Appendix A, 7 of the 26 Top 100 triennially inspected firms with 10 or more PCAOB inspections had deficiency rates of 50% or greater (CBIZ/MHM, SingerLewak, Schneider Downs, Prager Metis Int’l, Cherry Bekaert, Haynie & Co, Bonadio Group). By contrast, CohnRezick (2.3%), CLA (6.7%), HoganTaylor (9.1%), Weaver (11.8%), Freed Maxick (15.4%), Frazier & Deeter (16.7%), and Arminino (18.2%) had notably lower deficiency rates. Amongst GNFs, Appendix A shows that Deloitte and PwC have the lowest average deficiency rate over from 2009–2023 (around 26%), while BDO’s deficiency rate was almost double that of the market leaders. Among annually inspected non-GNF firms, Cohen and Company had the lowest deficiency rate (9.4%), whereas Withum (54%), Baker Tilley (49.3%), and Marcum (46.3%) had much higher deficiency rates.
EXHIBIT 7
Type 1.A Deficiency Rates at Annually and Triennially Inspected Firms, by Firm Size and Global Network Status, 2009–2023
In the author’s opinion, an obvious problem exists among smaller triennially inspected firms, which account for 36% of all PCAOB inspections. This has not gone unnoticed by the PCAOB. In January 2025, the PCAOB launched a new online resource page for small firms including publications, videos, and more (https://pcaobus.org/resources/information-for-smaller-firms). The online resource adds to other initiatives directed at small firms (forums, publications), reflecting the PCAOB’s intent on improving the performance of smaller audit firms, which it identifies as “an important part of the auditing landscape, playing a critical role in investor protection, but have unique needs and challenges” (PCAOB, “PCAOB Launches New Resource Page for Smaller Audit Firms,” press release, Jan. 28, 2025, https://tinyurl.com/54hrr8rs).
Domestic Versus International Inspections
Given the globalization of economic activity, one must consider the relationship between audit firm location and the audit deficiency rate. As shown in Exhibit 1, 2,464 PCAOB inspections of international firms occurred in the 2009–2023 timeframe, accounting for 20% of all PCAOB inspection activity. Across that span of time, 38.1% of all international office audit inspections were found to have a Type 1.A deficiency, in contrast to 35.4% of US office inspections. Exhibit 8 compares the domestic and international audit deficiency experience indicating that, while international firms had notably higher deficiency rates from 2009–2013, the difference compared to US offices has largely dissipated since 2014 (with the exception of 2020). In fact, since 2021 international offices have modestly lower average deficiency rates. Thus, it appears that, in aggregate, office location is not currently an explanatory variable of PCAOB audit quality deficiencies.
EXHIBIT 8
Audit Deficiency Rates: U.S. Versus International Offices (All Firms)
Regional differences.
Exhibit 9 examines deficiency rates by geographic regions, showing that Latin America and the Caribbean (LAC) had the lowest deficiency rate (34.2%), followed by Asia and the Asia Pacific region (34.7%), and the United States (35.4%). Canada, broken out as a separate region due to its large number of PCAOB inspections, notably lags behind other geographic regions with a 46.9% deficiency rate. The Type 1.A deficiency rate of Canadian audits firms has consistently been higher than other regions, ranging from a high of 63% (2022) to a low of 36.7% (2021); the median for the 2009–2023-time frame is 44.7%.
EXHIBIT 9
Audit Inspection Activity and Deficiency Rates by Geographic Region, 2009–2022
Country-specific inspection results.
While regional deficiency rates have only modest variability (apart from Canada), audit quality is poor in certain countries. Thus, while the average audit deficiency rate over the fifteen-year span is 35.9%, Exhibit 10 shows that the five countries with thirty or more PCAOB inspections in the 2009–2023 period (Germany, Brazil, Mexico, Canada, and France) had deficiency rates more than 45%. Of the 25 countries with 30 or more PCAOB inspections, 12 reported lower, and 12 higher, deficiency rates than the United States.
EXHIBIT 10
Average Audit Deficiency Rate in 2009–2023 Time Period, by Country (Minimum of 30)
Global Networks and International Office Audit Deficiencies
Six registered public accounting firms are members of networks through which they affiliate with other firms for various business and client service purposes, particularly in support of large international clients. These firms provide information about their affiliations in annual reports to the PCAOB. At present, these Global Network Firms (GNF) include Deloitte, PwC, EY, KPMG, BDO, and Grant Thornton. Exhibit 11 indicates that, with the exception of the 2012–2015 period, the international office audit deficiency rate of GNFs is significantly better than that of their non-GNF counterparts. For 2023, the gap between the deficiency rate of GNFs and non-GNFs (32.9% versus 76.0%) is at near record high.
