30 minute read 11 Nov 2019
Our commitment to audit quality Ernst & Young LLP's 2019 report

Our commitment to audit quality — Ernst & Young LLP's 2019 report

By

EY Americas

Multidisciplinary professional services organization

30 minute read 11 Nov 2019
Related topics Assurance Audit quality

Our commitment to audit quality is central to our responsibility as independent auditors to perform audits that promote trust and confidence in the capital markets. 

As part of that responsibility, we want to help our stakeholders develop a better understanding of how we conduct our audits, how we monitor our performance and what we are doing to continuously improve the quality of our audits. This annual report is one way we provide that transparency. 

      10690 US professionals | 54% of new US audit partners and managing directors are women | 1:6 ration of Quality Network and Professional Practice partners to audit partners | 18.4% of US public company audit hours generated by specialists | audit 6 of the top 10 companies in Fortune 500 and 30% of Fortune 500 companies
      Our commitment to audit quality
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      1

      Chapter 1

      Our commitment to audit quality

      Our mission is to serve the public interest by performing high-quality audits now and in the future.

      How we define audit quality

      At Ernst & Young LLP (EY US), we define audit quality as providing reliable and independent audit opinions and informative communications that promote trust and confidence for stakeholders, delivered through globally consistent processes and innovative technologies by people who act with integrity, objectivity and professional skepticism.

      We understand the important role we play in the financial ecosystem, which also includes investors, regulators, audit committees and management. While we recognize that these stakeholders may have different definitions of audit quality, we view audit quality through the lens of the audit committees and investors we serve. That is, we understand that we serve the public interest by providing confidence and trust in the opinions we issue on financial statements and internal control over financial reporting.

      In this report, we describe the factors that we believe drive audit quality and how we measure our performance at the individual partner level, the engagement level and firmwide. We also describe new ways we are working to sustain audit quality. 

      Leadership, tone at the top and mindset 

      At EY US, our culture and communications emphasize that executing high-quality audits is our highest priority. We set a clear tone from the top with a culture that is focused on doing the right thing and speaking up.

      Our communications also emphasize our focus on our values, our global mindset, and our belief in the importance of diversity and inclusiveness, as well as the specific behaviors we have identified as contributing to audit quality. Our leaders deliver these messages consistently in town hall meetings, training sessions, all-hands webcasts and emails, and partners and managing directors reinforce them at the team level. 

      Accountability is also a key aspect of our culture. All of our professionals are held accountable for the quality of their work, including our leaders and professionals from other service lines who help us execute audits.

      Our values 

      • People who demonstrate integrity, respect and teaming
      • People with energy, enthusiasm and the courage to lead
      • People who build relationships based on doing the right thing

      We also continue to focus on emphasizing the specific behaviors we have identified as contributing to audit quality and how our professionals incorporate them into their daily activities and interactions.  We believe that our focus on these behaviors has improved audit quality, and our monitoring efforts confirm that we have identified the right behaviors.

      behaviors chart

      Delivering high-quality audits across the globe 

      EY US is a member of a global organization that is committed to globally consistent, high-quality audits. This structure provides a unifying culture and a shared set of values for auditors at EY member firms around the world. It also enables large-scale investments in technology, training and methodology that would be difficult for member firms to achieve on their own.

      As a result, auditors at all EY member firms around the world use the same audit technology and the same audit methodology, and they are evaluated against common internal quality objectives, regardless of their location.

      The EY global organization’s Sustainable Audit Quality (SAQ) program, which reflects our collective commitment to conducting globally consistent high-quality audits over time, continues to be the top focus for the Assurance practice at EY member firms around the world. It establishes a strong governance structure that enables each member firm to provide high-quality audits.

      Our system of quality control

      Our system of quality control is the foundation for how we consistently perform high-quality audits. Our approach is (1) to promote a culture of audit quality, (2) prevent and detect risks to audit quality and (3) have all our people understand their roles and responsibilities, including their responsibility to be accountable for the quality of their work. 

      We view our system of quality control as the foundation for consistently performing high-quality audits. That’s why we continuously review our processes and controls and make investments in enhancing them.
      John L. King
      US Vice Chair of Assurance
      john-king

       

       

       

      Our multidisciplinary strategy

      Our multidisciplinary model allows us to build our teams by including EY professionals who focus on tax matters, IT and valuation in the US and throughout the EY global organization who share our values. These professionals help us deliver high-quality audits at a time when business models and transactions are changing rapidly and increasing in complexity. Our audit professionals and our specialists in other fields collaborate throughout the audit because we believe this approach enhances the quality of our audits.

