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Audit Quality Report
Integrity is our purpose. Quality is our brand.
Deloitte US 2022 Audit Quality Report
Independence is integrity, professional skepticism, intellectual honesty, and objectivity—freedom from conflicts of interest. The people of Deloitte must remain unbiased and free from conflicts of interest with our clients, in fact and appearance.
Our independence requirements are governed by specific sets of policies and external rules and regulations, and apply to all Deloitte partners, principals, managing directors, and professionals, whether they are directly or indirectly involved in delivering audit and assurance services. The national managing partner for the Independence & Conflicts Network is responsible for overseeing approximately 500 professionals working in the network and managing the independence policies and related training, organizing, and staffing of the independence consultation function; monitoring firm, personal, and audit engagement-related independence compliance; and overseeing the Deloitte US Entities’ independence systems. The Chief Ethics and Compliance Officer is responsible for making sure appropriate disciplinary action is taken when policy or regulatory violations occur.
The importance of independence and ethics is a part of our culture, and our professionals are introduced to our standards and expectations for independence and ethics during their onboarding process as new hires, and additional trainings during the first 60 days of employment. We also conduct periodic mandatory training for our partners, principals, managing directors, and professionals related to specific ethics and independence-related topics. In addition to trainings, our readily accessible tools and resources support our professionals in meeting their independence and compliance requirements.
System of quality control
We believe an effective system of quality control (SQC) is crucial for the consistent performance of high-quality audit and assurance engagements, and we continue to make significant investments in the people, processes, and technologies that underline Deloitte’s SQC. Our SQC includes numerous elements, such as documenting key areas of the SQC processes and controls and performing procedures for testing the operating effectiveness of the SQC, including execution of a comprehensive SQC review program.
Used in conjunction with other metrics, Audit Quality Indicators (AQIs) further assist in developing and monitoring audit quality action plans and reporting on the progress of our audit quality journey. AQIs are integrated with ongoing Quality & Professional Practice Network monitoring activities.
In addition, proper timing and sequencing of audit activities, including timely reviews of work performed and the resolution of matters identified, are closely associated with high-quality audits. Audit quality milestones are established centrally to drive consistency of engagement teams in project management; timing of when work is done; and necessary focus on engagement staffing, including the sufficiency and skills, knowledge, and experience of assigned resources.
Regulators and standard setters in the United States and globally are focused on driving further improvements in firms' system of quality control. In November 2022, the Public Company Accounting Oversight Board (PCAOB) proposed a new standard that provides a framework for a firm's quality control system. In December 2020, the International Auditing and Assurance Standards Board released its revised suite of quality management standards, including International Standard on Quality Management 1 (“ISQM 1”). Effective December 15, 2022, ISQM 1 focuses on quality management at the firm level.
We are completing the implementation of ISQM 1, which will further enhance our proactive approach to managing the quality of engagements performed—identifying and addressing risks to audit quality and driving continued advancements in quality control processes.
We are utilizing a new technology platform to facilitate our ISQM 1 implementation and ongoing monitoring. This technology platform allows us to efficiently manage data across our SQC, enable identification of components of ISQM 1 where enhancements can be made, and allow for self-reporting of significant changes or findings, if any, in the design or operation of our SQC.
Our multidisciplinary business model
Our robust multidisciplinary business model is a significant asset that contributes to performing high-quality audits. In order to audit the most difficult and complex areas of a company’s business, it is essential for us to have a vibrant multidisciplinary organization where leading functional and industry subject-matter resources across a range of disciplines reside under one umbrella. The following are among the many benefits of our multidisciplinary business model:
- Immediate access to specialized, market-leading resources and experience that is crucial to performing high-quality audits
- Strength, capabilities, and expertise to make significant investments in audit and assurance quality, particularly as we invest in technology-enabled delivery of our services
- Industry insights through multiple lenses enhance our understanding of business risks
- Intellectual capital from other service lines is deployed back into our audit processes
- A thriving multidisciplinary organization attracts top-caliber talent from universities and the experienced talent market
We recognize there are risks inherent to this model, and we proactively manage these risks with controls and safeguards to ensure that the fulfillment of our public-interest mandate—performing high-quality audits—remains the bedrock of our professional services organization. We employ comprehensive independence-monitoring systems and processes to maintain compliance with all applicable regulations. Culture, leadership, and tone at the top are all critical components of managing our multidisciplinary business model to the benefit of our clients, our professionals, and the investing public. We have demonstrated that, when appropriately managed, having a robust multidisciplinary business model and executing high-quality audits are complementary to one another.
