The Public Company Accounting Oversight Board (PCAOB) has oversight responsibilities that include inspection of not only the audit of financial statements, but also of internal controls and quality controls. The topic of this paper, however, relates only to the inspection of quality controls of registered firms.
This paper presents the results of an exploratory survey of quality control issues that registered firms were unable to resolve within the 12 months from the date of the inspection report. If remediation is not successful within the 12-month period, the issues not resolved by the firm are revealed to the public. The original report is not posted until the communications between the firm and the PCAOB related to issues are concluded. The inspection is then posted as an expanded inspection report, dated as of the original inspection report date.
All the firms with expanded inspection reports, which included 107 inspections as of December 18, 2011 were included in the survey. The issues that were most common that were not resolved included issues related to audit performance. The seven most common issues were: 1. Technical competency, due care, and professional skepticism (firms with issue, 59, 55.1%); 2. Auditor Communications (firms with issue, 45, 42.1%); 3. Concurring Partner Review (firms with issue, 43, 40.2%); 4. Appropriate Procedures (firms with issue, 21, 19.6%); 5. Fraud Procedures (firms with issue, 16, 14.9%); 6. Engagement Completion Document (firms with issue,12, 11.2%); and 7. Testing Appropriate to the Audit (firms with issue, 12, 11.2%)
The limitations of disclosure, including the agreement to maintain confidentiality of certain issues by the firms, precludes providing conclusions about the status of quality control in registered public accounting firms. The question that cannot be answered is: “Has the PCAOB’s strategy for the inspection of quality controls and the nonpublic disclosure of extent of issues identified resulted in significant improvement in quality controls in registered firms?”
There is need for empirical, objective research to determine the effectiveness of the PCAOB’s strategy in enhancing audit quality. Within a year (of March 2012), the PCAOB will have completed a decade of oversight. To date, there has been no publicly revealed evidence of achievements.
Newman, Bernard H. and Oliverio, Mary Ellen, "PCAOB Quality Control Inspections: Unresolved Issues of Registered Firms" (2012). Faculty Working Papers. Paper 72.