      Our multidisciplinary model also gives both EY US and the EY global organization the scale and resources to invest in digital audit technology and other cutting-edge technologies that are reshaping the way we perform our work.

      In fiscal 2019, our specialists accounted for a total of 18.4% of our US public company audit hours, up 0.5 percentage points from 2018. IT specialists accounted for 10.8% of US public company audit hours. Tax and valuation specialists’ time represented 6.4% and 1.2% of total US public company audit hours, respectively.  

      Independent advice on audit quality

      We value independent perspectives and are committed to incorporating them into our efforts to further strengthen audit quality, risk management and our system of quality control. Leaders of the US Firm meet regularly with our three-member Independent Audit Quality Committee (IAQC) and seek the IAQC’s feedback and advice about aspects of our business, operations, culture, talent strategy, governance and risk management that affect audit quality.

      In their discussions with the IAQC, the leaders of the US Firm focus on gaining fresh insights on areas to drive improvements in audit quality and whether we should consider taking additional actions.

      The inaugural members of our IAQC have extensive experience with public company audits and financial reporting and provide us with a range of valuable perspectives represented in the financial reporting ecosystem.

      In its first year, the IAQC has focused on gaining an understanding of our operations as well as insights into audit quality measurement, audit technologies and our talent strategy. The IAQC has also focused on the nature and effect of our engagement with selected key stakeholders in the capital markets ecosystem.

      We respect the work EY US is doing and welcome the opportunity to provide independent perspectives to EY US as a part of the Firm’s continued focus on enhancing the quality of audits on which our capital markets, investors and other stakeholders rely. In our early efforts, we are seeking to engage across EY US and with EY stakeholders to better understand the Firm’s system of quality control, risk management approach and culture.
      F. William McNabb III, Jeanette M. Franzel and Charles H. Noski
      We believe in diverse points of view in all aspects of our business. In a dynamic and fast-paced world, audit quality is not static, and the IAQC’s independent perspective is an important contributor to continuously strengthening audit quality, which is central to our mission.
      Kelly Grier
      US Chair and Managing Partner
      kelly-grier

       

       

       

      Engagement with stakeholders

      Our leaders actively engage in discussions with officials at the Public Company Accounting Oversight Board (PCAOB) and the Securities and Exchange Commission (SEC) as a critical part of our efforts to improve audit quality. We recognize that audit quality has improved significantly since the PCAOB was created by the Sarbanes-Oxley Act in 2002. Investor confidence in the reliability of financial reporting has also increased.

      Issuing this annual report and finding ways to provide additional data and context about our audit practice each year is one way we work to make the audit process more transparent to investors, audit committees and other stakeholders. Our leaders have also worked with their counterparts across the profession to develop a framework for reporting on audit quality to increase the consistency of the data firms include in reports like this.

      We also continue to issue thought leadership aimed at improving the quality of financial reporting and helping audit committees and management understand new accounting standards and emerging technologies, such as blockchain technology.

      Information security and privacy

      Members of the EY global organization use a globally consistent and regionally based approach to information security that incorporates aspects of people, process and technology in how we protect information and technology assets. The global organization invests heavily in protective and detective technologies, and actively monitors our systems. One of the most important elements of our strategy is maintaining a security-aware culture enabled by training and risk management communications.

      EY US maintains robust information security and data privacy programs, consistent with industry standards and applicable legal requirements, designed to protect against unauthorized disclosures of data and attacks on our network. Our policies for protection of data generated by the companies we audit are updated on a continuous basis to reflect the changing nature of risks and privacy legislation.

      Safeguarding the confidentiality of the information we receive from the companies we audit is core to our IT strategy and our digital audit strategy and is increasingly important as we continue to transform our audits through the digital analysis of large amounts of company data. 

      Innovating the audit
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      Chapter 2

      Innovating the audit

      We are deploying a truly digital audit that combines the talents of our diverse workforce with the power of advanced technology to improve audit quality and the experience of our people. We are also continuing to innovate.

      Leveraging technology to improve audit quality 

      We continue to expand our use of digital audit technology. That means using data analytics in every phase of the audit to help us develop an even deeper understanding of a business and its financial reporting, enhance our risk assessments and obtain audit evidence based on full populations of data. Our technology helps us spend the right amount of time responding to key risks throughout the year.

