Voice of Experience
A Small Firm Talks About Its PCAOB Inspection
Frank A. Bianculli
2006 - When my partner, Jeff Brinn, and I formed BP Audit
Group PLLC (BPA) in 2003, our goal was to capitalize on
the opportunities presented by the Sarbanes-Oxley Act of
2002. The private company practice I had started 20 years
ago would no longer do public company work; instead, a company
known as BPA would.
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.
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
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.
Commitment to the Process
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
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.
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.
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.
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.
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.
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.
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
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.
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
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
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.
from the Government and We’re Here to Help’
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).
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
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”
A. Bianculli, CPA, is managing partner of BP Professionals,
LLP, CPAs and Consultants, based in Farmingdale, N.Y. He is
a member of the NYSSCPA’s Auditing Standards and Procedures