PCAOB Says Audit Firm Culture is Tied to Audit Quality

In September 2023, inspection staff launched an initiative to probe whether audit firm culture and the rising levels of audit deficiencies were linked. In addition to interviews, staff analyzed inspection results and other materials related to aspects of the quality control systems at the firms, including governance and leadership, engagement performance, and information and communication.

Key insights from the report include the following:

• Audit firm culture can drive audit quality—positively or negatively: The results of PCAOB staff interviews support the idea that audit firm culture can impact audit quality, for better or worse.
• Centralization and standardization may be correlated with audit quality: The report discusses how the degree of centralized and standardized processes, tools, and templates at the audit firms is important to ensuring consistent application and promoting audit quality. The staff observed that audit firms with cultures marked by more centralization and standardization appear to have fewer deviations in their procedures nationally and fewer deficiencies.
• The remote/hybrid work environment affects audit firm culture: Interview subjects suggested that the COVID-19 pandemic and the remote/hybrid work environment impacted the audit firms’ apprenticeship model for on-the-job training, dissemination of culture, and professional skepticism.
• Audit firms need to promote a culture of accountability to support audit quality: PCAOB staff observed that negative audit quality events—internal and external inspection deficiencies, restatements, and independence violations—at some audit firms are not sufficiently evaluated or attributed to firm personnel. In addition, there was a lack of timeliness of performance evaluations at certain audit firms, resulting in current-year negative quality events being considered in the subsequent performance year.
• Certain firm personnel may lack foundational skills: Some respondents had concerns about the competency of certain firm personnel and the appropriateness of how engagements are staffed. In particular, respondents also expressed concern that the push for the use of shared service centers is removing foundational skills and experiences from firm personnel.
• Audit leadership sends mixed messages: Some respondents indicated that audit firm leaders send mixed messages to line partners and other firm personnel about incentives and penalties for audit quality events. In the view of these respondents, audit firms need to ensure that the factors that drive adjustments to partner compensation are aligned with behaviors that promote audit quality and clearly communicated to firm personnel.

“Culture is crucial at audit firms, since it lays the foundation for the work auditors perform in our capital markets,” PCAOB Chair Erica Williams said in a statement. “Audit firm leaders can and should leverage the insights in our staff report to double down on their efforts to create cultures that reward integrity, accountability, and strong performance of audit work.”