      The EY Canvas platform is the foundation of our audit technology. All EY teams around the world use it to apply the EY audit methodology and manage their day-to-day audit work. This global platform helps our teams track their progress and communicate with team members in other locations, which is especially helpful in multinational audits when our US auditors are supervising the work of auditors from other EY member firms.

      EY Canvas also enables our teams to securely communicate with and obtain data from the companies we audit and provide them with real-time status updates. This enables us to manage the audit more effectively, with less disruption for the companies we audit.

      The EY global organization continues to add features to EY Canvas that reduce the effort required to perform administrative tasks and help our teams spend more time focused on areas of the audit that require professional judgment. The EY Canvas platform now features solutions that automate routine audit procedures and processes, such as a solution that sends out and receives requests to confirm the Trade Receivables balances with customers. 

      The digital audit
      One technology platform. One global audit.

      Over the past year, our teams continued to make significant progress in securely capturing the large amounts of audit-relevant data generated by the companies we audit and using the EY Helix suite of data analytics to analyze full populations of data rather than samples.

      EY Helix analyzers can be used in every significant aspect of an audit, regardless of size, and many of our teams are building custom solutions to audit more effectively.

      As a result, our auditors gain a deeper understanding of a company’s processes and can better identify and focus on the most important risks in an audit. They ask better questions and spend more time on analysis than on routine tasks, enhancing professional skepticism.

      In a 2019 survey conducted for the EY global organization by an independent research firm, business leaders ranked the EY US audit practice No. 1 among the Big Four in expertise in advanced technologies and data analytics.

      Having access to a company’s data allows us to proactively identify unusual transactions or events and discuss them with management. We now have the ability to focus on issues in real time and consider the audit implications immediately.
      Thomas J. Kornya
      US Deputy Vice Chair of Assurance
      thomas-konya

       

       

       

      Supporting our teams with the 10x Accelerator

      To accelerate our use of technology in our audits, EY US continues to invest in the centralized service delivery model we call our 10x Accelerator. By providing our teams with access to more than 500 data analytics professionals who can help them efficiently capture data from the companies we audit and effectively use it in the audit, our 10x Accelerator has inspired confidence in our teams and sparked a cultural shift.

      We continue to invest heavily in training our data analytics professionals to support our teams. This year, we brought together nearly 300 of our digital coaches for the first ever Digital Coaches Academy. During this event, the digital coaches shared knowledge and leading practices, received advanced training in how to use our analyzers, brainstormed about how to effectively support our teams and learned about emerging technologies. 

      To make sure our people are well-equipped to use our digital solutions, we have expanded our digital training. We are also driving quality by integrating Quality Network professionals into our digital support network activities and developing training and materials to make sure we consistently execute high-quality digital audits.

      The power of technology is its ability to unlock the talents of our people as we strive toward our overarching ambition to provide trust and confidence in the capital markets. That’s why we invest heavily in training to expand the skills of our people.
      Scott Zimmerman
      Assurance Innovation Digital Leader
      scott-zimmerman

       

       

       

       The graphic below lists certain analyzers in our current EY Helix portfolio. In addition, we continue to develop sector-specific solutions.

      Financial statements

      In our latest audit cycle (mostly audits of 2018 financial statements), 90% of our teams on large public company audits incorporated the use of these analyzers into their audit plans, and the number of teams using data-driven audit procedures to obtain substantive evidence increased by 50% from the previous year.

      Emerging audit technology

      We are making significant investments to both take advantage of emerging technologies and to proactively address technological changes at the companies we audit.

      For example, our teams can use the EY Blockchain Analyzer to review cryptocurrency business transactions, among others. The analyzer is designed to help our audit teams gather a company’s entire transaction data from multiple blockchain ledgers, reconcile the data with what is in the company’s records and identify items for follow-up.

      The EY global organization is also using artificial intelligence to develop solutions that enable our auditors to review contracts and other documents such as invoices, bank statements and broker statements quickly and more accurately than if they did so manually. 

      Our people
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      Chapter 3

      Our people

      Our people are critical to our ability to deliver high-quality audits. That’s why attracting, inspiring, retaining and developing great people and promoting a culture of belonging are central to our purpose.