We began our transformation journey many years ago by establishing a vision and strategy focused on the digital audit. Today, we deliver a truly digital experience for audit and other assurance services—one that features advanced technology and data analytics, is grounded by our risk-based methodology and standardized workflows, and showcases our professionals’ skills and experience. As a result, we continue to elevate quality, provide objective insights, and deliver a differentiated audit and assurance experience.
We have invested hundreds of millions of dollars to transform the audit and other assurance services. Further, hundreds of US and global professionals comprise our dedicated audit transformation team, bringing the resources and best thinking from across Deloitte’s multidisciplinary organization, as well as our global network of member firms. The audit transformation team collaborates with technical and quality specialists, developers, designers, consultants, data scientists, and strategists to create innovative solutions and approaches that are transforming the way we deliver the audit and other assurance services.
Throughout our transformation journey, our innovations have been leading us to optimal digitization:
Annual talent survey
Our annual talent survey is part of our commitment to our high-impact working culture. The Simply Irresistible Organization™ employee engagement model comprises six indices that are used to calculate results for the annual talent survey. Scores that are higher than 80 are considered “best-in-class,” and “strong results” are scores between 70 and 80. In our most recent annual talent survey, five of the six indices increased by two or more percentage points with the sixth index remaining flat.
Recent talent survey results are:
With the continual change in accounting and auditing standards, regulations, and needs of the marketplace, accountants are in high demand, creating an increase in turnover. However, while our voluntary turnover increased, the number of hires outpaced attrition. We hired almost 2,400 professionals from college and university campuses in fiscal year 2022 (FY22), which is up from just under 2,000 in fiscal year 2021 (FY21). Our non-entry-level hiring more than doubled from almost 1,800 professionals in fiscal year 2021 to more than 3,700 in fiscal year 2022.
Shaping the future of the profession
As the largest professional services organization in the world, we have a responsibility to be forward-looking and committed to building a vibrant future for auditors and the profession. We are engaged in raising standards and helping investors and companies, as well as the general public and policymakers, appreciate and understand the auditor’s role. To that end, we are constructively engaged in the dialogue around audit reforms, quality standards, emerging market issues, assurance services, and other topics critical to shaping the future of the profession.
Understanding the needs of our stakeholders
As we continue to transform the audit, we believe it is imperative that our actions are informed by outside perspectives and stakeholder expectations. Ongoing collaboration with key stakeholders helps guide our efforts to improve audit quality. Leveraging insights and experience from across our multidisciplinary organization, we engage with audit committees, collaborate across the profession, and bring investors into the dialogue.
Executing quality audits
Our approach to a high-quality audit is underpinned by professional standards, and it combines qualified people, consistent processes, and innovative technologies. This includes our next-generation cloud-based audit delivery platform Omnia, which enables a differentiated, digital audit experience and integrates cognitive technologies, automated workflows, and advanced data analytics for a more streamlined and insightful audit.
Our audit process is dynamic; it is ever-evolving to keep pace with the changing demands of companies, investors, and other stakeholders. It recognizes that advances in the availability and management of large data sets and in statistical science are relevant to continuing to enhance the quality of our audits. It is fueled by innovation, as our investments in cloud technology and digital solutions are bringing artificial intelligence, automated workflow processes, and advanced analytics into the audit.
Our audit methodology is risk-based and adaptable, focused on what matters most. During the planning phase of the audit, we focus on the company’s business operations (including the financial reporting and internal control structures) and identify risks through consideration of changes in the industry, business, control environment, company personnel, complexity factors, and regulatory environment and then tailor the audit to respond to such risks. As an iterative process, we reevaluate risks of material misstatement throughout the audit and revise our audit plan as needed.
