The Public Company Accounting Oversight Board (PCAOB) has responsibility for monitoring public accounting firms that provide audits for publicly owned companies. Among the duties assigned to the PCAOB was “conducting inspections of registered public accounting firms.” A strategy for such inspections was developed that includes reporting deficiencies judged to be significant for supporting conclusions made.
This paper presents a content analysis of deficiencies disclosed in the nine inspections (during three years) of three accounting firms, along with the largest four firms, that are inspected each year. Also discussed are the general implications for auditing teaching in colleges/universities and in continuing education programs in public accounting firms. There is no attempt in this paper to evaluate the PCAOB inspection process in relation to the responsibility as stated in the Sarbanes-Oxley Act of 2002, except for some comment in the concluding segment. Furthermore, there is no discussion of quality control deficiencies, since those are not revealed in inspection reports that are provided on PCAOB’s Website.
Among the conclusions of the analysis of the nine inspections are the following:
Auditing is a generic process and auditors must understand that process through initial instruction that is engaging, relevant and meaningful. The auditor needs to internalize the basic simple concept that “an audit is more than the sum of its parts,” and the process is applicable across many types of entities.
Professional guidance is not properly understood or if understood, not implemented in practice. Deficiencies provide evidence of failure to do what is expected.
A concept-driven education/training strategy is needed. The reality of actually participating in the performance of an audit demands that learning be both conceptual and practical. Critical operational concepts must be reflected in instruction. These are: a. need for comprehensive understanding of the entity and its environment; b. understanding that an audit is more than the sum of its parts. Its parts, therefore, cannot be evaluated in isolation of other parts; c. value of corroborating evidence d. evidence requires assessment and evaluation; and e. criteria (GAAP, etc.) must be carefully reviewed (in basic source documents) to be assured of proper interpretation in financial reporting.
Newman, Bernard H. and Oliverio, Mary Ellen, "Deficiencies Noted in PCAOB Inspections: Implications for Auditing Instruction" (2008). Faculty Working Papers. Paper 62.