      Attracting exceptional talent

      We recruit talented people who share our values and our commitment to executing high-quality audits. We stress the importance of the work we do as auditors and the value of the EY brand in our campus recruiting and internships. This year, our audit practice hired over 2,000 people from college and university campuses, roughly the same number as in previous years. 

      More than 70% of our campus hires this year have first-hand experience with EY, having previously worked with us as interns. The fact that they want to work with us full-time underscores the strength of our business, our culture and our ability to retain talented professionals.

      We increased our emphasis on hiring people who have both an accounting degree and a major or minor in data analytics, management information systems or computer information systems. These recruits now represent close to 10% of our campus hires in our audit practice, and we plan to increase that percentage over time.

      Our reputation as a great place to work and our culture of belonging enhance our ability to attract exceptional people. For example, we are the only Big Four firm to have made Fortune magazine’s 100 Best Companies to Work For®  list for 21 consecutive years. 

      EY US is widely recognized as a great place to work, as demonstrated by the following:

      • Fortune magazine’s 100 Best Companies to Work For® list for the 21st consecutive year
      • DiversityInc’s Top 50 Hall of Fame recognition for companies that have achieved a No. 1 ranking on the publication’s Top 50 Companies for Diversity list
       

      Leveraging diversity and promoting inclusiveness

      Diversity and inclusiveness (D&I) is central to our ability to deliver high-quality audits. We create high-performing teams when we maximize the power of diversity and bring together professionals with different opinions, experiences, perspectives and skill sets.

      This year, 54% of the audit professionals we promoted to partner or managing director were women or minorities. In our campus hiring, 48% of our recruits in fiscal 2019 were women and nearly 32% were minorities. 

      Percentage us audit partners who are women or minorities

      Our retention rates for women or minorities at the senior manager and manager ranks and at the senior and staff ranks have improved over the past three years and are now the same as our overall retention rates of 82% and 76% for these groups, respectively.

      We also monitor the percentage of partners and managing directors in leadership positions who are women or minorities, including those who are in charge of audits. The percentage of women or minority partners in charge of audits rose to 26% from 23% last year. The percentage of women partners who lead our most complex multinational audits is also rising. We expect women to lead 23% of these audits for periods beginning in 2020, up from 11% three years earlier.

      We have also been recognized for D&I efforts by the following organizations:

      • Working Mother magazine – 100 Best Companies (Hall of Fame, Top 10)
      • National Association for Female Executives – Top Companies for Executive Women
      • Human Rights Campaign – 100% Corporate Equality Index rating reflecting our inclusive workplace for lesbian, gay, bisexual and transgender people
      • Disability Equality Index – top-scoring companies list
      Percentage of women or minorities in our US audit practice

      The right people at the right time

      We are focusing on strategic workforce planning to make sure we have the right people with the right skills at the right time. Our efforts include analyses to predict future retention rates and what our business needs will be.

      Identifying and developing partners who can lead our most complex and most challenging multinational audits when more senior partners retire is critical to our ability to deliver high-quality audits. We are strengthening and expanding this group of partners by making sure they have the appropriate experiences to develop their skills.

      We also recognize and reward our top performers to make sure we have the continuity of skills and experience we need to perform high-quality audits, especially on our most complex engagements. In a significant change to long-standing practice in the profession, we are beginning to promote top performers when they’re ready, rather than requiring them to complete a specified number of years of service in each rank.

      We’ve also launched a program to recognize audit teams and individuals who exhibit the behaviors we believe contribute to audit quality. Any partner or managing director can nominate a team or individual for this honor, which includes recognition in communications from our leaders. 

      Number of us audit partners and professional staff

      An integral part of our talent strategy is our focus on our professionals’ well-being and vitality. We introduced two one-week office closures this year — a summer break and winter break, when our professionals can disconnect because everyone is out of the office at the same time. In addition, we launched a pilot platform called Well-being Communities, which connects audit teams to renowned experts in fields such as positive psychology, digital well-being, the power of gratitude, finding balance and optimizing energy. 

      Average annual hours in excess of 40 hours per week by rank

      Many of our professionals worked more hours throughout the year than they did in the previous year to audit the implementation of certain new accounting standards, to prepare for reporting on critical audit matters and to implement our new approach for understanding key business processes. We continue to assess workloads of our executives to make sure they have the time to execute high-quality audits and continue to put in place measures to reduce hours.

      Our retention rate for top-rated senior managers and managers and for seniors and staff far exceeded the overall retention rates for both of those groups.

