New Watchdog Body Finds Quality Control Problems at Accounting Firms

August 30, 2004 - The Public Company Accounting Oversight Board (PCAOB), the financial auditing industry regulatory body established in 2002 by the Sarbanes-Oxley Act, released its first report Thursday on initial inspections at the four largest public accounting firms in the United States, stating that the board “identified concerns about significant aspects of each firm’s quality controls systems.”

The inspections, which examined compliance, quality control, and selected public-company audits in the national and regional practice offices of the four firms, also found significant audit and accounting issues that were missed by the firms.

ASQ’s review of the reports on the 2003 limited inspections at each of the firms revealed little detail on the exact nature of the quality-control issues identified. In general, the issues that were discussed in the public portions of the reports involved departures from the companies’ own quality control policies and documentation deficiencies. For example, at two of the firms work papers were not archived within the time period required by company policy. At another firm, the board’s staff identified actions and agreements related to a business affiliation with an audit client that raised questions about compliance with independence requirements of the PCAOB, the SEC, and the auditor’s own policies.

Substantial portions of the inspection reports—specifically, criticisms of a firm’s quality control system and the Board’s dialogue with the firm about those criticisms—are not made public, in accordance with legal restrictions. The Sarbanes-Oxley Act states that “no portions of the inspection report that deal with criticisms of or potential defects in the quality control systems of the firm under inspection shall be made public if those criticisms or defects are addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.”

Press contact: John Ryan at jryan@asq.org