The Voice of Experience
A Small Firm Talks About Its PCAOB Inspection

By Frank A. Bianculli

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Brinn’s job was to make sure that our clients’ financial statements and related disclosures complied with GAAP and SEC regulations. My role as the GAAS specialist was to ensure that workpapers and testing complied with the PCAOB’s standards.

The endeavor represented a challenge because I had principally provided tax and consulting services to private companies. Although we did some SEC audits and had been successfully peer-reviewed, could we withstand the new and unfamiliar PCAOB inspection process? Was this a path I wanted to pursue? Many practitioners in my situation walked away from SEC work. I was attempting to embrace it and take on more of it.

Our traditional SEC practice has always been taking the work that larger firms no longer had an appetite for. Our clients are small ones or shells that are looking to merge, have just merged, or are “new shells.” It is a good practice base, and we are proud of our work.

Our Commitment to the Process

I recognized that forming BPA would bring new professional risks and rewards. I made a commitment to revamp our audit practice. Although we passed peer reviews successfully, as a former big-firm audit manager I knew that our work product was not bulletproof. Accordingly, my immediate goal became making our application of GAAS rock solid. I joined the NYSSCPA’s Auditing Standards and Procedures Committee. CCH’s Accounting Research Manager became my audit guidance of choice. I decided to make our workpapers and documentation shine, and to make certain that the accounting is always conservatively correct. Our motto regarding audit procedures became, “If it isn’t documented, it didn’t happen.”

We required an audit planning memo and summary memo, and a memo detailing all consultations, internal and external. We early-adopted PCAOB Auditing Standard (AS) 3, Audit Documentation. We marked off 45 days from report issuance, and within that time executed a post-issuance documentation review that included completing the peer-review checklist. We indexed all files, especially permanent files. Every number in a Q or K filing was tied back to workpapers.

But we wondered, Was it enough? Would it be worth it? Were we going overboard? Regardless, one thing was certain: The increase in our audit time was incredible. We decided to do whatever it took to be confident in our audit work. Clients are still fee-sensitive, and our realization rates have suffered. But because we lack the overhead structure or bureaucracy of a large firm, this attitude found acceptance.

The Call

At a seminar that addressed preparing for a PCAOB inspection, I was comforted when a PCAOB official said that the board did not intend to inspect firms during the tax season. So when the PCAOB called on April 8, 2005, I was somewhat confident that it was concerning an administrative issue and that this was not the call. We were still in tax season, and a tiny firm like ours would be last on the PCAOB’s list to inspect. Or so we thought.

A polite gentleman explained that he was in charge of scheduling small-firm inspections. The caller and I developed an appropriate professional rapport. He knew my peer reviewer, had worked at the AICPA, and was glad to hear that we were members of the AICPA’s Center for Public Company Audit Firms. He wanted to schedule fieldwork for May 4 and 5. At that point we were knee-deep in 1040s and I hadn’t had a day off in over a month. He didn’t mention the PCAOB’s sensitivity to small firms or the no-tax-season-inspections statement that I had heard earlier. I expressed my concerns, but to no avail. Even the pre-inspection documents would have to be prepared within five days of the request. I was also told that given the period of our inspection and the number of clients that the firm had, the inspection would look at only one audit.

Although I had great confidence in our work product, the thought of the inspection made me nervous and uncomfortable. I decided to maintain a log of PCAOB contacts in the form of a memo to files. If nothing else, this would provide an outlet for my nervousness, and also document the process thoroughly.

The Next Step

An e-mail from a PCAOB administrative assistant on April 14 indicated that the team leader for our inspection had been changed, but given the frenetic atmosphere on that date, I did not pay as much attention to this as I should have. I did not realize that this e-mail attached a previous e-mail that the team leader had apparently sent the same day but that I had not received. (That e-mail indicated that an attached electronic form, Exhibit 1, was due back completed by April 21.) I responded that this was the first mention of a team leader being assigned. Her reply apologized for the confusion and said that she had corrected the team leader mix-up; it didn’t mention that a document was due by April 21.

On April 20, a Fed-Ex delivery confirmed the inspection dates and indicated that I needed to complete two exhibits, one of which was sent electronically and had been due five days from receipt. I located the missing e-mail of April 14 and its attachment, and called the team leader. He sent the file to me and I spent the day filling out the Issuer Information Form (Exhibit 2) and e-mailing it a day before it was due. Unfortunately, this time it was the PCAOB that didn’t receive the
e-mail. On April 26 the administrator sent a strongly worded e-mail indicating that I had missed a deadline and that I should get the file in their hands no later than the next day. After repeated attempts to e-mail the file, it eventually got through to the PCAOB.

On the previous day, Monday, April 25, our SEC manager and I had spent hours gathering documents and files for the PCAOB inspection. I had decided we would prepare an “audit assistance” binder with all the data the PCAOB had requested in its Exhibit A. We put together a three-ring binder with 13 section tabs, one for each item on the data request form.

The how-to seminar that I had attended recommended hiring an attorney, if not to actively represent the firm in the inspection process, then to participate in the background debriefing on the day’s events. We decided that this would not be appropriate. My partner and I agreed that if we wanted to be a PCAOB-registered CPA firm, then we had to accept the responsibilities and consequences, even though we could not imagine there being anything problematic in our work. So we did not hire an attorney, although we have on occasions in the past engaged SEC counsel to help sort out delicate issues.

Our next major question was: Who would know if we “cleaned things up”? Readers who say, “I would never even think about making changes to workpapers or documents,” are lying to themselves, because even though it might be a crime, it’s human nature to think about it. My personal decision was to not even look at any papers. I wanted to give our systems the ultimate test, cold. If we were going to be in SEC practice, then I wanted to know my strengths and weaknesses. My partner chose to read through filings and to skim the papers the day before the inspection so he could be fresh.

‘We’re from the Government and We’re Here to Help’

They actually did help. The two PCAOB inspectors arrived promptly at 9 a.m. on May 3. The team leader described the process: I would be interviewed by both inspectors regarding the firm’s quality controls, and then each inspector would take a separate audit assignment (although we had been told earlier that there would be only one).

During the two and a half days the PCAOB inspectors were with us, we found them to be professional, knowledgeable, friendly, open-minded, and easygoing—exactly the opposite of what we had expected based on what we had heard from other CPA firms.

Client confidentiality prevents our discussing the issues raised during the course of our PCAOB inspection (three technical accounting issues, two audit issues, and one quality-control issue). We can, however, say that each time the inspectors politely challenged us on an issue, they were open to our discussion. In all six cases, they eventually agreed with the positions taken, resulting in a “clean” report.