PCAOB: Auditor, Audit Thyself

The board has proposed a new standard for accounting firms' internal reviews.
Sarah JohnsonFebruary 26, 2008

The Public Company Accounting Oversight Board has proposed a new standard that could stave off some of the audit deficiencies found during its inspections of accounting firms.

The new standard would tell firms how to conduct internal evaluations, known as “engagement quality reviews.” These reviews are usually conducted by a firm partner who provides an objective look at the audit work of another partner and his or her team.

“The engagement quality reviewers have a real potential to reduce after-the-fact audit failures,” Greg Scates, the board’s deputy chief auditor, said during a Tuesday board meeting.

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The Sarbanes-Oxley Act of 2002 mandated that PCAOB require registered audit firms to have this process in place. Until this proposal is approved by the PCAOB and the Securities and Exchange Commission, audit firms will continue to rely on their own policies as well as legacy standards the PCAOB adopted from the American Institute of Certified Public Accountants. However, only some of the firms regulated by the PCAOB are required to comply with those interim rules because they are not members of the AICPA’s SEC Practice Section.

In an October report, the board listed the lack of efficient partner reviews as one of the 11 main beefs the PCAOB has with small accounting firms. During its inspections, the PCAOB had found that some firms were using people with inadequate expertise to conduct the reviews. The reviewers — who Scates called a “backstop” to public-company audit reports — could have caught instances where documentation in an audit was lacking, the report suggested.

On Tuesday, the PCAOB unanimously voted to resolve any uncertainty in the partner reviews by releasing its new standard, Engagement Quality Review, for a public-comment period of 75 days.

The board members backed the proposal for taking a risk-based approach, meaning it calls on the reviewer to concentrate on areas that contain the highest risk. “By focusing the review on higher risks, the proposed standards would increase the likelihood of identifying and correcting deficiencies in the audit prior to the issuance of the auditor’s report,” said PCAOB Chairman Mark Olson.

Under the proposal, reviewers can be a partner or someone with a high level of experience and expertise that could opine on a particular engagement but not be directly involved in the audit under review. The reviewers could also come from another firm — which should help out staff-strapped auditors.

However, the guidance could bring added cost to the smaller firms if they do not already have a similar process in place to the one proposed by the PCAOB — or haven’t been conducting these types of reviews at all. For the most part, the large accounting firms are already doing what the new standard will require, said Chief Auditor Thomas Ray.