The Public Company Accounting Oversight Board announced that its next round of inspections would focus on the costs of internal control audits mandated under the Sarbanes-Oxley Act.

"A key emphasis of the 2006 inspections will be the efficiency of the firms' performance of audits of internal control over financial reporting," said acting chairman Bill Gradison, in a statement. Hoping to improve on the cost-effectiveness of the audits, Gradison said that inspectors would make an effort to determine whether auditors had accomplished the oversight called for under SOX's Section 404 with the "least expenditure of effort and resources."

The PCAOB is set to begin its 2006 inspections of registered public accounting firms this month. Only the largest public companies have had to comply with the internal controls provisions to this point. Small and midsized companies -- who have complained about the costs of 404 compliance -- are waiting to see whether the Securities and Exchange Commission adopts the recommendations of an advisory panel to dramatically scale back the internal controls provisions.

Specifically, the PCAOB said that inspectors will evaluate:

  • The degree to which the audit of internal controls over financial reporting and the audit of financial statements are performed as a single, integrated and mutually reinforcing process;
  • Whether auditors use a top-down approach in which company-level controls were identified as the first step in planning the audit;
  • Whether auditors properly assessed risk and used a risk-based approach to determine the nature, timing and extent of internal control testing; and,
  • Whether auditors took full advantage of the opportunities available to use the work of others, such as the company's internal audit staff.

The 2006 inspections will include the annual inspections of the nine firms that audit more than 100 public companies. In addition, the PCAOB will continue its three-year cycle of inspections of smaller firms that audit at least one public company.The PCAOB will meet with the SEC on May 10 to discuss Year Two 404 compliance and next steps. Representatives from major accounting firms and companies, as well as government officials, will be in attendance.

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