Quality Control Defects Revealed in Smaller Firms' PCAOB Inspection Reports

Dana R. Hermanson, PhD, and Richard W. Houston, PhD

The Sarbanes-Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB) and granted it the authority to inspect registered audit firms. When conducting an inspection, PCAOB inspectors may identify two types of problems: audit deficiencies or quality control (QC) defects. Audit deficiencies (problems with the audits of individual companies) identified by the inspectors are disclosed in the inspection report, without revealing any client-specific information. Audit deficiencies disclosed in small firms' inspection reports have been analyzed by academic researchers (“PCAOB Inspections of Smaller CPA Firms: Initial Evidence from Inspection Reports,” by Dana R. Hermanson, Richard W. Houston, and John C. Rice, Accounting Horizons, June 2007), and the AICPA has published various summaries of large and small firms' audit deficiencies (www.thecaq.aicpa.org/Resources/Inspections/).