      US audit overall staff through senior manager retention rate by rank
      Fiscal 2019 retention for top-rated US audit staff

      Developing our people

      We have a deep commitment to enhancing the growth and development of our professionals and making sure they have the right skills to succeed as the audit evolves.

      On-the-job coaching and supervision for less-experienced staffers is critical to delivering high-quality audits. That’s why we focus on maintaining our ratios of executives to less-experienced members of our audit teams. Our partners and managing directors who coach, mentor and supervise more junior professionals have on average 21.5 and 19.3 years of service, respectively. 

      Ratios of audit executives to other audit professionals

      In our training, we continue to focus on teaching our professionals how to think critically and apply the knowledge they have gained. In the classroom, our professionals work on simulations of the audit experience and focusing on risk, understanding professional standards and evaluating whether they have sufficient appropriate audit evidence, all with professional skepticism and due care. 

      We proactively invest in EY professionals to inspire them and help them deliver at the highest levels. This involves building future leaders, encouraging diversity and inclusiveness, recognizing and rewarding teams and individuals for their commitment to quality, and fostering vitality.
      Becky Burke
      Assurance Talent Leader
      becky-burke

       

       

       

      The skills and mindsets we need

      We also made significant investments this year in training our people on the effective use of data analytics, delivering a total of 132,000 hours of training on this topic, up 36% from the previous year.

      As they have in years past, our audit professionals exceeded our requirement to complete 40 hours of continuing professional education in any given year. 

      Executing high-quality audits
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      Chapter 4

      Executing high-quality audits

      We work with companies that share our commitment to quality and build high-performing teams that have the right skills and capacity to perform a high-quality audit. We support them with coaching and consultations. We also leverage data, so we can proactively identify audits that may require additional support to manage and mitigate risks in the audit.

      Working with the right companies

      We focus on making sure the companies we audit share our commitment to quality and transparency in financial reporting. Our rigorous firmwide assessment and approval process, conducted by our Assurance practice and its leaders, helps us evaluate risk and identify the companies we want to audit, considering factors such as management’s integrity and approach to meeting its financial reporting responsibilities, the company’s financial condition and the strength of its audit committee.

      Our Professional Practice group, which operates independently of our regional audit practices, also reviews and approves the decisions about which companies we will audit. As part of the process, which is an important element in our system of quality control, we develop an overall risk designation for each audit, based on the risk factors specific to the company.

      Market share

      We continue to have the leading market share among auditors of Fortune 500 companies (30%), Fortune 1000 companies (30%) and Russell 3000 companies (25%). We also audit six of the top 10 companies in the Fortune 500, giving us the largest market share among auditors of that group. 

      Number of public companies we audit

      The results of the latest brand survey conducted by an independent research firm for the EY global organization indicate that business leaders recognize our commitment to audit quality. Our EY US audit practice ranked first among the Big Four in categories such as (1) best mix of talent, knowledge and skills, (2) strongly recognized for technical quality, (3) deep industry expertise, (4) globally connected and consistent, (5) diverse teams and culture, and (6) proud to bring to the boardroom. As discussed earlier, we also ranked No. 1 among the Big Four in the category of “expertise in technologies and data analytics.”

      Establishing the right team

      The partner in charge of the audit sets the tone for the team and has overall responsibility for the audit. On all public company audits, another partner serves as engagement quality reviewer and evaluates significant judgments made by the team. The engagement quality review is an important element in our system of quality control.

      When we assign partners to these roles, we consider their skills, workload and experience with a particular industry and with auditing internal control over financial reporting in addition to the SEC’s partner rotation requirements. Our leaders also consider the company’s risk designation and the risk factors identified in our firmwide assessment process when determining assignments.  

      About 54% of our audit partners serve as the partner in charge of a public company audit, and they each lead an average of two public company audits. If audit partners who serve as engagement quality reviewers on public company audits are included, the percentage rises to 73%. Our other audit partners serve as engagement partners to gain experience, in quality or leadership roles, or as partners in charge of private company audits. To make sure our partners and managing directors have enough time to execute quality audits, we also review their workloads semiannually and when the scope of an audit changes significantly. We also perform an annual review of each team to make sure we are staffing our audits with audit professionals and specialists who have the right skills and capacity to execute quality audits, given the risk factors identified in each engagement.