EXHIBIT 11
International Audit Deficiency Rate of Global Network Firms and All Non-Global Network Firms, 2009–2023
Domestic Versus International Offices
Robert Conway, a former Big Four partner, identified a reason for concern about audit quality that related to the structure of the industry itself (The Truth About Public Accounting, independently published, 2020, ISBN 13:9798679285064). Specifically, he pointed out that global brands are, in reality, a series of independent, geographically located audit firms. As such, these firms do not share global profits; rather, profits are on a country-by-country basis and distributed among partners within each jurisdiction. This arrangement, he avers, has implications for audit quality. Principally, it increases the likelihood that in-country firms will prioritize resources and staff expertise toward supporting local clients over audits of subsidiaries of foreign parent companies referred to them by international offices. Exhibit 12 appears to support Conway’s critique, showing that Big Four deficiency rates have consistently differed between inspections of US and international office audits across the 2009–2023 period.
EXHIBIT 12
Domestic Versus International Audit Deficiency Rate of Big Four Firms, 2009–2023
A Comment on PCAOB Inspection Activity
Exhibit 2 shows that the overall number of PCAOB inspections has generally trended downward since 2009, going from 1,123 in 2009 to 710 in 2023. Exhibit 13 disaggregates this downward trend, showing that larger firms (Big Four and Mid-Tier) have only seen a 14% drop in inspections (going from 502 to 431), while all other firms have seen a 55% reduction in inspection activity (from 621 in 2009 to 279 in 2023). The reduced number of inspections is negatively and significantly correlated with (though may not be the cause of) an increase in audit deficiency rates for smaller firms, but a similar relationship does not exist for Big Four firms. At the end of 2023, the PCAOB announced its intention to increase the number of engagements selected for review in 2024 among annually inspected firms in response to heightened risk in certain industry sectors (PCAOB, “Spotlight: Staff Priorities for 2024 Inspections and Interactions with Audit Committees,” December 2023, https://tinyurl.com/5337adjh).
EXHIBIT 13
PCAOB Inspections of Audits of Big Four/Mid-Tier Firms Versus Top 100 and Other Firms, 2009–2022
Drawing Different Conclusions from the Data
The PCAOB chair’s tough rhetoric regarding the audit profession’s performance is aligned with the recent deterioration in audit deficiency rates across all firm size segments. But it may unintentionally mislead the public by comparing current deficiency rates against an atypical 2020, COVID year benchmark. The author’s analysis of the PCAOB’s data suggest somewhat different, and perhaps more nuanced, conclusions can be drawn.
There are fewer, but more extensive, inspections.
The number of annual PCAOB inspections has decreased by 37% between 2009 and 2023, with larger (smaller) firms experiencing a 14% (55%) reduction in inspection activity. Based on the PCAOB’s own budget data, the average time spent on an inspection has tripled, going from 928 hours in 2009 to 2,713 hours in 2023. The PCAOB announced its intention to increase the number of engagements selected for review in 2024 among annually inspected firms and that future inspections would include further “additional procedures” to enhance the robustness of inspections.
The preliminary data suggests a significant course correction in audit quality may be underway.
Firms are responding.
Big Four and Mid-Tier firms are responding to higher-than-expected deficiency rates by decreasing their audit client base and improving the internal oversight over firm audit policies and procedures.
More inspections tied to better performance.
Since 2015, annually inspected firms have had significantly lower audit deficiency rates than triennially inspected firms.
Small firms struggle, but help is on the way.
While “Top 100” triennially inspected accounting firms have deficiency rates comparable to annually inspected firms, smaller firms have a significantly higher average deficiency rate than any other size groupings. The PCAOB has recently committed to providing additional resources to small audit firms.
There is an international dimension.
Overall, office location (domestic versus international) is not a major factor in explaining audit deficiencies. But firms should take note that audit deficiency rates in some countries (like Brazil, Canada, and Mexico) are noticeably higher than elsewhere.
Global networks add value to international audits.
Since 2016, GNFs report significantly lower international office audit deficiency rates than other firms.
A Big Four anomaly.
Big Four US office inspections have exhibited consistently lower deficiency rates than Big Four international offices.
Postscript
While 2024 inspection data is not complete, the results to date appear much improved. As of the most recent (July 24) 2025 PCAOB release, 254 Type 1.A deficiencies have been reported out of 687 PCAOB inspections (a 37.0% deficiency rate, compared to 43.7% in 2023). Improvements appear to be broad-based, with deficiency rates falling among Big Four firms (18.1% versus 28.2% in 2023), Mid-Tier firms (50% versus 63.8% in 2023), Top 100 firms (50.7% versus 59.0% in 2023) and all other firms (57.1% versus 59.0% in 2023). Hence, the preliminary data suggests a significant course correction in audit quality may be underway.
APPENDIX A
EXHIBIT 1
Inspections, Deficiencies, and Deficiency Rates of GNFs and Other Top 100 Firms Inspected Annually by the PCAOB (2009–2023)
EXHIBIT 2
Inspections, Deficiencies, and Deficiency Rates of Top 100 and All Other Firms Inspected Triennially by the PCAOB (2009–2023)
