PCAOB starts full inspections of auditing

Washington, DC – The Public Company Accounting Oversight Board (PCAOB) has begun its first full inspections of accounting firms that have registered to audit public companies in the US, according to chairman William McDonough.

Testifying before the House Committee on Financial Services in June, McDonough said the PCAOB inspections, which began in May, would run through November.

“We will focus on, among other things, efforts to detect fraud; control over compliance with independence requirements; the adequacy of documentation; efforts to identify, evaluate and manage risk; and compliance with professional auditing and accounting standards,” said McDonough. “To capture a significant sample of engagements at each firm, we plan to review approximately 5% of the Big Four firms’ public company audits – that is, more than 500 audits – and 15 % of the next four largest firms’ public company audits – or about 50 audits. That adds up to more than 650 audits, in addition to the small-firm audits that we will select on a case-by-case basis.”

The PCOAB has so far registered 976 auditing firms, four of which are the so-called Big Four – Pricewaterhouse-Coopers, Ernst & Young, KPMG and Deloitte and Touche – which audit more than 78% of all US public companies.

Only 164 non-US auditing firms have been registered so far, although the Board expects as many as 400 foreign firms to register by the deadline. As of July 19, 2004, no auditing firm will be permitted to prepare, issue or play a substantial role in the preparation or issuance of, and audit report on the financial statements of a US public company unless it is registered with the Board.

In 2003, the Board made only limited inspections in the Big Four accounting firms. “Nevertheless, we learned a great deal about quality control in the largest firms. In numerous interviews, audit partners and staff expressed their perceptions of a renewed focus on audit quality. We have seen some evidence of this renewed focus in firm policies generally, and in internal firm communications about those policies,” said McDonough.