      Shared services

      The professionals in shared service centers that support the EY global organization perform certain audit procedures and other tasks under the supervision of our US audit teams. Our shared service center personnel execute less-complex audit procedures to help our audit teams devote more time to more complex aspects of the audit. In fiscal 2019, shared service center professionals accounted for 12% of US public company audit hours.

      Managing the audit

      We have long believed that strong project management, including timely supervision and review by audit executives, is an important driver of audit quality. Our experience indicates that teams that track and complete their work at the appropriate time, including reviews by audit executives, execute higher-quality audits.

      Our milestones program drives strong project management, discipline and timely executive involvement. It focuses our teams on monitoring progress and completing procedures, related documentation and reviews to meet certain milestones by a specified date for key phases of the audit.

      While a significant amount of audit work needs to be completed at or after year end, our milestones program helps our teams perform as many tasks as possible before that busy period. In recent years, our teams have been able to perform 35% of their work three months before the fiscal year end of the company under audit and about 60% of their work before the fiscal year end. Performing work earlier in the audit cycle gives teams more time to address any issues that arise before the year-end crunch.

      Our teams use EY Canvas to track the progress of their audits in real time. Our Quality Network also uses EY Canvas to track teams’ progress on milestones and identify teams that may need coaching or more resources to keep the audit on track in a timely manner.

      Performing the audit

      Our teams develop a deep understanding of key business processes and the risks involved by applying an approach that leverages the power of teaming and builds quality in at the source. 

      Under the approach, which we implemented last year as Project Insight, all of our teams that perform integrated audits meet early in the audit cycle and collaborate with IT, tax and valuation professionals to drive a deeper understanding of key business processes and risks. Our senior executives provide timely on-the-job coaching and supervision when the work is being performed. As a result, our teams are able to resolve issues earlier in the audit.

      We also reimagined our audit documentation to more readily pinpoint risks and more clearly document how transactions are processed and recorded. This approach is enhancing audit quality and enabling our people to ask better questions about the company’s processes and risks. 

      We are committed to supporting our people and providing the resources and training they need to improve the quality of their audits and exercise professional skepticism. That’s why we are leveraging technology and have reimagined our approach for understanding the risks in key business processes.
      James R. Estes
      US Vice Chair of Professional Practice
      jim-estes

       

       

       

      Supporting our teams

      Our Quality Network focuses on proactively improving audit quality by coaching our audit teams, advising them on audit methodology matters, providing training and executing various risk management and quality control procedures, such as analyzing workloads and reviewing staffing. Members of the Quality Network identify teams that need help partly by leveraging the risk designation and risks identified during our firmwide assessment process.

      Because the roughly 150 professionals who make up our national Quality Network are embedded in our regions, they have frequent contact with teams and are able to identify and proactively address emerging risks, including industry-specific risks. They’re also able to share that knowledge across the practice.

      We focus on proactive risk management and providing the necessary support and enablement to our audit teams to execute with high quality. Our processes are designed so that we can get in front of potential issues.
      Linda Lam
      US Director of Quality Implementation
      linda-lam

       

       

       

      In the upcoming audit cycle, our Quality Network plans to engage with approximately half of our teams on public company audits by providing coaching or advice. Additionally, frequent informal discussions occur between Quality Network professionals and audit teams. Our monitoring of the effectiveness of this coaching indicates that it helps our teams execute well and it promotes high-quality audits.

      I have regular contact with our teams in the field on emerging or challenging audit issues and provide real-time guidance to help teams resolve difficult auditing questions.
      Kaki Giauque
      Control and Audit Methodology Leader – US-West Region
      kaki-giauque

       

       

       

      We leverage key audit quality indicators and other data about our teams’ progress toward meeting milestones and providing timely executive involvement, so we can proactively identify those that may need additional help.
      Randall Duncan
      Quality Implementation Leader – US-Central Region
      randall-duncan

       

       

       

      Our Professional Practice group, which includes approximately 120 partners, supports our audit practice by consulting with our teams on difficult accounting, auditing, and SEC and other regulatory matters. Our Professional Practice group also provides audit teams and the companies we audit with guidance and thought leadership, develops materials to help our teams deliver high-quality audits, performs risk management activities, evaluates our quality control system and operates our monitoring and internal inspections programs.

      Our ratio of Quality Network and Professional Practice partners to audit partners remained consistent in fiscal 2019 at 1 to 6. 

