When the Private Becomes PublicBy Francine • Feb 15th, 2007 • Category: Pure Content
“Under the Sarbanes-Oxley Act and the Board’s rules, portions of an inspection report that deal with criticisms of, or potential defects in, the firm’s quality control systems are not made public if the firm addresses those matters to the Board’s satisfaction within 12 months after the report date. Those portions are made public, however, if (1) the Board determines that a firm’s efforts to address the criticisms or potential defects were not satisfactory, or (2) the firm makes no submission evidencing any such efforts. In the list below, a double-asterisk (**) indicates that the publicly available report has been expanded to include some or all such portions of the report. For additional information, see PCAOB Release No. 104-2006-077, The Process for Board Determinations Regarding Firms’ Efforts to Address Quality Control Criticisms in Inspection Reports (March 21, 2006).”
As of February 15, 2007, there are 403 Inspection Reports, for 396 different firms. (The Big 4 and Grant Thornton, RSM McGladrey and BDO Seidman have two reports each that are now published.) Of the 396 firms that have published reports, only five (5) have met the criteria described above for the expansion of their publicly available report. Only 5…
Find them here.
What’s still not available to the public are the comments made on the Part 2 audit topics for the majority of the firms, including the largest. The Part 2 audit topics and any exceptions relate to how well the firm is being managed and how well they are complying with other laws and regulations. These are the areas that the average former audit partner (or senior manager) being hired by the PCAOB as an inspector is least qualified to inspect. They know how to audit and they know their GAAP and they should know the accounting standards that apply to very technical situations. But unless these professionals have managed the “business” side of the business at the most senior level, which most have not, they are not going to be able to evaluate most of the following points and are probably going to be reluctant to criticize the judgment, the business judgement, of their former partners and colleagues.
Unfortunately, the inspections process started up slowly, so the first reports for the Big 4 were based on the 2004 calendar year. In PwC’s case, for example, members of the Board’s inspection staff (“the inspection team”) performed an inspection of PwC from May 2004 to January 2005. They did not issue their report until November 17, 2005. PwC had then until November 17, 2006 to respond to any deficiencies noted in the 2004 Part 2 report. That is, they had until the end of 2005 to tell the PCAOB, in private, how they were going to address any issues related to their overall audit quality control environment and overall firm management. This is a full two years after deficiencies, if any, existed. For 2005, the inspection report was issued December 14, 2006. It will be interesting to see if a large firm will be considered non-responsive if they have items repeat or do not make sufficient progress on any items, now that we have had more than one inspection in seven cases.
From the PwC Inspection Report for 2004:
Review of Quality Control System
In addition to evaluating the quality of the audit work performed on specific audits, the inspection included review of certain of the Firm’s practices, policies and procedures related to audit quality. This review addressed practices, policies, and procedures concerning audit performance and the following seven functional areas:
(1) tone at the top;
(2) practices for partner evaluation, compensation, promotion, and
assignment of responsibilities;
(3) independence implications of non-audit services; business ventures, alliances and arrangements; and commissions and contingent fees;
(4) client acceptance and retention;
(5) the Firm’s internal inspection program;
(6) practices for establishment and communication of audit policies, procedures and
methodologies, including training; and
(7) the supervision by U.S. audit engagement teams of the work performed by foreign affiliates on foreign operations of U.S. audit
Any defects in, or criticisms of, the Firm’s quality control system are discussed
in the nonpublic portion of this report and will remain nonpublic unless the Firm fails to address them to the Board’s satisfaction within 12 months of the date of this report.