Audit & Assurance teams
The deployment of resources on our engagement teams is important to the execution of a high-quality audit. The engagement team’s composition varies depending on the size, nature, and complexity of the company’s operations. An Audit & Assurance partner or managing director has leadership responsibilities for the audit and the engagement team. The engagement team may also include other partners or managing directors and typically includes one or more of the following professionals: audit senior manager, audit manager, audit senior, audit staff, and relevant internal specialists and centers of excellence resources.
Leverage ratios of Audit & Assurance headcount
Every public company audit engagement is subject to an independent engagement quality control review. This review is performed by a partner designated by the leadership in our Quality & Professional Practice Network. The engagement quality reviewer evaluates the engagement team’s significant judgments and related conclusions regarding both the overall engagement and the preparation of the audit report(s) and determines whether to provide a concurring approval of issuance.
Use of specialists
Our robust multidisciplinary model—consisting of our Audit & Assurance, Risk & Financial Advisory, Tax, and Consulting services—allows our engagement teams to access the experience of our specialists in various accounting and auditing areas (e.g., tax, information technology, data analytics, financial transactions, actuarial estimates, environmental related estimates). Involving engagement team members with specialized skill and knowledge to assist auditors in executing our audit procedures drives the execution of high-quality audits. During the 2022 audit cycle, approximately 13% of total audit hours were performed by more than 7,100 specialists. This percentage can vary from year to year depending on specialized issues affecting the financial reporting of our clients.
Quality & Professional Practice Network
Our Quality & Professional Practice Network (the “Network”) is composed of national partners, principals, managing directors, and other professionals. This national team, which includes more than 130 partners, principals, and managing directors, is supplemented by experienced regional and local professionals and supporting technology. The Network’s primary activities include:
- To provide oversight, leadership, and direction on US and global quality activities
- To design, operate, and monitor our system of quality control, including monitoring and inspecting our audits
- To provide consultation resources with deep technical knowledge in accounting, auditing, industry, and risk
- To maintain audit manuals, policies, and guidance used by our professionals
- To develop publications, webcasts, and videos covering a variety of accounting and financial reporting topics
- To engage with regulators and standard setters
Technical professional practice leadership ratio
Monitoring our business for continuous improvement
Our dedication to delivering high-quality audits requires us to develop techniques to centrally monitor the progress of audits on a real-time basis, effectively analyze results, and understand the causal factors related to audit deficiencies identified through practice reviews and PCAOB inspections and be rigorous in our evaluation of both financial statement and internal control report restatements.
We have implemented quality monitoring programs with oversight by various groups within the Network focused on the performance of engagements in progress to assess the implementation of our quality priorities. These programs are designed to provide feedback to engagement teams, which can be incorporated into the audit prior to the issuance of the opinion. These programs also help inform whether the actions taken continuously improve audit quality are having the intended effect, or whether we need further actions, such as communications, training, or changes to our methodology, guidance, or tools. We leverage information obtained from our Assurance Insight & Analysis group and in-flight monitoring programs to continuously monitor audit quality and identify issues for timely resolution.
We serve as our own critic, and our practice reviews and monitoring processes aim to swiftly identify and course-correct practice deficiencies. Each year, we reassess the scope and focus of our quality monitoring programs based on feedback from our practice review and external inspection results and in response to enhancements to our audit approach and methodology, including from the adoption of new audit and accounting standards. Our monitoring programs are critical to achieving our continuous improvement objectives and enable us to ascertain the effectiveness of the actions we take to enhance audit quality.
Monitoring of a sample of engagements “in-flight” provides timely visibility into the effectiveness of updates or changes to the audit methodology and tools resulting from new standards or in response to feedback from internal and external monitoring activities. In-flight monitoring results are evaluated overall to determine whether additional communication and support to the Audit & Assurance business is needed with respect to adherence to the updates or changes to the audit methodology.
We perform approximately 200 inspections of completed audits annually in addition to procedures designed to test compliance with our policies.
Regulatory inspections and outside perspectives are also critical to raising standards and achieving quality outcomes. We value the feedback received through the external inspection process, including peer reviews, and utilize input from various sources to continually improve the quality of our audits.
