The PCAOB 101

Internal Auditor, June, 2008 by Tom Olach

* Loans and accounts receivable (including allowance for doubtful accounts).

* Service organizations.

* Use of work performed by other auditors and specialists.

* Independence issues related to performing prohibited services for audit clients.

* Ineffective concurring audit partner reviews.

During inspections, the board routinely evaluates the accounting firm's quality of work and examines its practices, policies, and procedures. Although many firms conduct peer reviews that cover these areas, PCAOB inspections carry additional weight due to the board's authority to investigate and take disciplinary action. Hence, PCAOB inspections have created a stronger incentive for public accounting firms to perform thorough, frequent self-evaluations. Per the PCAOB's rules, accounting firms must provide any necessary documentation and testimonial evidence in response to the board's staff requests.

The PCAOB also has the authority to conduct inspections of a registered accounting firm's quality control system. If the board identifies a quality control defect during its inspection, the accounting firm must remedy the defect within 12 months of the inspection report date; otherwise, the PCAOB will disclose the deficiency to the public. Because such disclosures can cause significant reputational damage, they provide another strong incentive for firms to self-evaluate effectively. Internal auditors can help prevent PCAOB disclosures by teaming up with their financial statement auditors to reduce redundancy of effort and seek situations where the internal auditors can simultaneously perform their own responsibilities and assist the financial statement auditors.

INVESTIGATION AND ENFORCEMENT Pursuant to Sarbanes-Oxley Section 105, the PCAOB may investigate and discipline violators. If the board believes one or more violations have occurred, review of the registered public audit firm escalates from an inspection to a formal investigation. Normally during a PCAOB inspection, however, the registered public accounting firm, and any other party associated with the violation, cooperate in an attempt to avoid penalties and negative publicity.

The PCAOB has several options for disciplining any wrongdoing:

* Suspend or revoke the accounting firm's PCAOB registration.

* Suspend or bar wrongdoers from further association with any registered accounting firm.

* Limit the accounting firm's activities, either temporarily or permanently.

* Assess civil penalties up to US $15. million for violations.

* Censure the accounting firm and wrongdoers.

* Require additional professional education and training.

Similar to SEC investigations, the PCAOB maintains some discretion with regard to its investigation findings. If necessary, however, the board will share information with the U.S. Department of Justice, certain federal bank regulators, state attorneys general, and appropriate state regulatory authorities. According to the PCAOB's most current published annual report (2006), the board initiated several preliminary investigations of registered accounting firms, but only eight resulted in formal investigations. Although several auditors were barred from auditing registered companies, the PCAOB allowed some of them to petition the board to do business with registered public accounting firms.