Firm regulator mulls wider exposure of audit deficiencies
Audit firms that fail to correct quality control deficiencies identified by Public Company Accounting Oversight Board inspectors may soon be targeted for unwelcome publicity under a plan to shine an Internet spotlight on their defects.
Although the results of PCAOB audit firm inspections are made public, under the board's current rules a substantial portion of the inspectors' criticisms of a firm's quality control system is kept confidential. Those quality control problems, and the board's dialogue with the firm about those criticisms, are permanently kept out of public view unless the firm fails to make progress in addressing the issues to the board's satisfaction.
Only if the audit firm fails to correct its quality control problems and audits within 12 months are those criticisms made public. But even then, investors hoping to glean information about audit quality have to rummage through the PCAOB's regulatory haystack to find the material.
That task may soon become considerably easier under a plan championed by board member Steven B. Harris, who has been pushing the organization to increase its internal transparency.
"The PCAOB is working to find a better way to make known the firms that fail to remediate deficiencies in their quality control systems," he said at a recent Ernst & Young Accounting and Public Policy Symposium at the University of Michigan. Specifically, Harris said that the board is considering plans "to more prominently display such firms on the official record on our Web site" - a change that he said is likely to take effect shortly.
More sunshine for auditors with failing quality control grades is only one part of a broader PCAOB push for greater transparency.
Another element involves new rules that alert investors to audit firms that have so far managed to avoid inspections by PCAOB.
Under Sarbanes-Oxley rules, firms registered with the board to audit public companies are required to submit to PCAOB inspections at least once every three years, and the largest accounting firms must be inspected annually. Despite these requirements, dozens - perhaps hundreds - of firms that audit U.S. public companies still have not been inspected by the PCAOB. "Firms may not be inspected for a variety of reasons but, regardless of the reason, investors and the general public have the right to be able to distinguish easily between those firms that have participated in our inspection regime and those that have not," Harris said.
At least 50 of those firms are international audit firms that originally had been scheduled to undergo inspections before the end of this year. But a rule change now under consideration by the PCAOB would extend that deadline until 2012. Part of that rule change includes a new provision calling for the public identification of audit firms that have not been inspected by the board.
Harris, a former Senate aide who helped craft the Sarbanes-Oxley Act that created the board, expressed strong support for such disclosures when the PCAOB debated the rule change late last year.
"Sunshine is the best disinfectant and investors deserve this type of information" in order to easily determine which audit firms "have not been subject to the board's expected oversight," he told fellow board members.
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