Public portion of PCAOB inspection reports (Part I)
For SEC issuer engagements, the PCAOB performs rigorous inspections of public company audits. PCAOB inspections of audit engagements can result in observations that are made public through:
- Part I.A—Deficiencies that are of such significance that it was determined that the firm had not obtained sufficient appropriate audit evidence to support the audit opinion(s) on the issuer’s financial statements and/or internal control over financial reporting; and
- Part I.B—Deficiencies that do not relate directly to the sufficiency or appropriateness of evidence the firm obtained to support its opinion(s) but nevertheless relate to instances of non-compliance with PCAOB standards or rules.
Recent inspection results
Part I.A of our 2021 PCAOB Inspection Report, the most recent report published by the PCAOB, identified deficiencies in seven audit engagements. These comments did not result in the reissuance of our audit reports or the restatement of issuer financial statements. The PCAOB typically inspects approximately 55 audit engagements each year.
Part I.B of our 2021 PCAOB Inspection Report includes the following instances of non-compliance with PCAOB standards or rules related to more than one audit engagement: (1) in three instances there were matters that were communicated, or required to be communicated, to the issuer’s audit committee and related to accounts or disclosures that were material to the financial statements were not included as part of our analysis of critical audit matters; and (2) in two instances certain work papers required were not included in the final set of audit documentation.
Non-public portion of PCAOB inspection reports (Part II)
While we are proud of our most recent PCAOB inspection results, we are focused on continuous improvement. We carefully analyze inspection themes, identify causal factors, and design responsive remedial actions to PCAOB findings. Under the Sarbanes-Oxley Act of 2002, quality control criticisms contained in Part II of PCAOB inspection reports are publicly released only if the PCAOB determines that satisfactory remedial actions have not been taken within 12 months of the report’s issuance. Once the PCAOB determines that remediation activities have addressed quality control deficiencies cited in that year’s inspection report, or determines that portions will be publicly released because certain matters have not been addressed to its satisfaction, that inspection year is “closed.”
In January 2023, in closing our PCAOB 2018 inspection report, the Board determined that the remedial actions we took in response to one or more of the quality control observations in Part II of that report had been addressed to their satisfaction. However, the Board also determined that the remedial actions we took to address a finding related to instances of incomplete reporting of personal financial holdings in our platform that tracks and monitors the personal investments and financial relationships of partners, principals, managing directors, professionals and their immediate family members resulting in violations of firm policy were not sufficient, and the Board made that quality control criticism public.
We are intensely focused on strengthening and improving the timely and accurate reporting of personal financial holdings disclosures and all other quality matters that we observe in our internal reviews and that the PCAOB raises in its inspection reports.
Our remediation responses to Part II of the 2019 and 2020 inspection reports have been submitted and the PCAOB is currently reviewing the remediation responses.
For non-SEC issuer engagements, the AICPA triennial peer review process is conducted to provide reasonable assurance that Deloitte’s quality control systems are appropriately designed and in compliance with applicable professional standards. On our most recent peer review completed in 2020 we received a pass rating. Our next peer review will be in 2023.
We have a relentless focus on professional excellence and continuous improvement and, therefore, we take all inspection observations very seriously. In addition to holding our professionals accountable for inspection findings, we as a firm seize opportunities to enhance the quality of our audits and have taken the constructive feedback from past inspections to make changes that are yielding desired improvements in audit quality. We analyze and perform remedial procedures relative to each written inspection comment received. In addition, we perform analyses to identify the causal factors behind our positive inspection outcomes and written inspection comments, and we develop action plans accordingly to continuously enhance audit quality. Furthermore, we assess whether corrective actions to our SQC may also be appropriate and, if so, such actions are designed, implemented, and monitored.
Quality across the global Deloitte network
Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax, and related services. With approximately 415,000 professionals around the world, in more than 150 countries and territories, Deloitte has unmatched scale to deliver.
The Global Center of Excellence (GCOE) for Audit Quality aims to support Deloitte network member firms in promoting, enabling, and continuously enhancing the quality and consistency of PCAOB audits delivered across the globe. The GCOE activities support member firms in improving audit quality, overcoming barriers to consistent execution, and demonstrating Deloitte’s commitment to quality to our regulators and the marketplace.
These efforts have contributed to a significant improvement in PCAOB inspection results for Deloitte network firms outside of the United States over the past few years. The percentage of audit engagements with Part I.A deficiencies decreased 43% from 2015 to 2020.