PCAOB Prepares to Ramp Up Inspections

While the inspection team has doubled in the last year, to 120 people, the accounting regulator is still looking for personnel to manage the increa...
Craig SchneiderMarch 22, 2005

The Public Company Accounting Oversight Board is preparing to inspect hundreds of small accounting firms this year, compared with fewer than 100 inspections in 2004, according to the Securities Regulation and Law Report.

The board, created by the Sarbanes-Oxley Act of 2002, is required under that law to conduct triennial inspections of all firms that provide audit reports to fewer than 100 issuer clients. At a recent PCAOB forum, held in Chicago, of small audit firms and the businesses they audit, deputy director for inspections Chris Mandaleris reportedly told the audience that his department examined only 91 such firms in 2004.

According to Securities Regulation, Mandaleris added that the PCAOB would need to complete nearly 500 additional inspections by 2006 to meet its obligations under the law. (For a more puzzling side of these Sarbanes-Oxley requirements, see “For Auditors’ Eyes Only.”)

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Mandaleris noted that while the inspection team has doubled in the last year, to 120 people, he is still looking for personnel to manage the increased workload. “Our head count continues to grow,” the newsletter reported. “Our methodology is being refined and improved so that we will be able to do more.”

The PCAOB’s ambitious schedule also includes plans to release standards shortly that cover responsibility for fraud detection; auditing related-party transactions; auditing fair value measurements and disclosures; communications with audit committees; the confirmation process; engagement quality review; quality control; and assessing audit risk.

Mandaleris also reportedly noted that when scheduling inspection dates and times, inspectors would be sensitive to the fact that accounting firms are currently busy responding to client demands associated with tax season.

With respect to the quality control assessment, Mandaleris added that inspectors would be particularly mindful of the “tone at the top,” Securities Regulation noted. In cases where violations are suspected by either the firm or an issuer, the problem would be referred to the Securities and Exchange Commission, the Department of Justice, or another appropriate federal or state agency.

The forum was held in Chicago to provide auditors and audit committee representatives with insight into the PCAOB inspection process and the impact of new auditing standards. The board plans to hold five additional forums: in Fort Lee, New Jersey, on March 22 and 23; in Denver on April 26 and 27; in Pittsburgh on June 22 and 23; in Orlando, Florida, on August 4 and 5; and in Boston on October 20 and 21.