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February 25, 2013

PCAOB domestic firm inspections show encouraging results

The US Public Company Accounting Oversight Board (PCAOB) found a reduced rate of reported "significant audit performance deficiencies" among domestic firms, which audit less than a 100 public companies.

The PCAOB inspection report reviewed 748 audits by 578 firms for the time period from 2007 to 2010 and compared the results to the previous report for the time period from 2004 through 2006.

The report notes lower rates of significant audit performance deficiencies overall in the group of firms that had second inspections during the 2007-2010 period. Of firms that had a second inspection during that period, 36% had at least one such deficiency in their second inspection, compared to 55% in their initial inspection.

Of the individual audits inspected between 2007 and 2010, 28% had at least one significant audit performance deficiency compared to 36% of the audits inspected between 2004 and 2006.

Despite encouraging results the PCAOB said that the number of "significant audit performance deficiencies" are still too high overall."This is good progress, but the whole story is more complicated. Despite the decrease in the rate of significant deficiencies in second inspections, the persistence of such significant deficiencies in audits performed by a large number of the domestic triennial firms remains a concern of the board," PCAOB board member Jeanette Franzel said.

"Despite the overall decrease in significant deficiencies during the 2007-2010 period, we noted that in the 2011 inspection year, the percentage was at 45%," Franzel said.

The PCAOB also said it has thus far no evidence of any correlation between the size of a firm and its ability to perform an audit that complies with PCAOB standards has been found.

PCAOB board member Jay Hanson said that the firms that fall under the remit of this inspections are inspected at least once every three years and are called triennial firms by the PCAOB.

"Presently, there are approximately 2,360 firms registered with the PCAOB, of which about 750 are subject to inspection because they regularly issue audit reports for issuers. About 500 of those firms are US based — and that is the group we are talking about. At year-end 2011, these firms audited the financial statements of approximately 4,600 issuers with a total market capitalisation of about $115bn," Hanson said.

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