Washington (Oct. 8, 2003) -- The Public Company Accounting Oversight Board approved new rules Tuesday, requiring routine annual inspections of all major accounting firms with 100 or more audit clients. The rules, which now must be approved by the Securities and Exchange Commission, subject smaller firms with fewer than 100 audit clients to regular inspections once every three years.
Additionally, PCAOB will be empowered by the new rules to undertake separate “special investigations” of firms at any time to “assess the degree of compliance with the Sarbanes-Oxley Act.” In explaining those provisions to Board members during a October 7 meeting in Washington, PCAOB staff enforcement officials stressed that while these special inspections may have a “more narrow focus” than the routine scheduled inspections, these proceedings will not be “tantamount to an investigation” of the accounting firm.
In addition to giving final approval to the inspection rule, the five-member board also unanimously voted to propose two additional rules: one designed to define the terms used in auditing and related professional practice standards, and another establishing an auditing and related professional practice standard for the attestation to management’s assessment of internal control over financial reporting.
PCAOB’s new rules governing inspections of audit firms had come under some criticism from the accounting profession for failing to protect the “due process” rights of accountants and their firms.
Accountants at Most Horowitz & Company, for example, had argued that PCAOB’s rule “could result in reporting matters to the (Securities and Exchange) Commission and state licensing agencies that may not be violations” of SOX.
In comments raising those concerns to PCAOB, the firm’s Quality Control Director, Robert J. Sonnelitter, Jr. CPA, said “I believe that this proposed rule does not provide adequate due process” for accountants.
For their part, officials at PCAOB offered little sympathy for the “due process” concerns voiced by accountants.
Among other things, they pointed out that criticisms of accounting firms uncovered during inspections will not be made public if they are corrected within 12 months. Additionally, firms will have a right to review and comment on PCAOB inspection reports before they are finalized.
Audit firms will also be able to appeal the findings of PCAOB inspectors, staff officials told the board.
“Sounds like due process to me,” said PCAOB Chairman William McDonough.
-- Ken Rankin
