PCAOB Inspector: It’s Your Call
Firms Must Provide Own Answers to Audit Issues Raised

By Jay Dismukes

Firms that are about to undergo inspections by the Public Company Accounting Oversight Board (PCAOB) shouldn’t harbor any illusions that the process will be similar to peer review proceedings, PCAOB official Paul Bijou said in late October.

“This is not peer review,” said Bijou, deputy director of inspections for the New York City Office of the PCAOB. “We won’t present to you what we think the answer to a particular issue is.”

Referring to firms with fewer than 100 public company clients, Bijou said that these practices should not rely on inspectors to do things like interpret generally accepted accounting principles for them, but should have the technical capabilities to understand the engagement issues raised through the inspections process and be able to address those issues on the matter sheet, whether agreeing with the inspection team or not.

Bijou’s remarks, “Lessons in Pitfalls in the Inspection Process,” came as a guest speaker of the Foundation for Accounting Education’s 2004 Auditing Conference, held at the new NYSSCPA headquarters in Manhattan.

The matter sheets Bijou mentioned are prepared after the inspections have taken place; they are then reviewed and responded to by the firm. While the inspectors will not tell the firm how to respond, they will discuss the reasons for the conclusions they’ve reached, Bijou said.

The firm’s responses, which are expected within approximately two weeks, could include any remedial action that the firm plans to take or could disagree with the inspectors’ opinions. Following this stage, the responses will be incorporated into a report that is prepared and submitted to the board of the PCAOB. From there, the report makes its way to the Securities and Exchange Commission.

The Element of Surprise

The Sarbanes-Oxley Act requires that firms with fewer than 100 issuer clients, which Bijou refers to as Small Firms, undergo inspections at least every three years. Given that the purpose of the inspections is to assess and improve audit quality, firms—especially ones that had issues raised during the prior inspection—should recognize that they could have a second inspection within less than three years’ time, Bijou noted.

“The unpredictability of the inspection is a tool we will use to understand how deep the corrective action you’ve taken is—to know how deep that has gone through your organization,” Bijou said.

According to statistics provided by Bijou, in the Northeast region there are 136 Small Firms currently registered with the PCAOB. Of those, the vast majority, 105, have less than five issuer clients.

In addition to the surprise aspect of the inspection, Bijou reminded the attendees that the inspectors “are not locked into a program.” Prior to the inspection, the PCAOB identifies engagements with audit risk areas that it will review. However, if over the course of the process the inspectors find other risk areas, they will not hesitate to “shift gears very quickly,” he said.

The NYSSCPA’s Auditing Standards and Procedures Committee, chaired by Mark Mycio, sponsored the Oct. 28 conference. Committee member Frank Bianculli chaired the event.