Blake Oliver

When Senator Elizabeth Warren publicly accused PCAOB Board Member Christina Ho of “downplaying atrocious findings” about audit quality, it got me thinking: Do these alarming statistics about audit deficiencies really tell the full story?

The numbers definitely grab attention: Audit deficiency rates rose from 29% in 2020 to 46% in 2023. These figures from the Public Company Accounting Oversight Board (PCAOB) suggest that nearly half of all audits reviewed contained deficiencies so severe that “the audit firm had not obtained sufficient appropriate audit evidence to support its opinion.” At face value, these statistics paint a troubling picture of the accounting profession.

In a conversation on the Earmark Podcast, I asked Christina to help me understand these numbers. Christina explained the gap between headline statistics and meaningful measures of audit quality.

Understanding the PCAOB’s Role

Before getting into deficiency rates, it’s essential to understand what the PCAOB does. Christina explains, “The PCAOB is responsible for making sure auditors who check the publicly traded companies’ financial disclosures are doing their job well.”

The PCAOB fulfills this mission by registering audit firms, inspecting their work, and enforcing standards through sanctions when necessary. The inspection program represents the largest part of the PCAOB’s operations, with different firms facing different inspection frequencies:

• The “Global Network Firms” (Big Four plus Grant Thornton and BDO) are inspected annually, with about 50 audits reviewed for each of the largest firms.
• Firms with more than 100 public company clients are inspected annually, with about 10% of their audits reviewed.
• Firms with fewer than 100 public company clients are inspected every three years.

The Misleading Mathematics of Deficiency Rates

When the PCAOB announced that 46% of audits reviewed in 2023 contained significant deficiencies, it received considerable attention. In our discussion, Christina pointed out several critical issues with how these numbers are presented and interpreted.

First, these audits aren’t randomly selected. The PCAOB uses a “risk-based approach” that deliberately targets audits they believe are likely to have problems. 

This selection bias fundamentally changes how the statistics should be interpreted. Christina pointed out, “We really can’t extrapolate the deficiency rate to the entire population of all audits because we did not take a statistical sample.”

Even more revealing is what these deficiencies actually mean. Despite the alarming definition, the PCAOB’s own reports include a critical disclaimer that Christina highlighted: “It does not necessarily mean that the issuer’s financial statements are materially misstated.”

In fact, less than 5% of these so-called deficient audits resulted in incorrect audit opinions—the outcome that would truly matter to investors. This stark contrast between the headline figure (46%) and the rate of consequential errors (under 5%) reveals how statistics without proper context can give the wrong impression.

Another significant issue is the PCAOB’s failure to differentiate between levels of deficiency severity. “Our deficiencies… we put everything in the same bucket,” Ho explained. “And in reality, not everything is the same in terms of impact and materiality.”

Unlike internal control evaluations, which distinguish between material weaknesses, significant deficiencies, and minor deficiencies, the PCAOB’s inspection reports do not make such distinctions. This makes it nearly impossible for investors to understand which deficiencies truly matter.

The Disproportionate Burden on Smaller Firms

Christina argued that the current inspection approach unfairly burdens mid-sized audit firms. While the largest firms have a smaller percentage of their audits inspected, firms just above the 100-client threshold face much more scrutiny.

“I personally think that our inspection program is disproportionately burdensome on these firms,” Christina said. This burden is so significant that some firms are intentionally reducing their client base: “They are trying to get rid of their audit clients to get under 100” to qualify for inspections every three years instead of annually.

This creates a troubling situation where firms avoid growth to escape regulatory burden. “I just don’t think it’s good for a very important part of an ecosystem to try to not grow,” Christina said. “We need to make sure we have resilience in the audit marketplace.”

The impact extends beyond individual firms to affect market competition and, ultimately, the capital markets themselves. When mid-sized firms deliberately avoid growth, it concentrates the market among the largest firms—limiting options, especially for smaller public companies.

The Political Fallout

Christina experienced firsthand how deficiency statistics can become political weapons when Senators Elizabeth Warren and Sheldon Whitehouse publicly accused her of “downplaying atrocious findings” after she questioned these metrics in a speech.

“I was very upset about being accused of lying,” Christina told me. “I thought it was very hypocritical of the senators, especially Senator Warren, to essentially bully me because I had a different view from her.”

Rather than reaching out for discussion, the senators sent a letter to the PCAOB Chair, which Christina said left her without “a proper avenue to respond.” This prompted Christina to respond via LinkedIn, where she received significant support from accounting professionals.

This incident highlights how statistics without context can be weaponized in ways far beyond academic disagreements about methodology.

The Search for Better Measures of Audit Quality

Given the problems with the PCAOB’s deficiency rate figures, how should audit quality be measured? Christina suggested several approaches that might be more meaningful:

1. Look at trends rather than isolated annual statistics. Christina said, “The best way to look at the deficiency rate is not by each year. The best way to look at that data is to be looking at a trend.”
2. Focus on restatements. Christina said, “Restatements is a much better metric…because that really measures the true impact to investors.” Restatement rates have declined over the past decade, suggesting improvement rather than deterioration in audit quality.
3. Consider greater transparency. When asked if revealing the names of companies whose audits contained deficiencies would be beneficial, Christina was open to the idea, though she acknowledged the need for broader stakeholder input.
4. Develop severity ratings. Creating a framework distinguishing between technical violations and substantive errors would provide context for interpreting deficiency findings.

Christina noted that measuring audit quality has been challenging because “audit quality is not quantitatively easily measurable.” And yet, the PCAOB’s approach to deficiencies is to treat all issues identically—regardless of severity or impact.

The PCAOB has been exploring “audit quality indicators” for approximately 15 years but has yet to develop more meaningful metrics. This lack of meaningful data makes it difficult to evaluate the effectiveness of the PCAOB’s oversight or the true state of audit quality.

Has Audit Quality Improved?

Christina believes the PCAOB has helped improve audit quality over the past two decades despite the challenges in measurement. When asked about evidence for improvement, she pointed to declining restatement rates and feedback from audit committee chairs and controllers who report improvements in audit and financial reporting quality.

“If you look at the data on the number of restatements and you look at the last ten, twenty years… restatement has been on the decline,” Christina said. “If you look at the AICPA/CAQ study that they released last year… if you talk to [audit committees], they feel that the audit quality has been improving.”

This more nuanced perspective indicates that, despite the worrying headlines about deficiency rates, the overall reliability of financial reporting might be improving.

Looking Ahead: The Future of Audit Oversight

As artificial intelligence and other technologies transform audits, Christina argues for “a more agile approach” to quality measurement—one that can adapt to technological change and focus on outcomes rather than inputs.

After talking with Christina, it’s clear to me that to move forward, we need to find a balance between regulatory oversight, an understanding of how audits work, and what affects the reliability of financial statements. If we don’t, the profession will get bogged down by misleading metrics that only check compliance boxes rather than enhancing what counts: protecting investors through trustworthy financial reporting.

Want to hear the entire conversation with Christina Ho about PCAOB deficiency rates, audit quality measurements, and her experience with political criticism? Listen to the complete episode of the Earmark Podcast.