The PCAOB 101

Internal Auditor, June, 2008 by Tom Olach

In April 2004, the PCAOB formed a Standing Advisory Group to advise the board on establishing audit and related professional standards. The group presently comprises 36 members who represent the audit profession, public companies, investors, and others. The board invites representatives from the Auditing Standards Board of the AICPA, the U.S. Department of Labor, the Financial Accounting Standards Board, the Government Accountability Office, and the International Federation of Accountants' International Auditing and Assurance Standards Board. SEC representatives also attend the meetings. The Standing Advisory Group holds both open and executive sessions--decisions to recommend actions to the PCAOB are made at open sessions.

Some of the topics the advisory group addressed during 2007 include:

* The PCAOB's standard-setting process.

* The SEC's proposed rule regarding the International Accounting Standards Board's International Financial Reporting Standards.

* Fair value accounting within the broader context of auditing accounting estimates.

* Audit engagement team performance in areas such as planning and supervising audit engagements and conducting reviews of high-risk areas involving professional judgment.

* Risks and audit procedures associated with related-party transactions.

* Deficiencies associated with AS2 and the subsequent replacement of AS2 with AS5.

Standing Advisory Group members meet in person three times a year. Agendas for the group's meetings can be found on the PCAOB's Web site.

INSPECTIONS Sarbanes-Oxley Section 104 requires the PCAOB to inspect all registered public accounting firms. If a registered firm provides more than 100 audit reports, the PCAOB must inspect it at least annually. All other registered public accounting firms are subject to investigations every three years. Both U.S. and non-U.S. registered public accounting firms must adhere to the board's and SEC's rules.

During the inspections, the PCAOB assesses compliance with Sarbanes-Oxley, PCAOB, and SEC rules, as well as with professional standards pertaining to audit engagement performance and report issuance. Inspections include a review of selected audits of financial statements and internal control over financial reporting.

The PCAOB can perform its inspections announced or unannounced. While all registered public accounting firms are subject to routine PCAOB inspections, the board may perform an inspection with special instructions if and when necessary. If the board selection team identifies deficiencies, it typically alerts the firm--any deficiencies that exceed a specific threshold are disclosed to the public in the board's inspection report.

After a series of inspections in 2007, the PCAOB issued a report stating that many small U.S. public accounting firms, and some large firms, had control deficiencies in the following areas:

* Revenue recognition practices.

* Related party transactions.

* Equity transactions.

* Business combinations and asset impairments.

* Going concern issues.