      Engagement with audit committees

      Our audit partners meet regularly with audit committees to share information on risks, the company’s progress in implementing major accounting standards, insights about the business and engagement-specific audit quality indicators. We have recently revamped our audit committee materials to improve the quality and focus of our interactions with the audit committee.

      Cybersecurity

      Business risks, including cyber risks, are addressed by audit procedures when those risks could result in a material misstatement of the financial statements. We obtain an understanding of a company’s processes and controls that relate to IT and are relevant to the audit. The auditor would need to consider the effect on financial reporting, including disclosures, and the effect on internal control over financial reporting if information about a material breach is identified.

       

      Monitoring
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      5

      Chapter 5

      Monitoring

      Monitoring the effectiveness of our actions and performing robust root cause analyses of positive and negative audit performance are key to our system of quality control.

      Early monitoring of in-progress audits

      Our reviews of certain public company audits prior to the issuance of the related audit report are an important early monitoring component of our system of quality control. We conduct these pre-issuance reviews to provide timely feedback to teams and to help us determine whether the actions we are taking to improve audit quality are achieving our objectives or whether enhancements to our training, guidance or tools are required during the current audit cycle.

      In the current audit cycle, we are focusing on how our teams are using our approach for performing and documenting our risk assessment procedures, nonrecurring events, auditing the company’s reporting under the new leases standard, and our reporting on critical audit matters.

      Internal inspections of completed audits

      We conduct internal inspections of selected engagements after we issue our auditor’s report. In these inspections, which we call audit quality reviews, we focus on specific audit areas of an engagement for compliance with professional standards, regulatory requirements and our policies and to evaluate audit quality. Audits are selected for review based on risk, including factors such as how long it has been since a partner’s last inspection and the results of that inspection, along with the complexity of the audit.

      Turning root cause analyses into actions

      We use the results of our root cause analyses of both positive and negative outcomes to design the actions we take to improve audit quality. We also use this information to obtain meaningful insights into the effectiveness of firm actions to improve our system of quality control.

      Independence monitoring

      Independence from the companies we audit is foundational to providing trust and confidence to the capital markets.

      Our policies require managers through partners to record securities and other financial relationships held by them and their immediate family members in the Global Monitoring System, which initially assesses and then monitors the permissibility of the securities and financial relationships. Managers through partners are required to have automated feeds from their brokers to make sure the records are updated in a timely fashion.

      All EY US professionals who work on audits and certain others, based on their role, are also required to confirm compliance with our independence policies and procedures each quarter.

      Restatements

      We monitor restatements of the financial statements of the companies we audit and evaluate whether there are any trends that require additional action or changes to our system of quality control.

      The data below is based on the approximately 1,500 issuers that we audit, which includes SEC registrants and mutual funds. The number of mutual fund issuers was approximately 550 funds in each of the past three years. 

      Restatements
      External inspections
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      Chapter 6

      External inspections

      The PCAOB conducts annual inspections of the audit work we perform and aspects of our Firm’s quality control system. We value the PCAOB inspection process and believe that it has led to improvements in audit quality.

      The role of the PCAOB

      We support the PCAOB’s efforts to innovate and explore new ways to prevent audit deficiencies and report on its inspection findings, including increasing its focus on a firm’s system of quality control. As discussed earlier, we have been focusing on enhancing our system of quality control over the past few years. We agree with the PCAOB’s emphasis in this area.

      Part I of the PCAOB report

      Our 2017 inspection results were generally consistent with those in the previous two years. 

      Part 1 of the pcaob report

      The report on our 2017 inspection results, which generally covers our audits of 2016 financial statements, is the latest the PCAOB has released.

      Part II of the PCAOB report and status of inspection reports

      This nonpublic section of the PCAOB’s inspection report provides observations on a firm’s system of quality control.

      The PCAOB may make public any quality control deficiencies identified in this section of the report if they are not addressed to the PCAOB’s satisfaction within 12 months of the report date.

      The PCAOB issued its 2017 report in October 2019, and we will submit our response no later than September 2020.

      Peer review

      We participate in the AICPA peer review program that requires a review every three years of our system of quality control for our private company audit practice. Grant Thornton is performing our latest review (primarily of audits for the year ended 31 December 2018), and we expect to receive a report in December 2019.

      Summary

      EY US is committed to audit quality and to helping EY member firms around the world conduct globally consistent, high-quality audits sustained over time.

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      Related topics Assurance Audit quality