April 7, 2005 -- Section 104 of the Sarbanes-Oxley Act of 2002 requires inspections of registered public accounting firms on an annual basis for firms that issue audit reports for more than 100 issuers, and at least triennially for those firms that issue less than 100.  Additionally, the Securities and Exchange Commission ( SEC ) requires that each issuer be inspected on a periodic basis (at least once every three years) as well.  The inspections include assessments of compliance with the Sarbanes-Oxley Act of 2002, compliance with rules of the Public Companies Accounting Oversight Board (PCAOB), compliance with rules of the SEC , and compliance with professional financial reporting standards.

In conducting its inspections of registered independent accounting firms, the PCAOB has identified the following accounting and reporting deficiencies to be common among all types of issuers, as well as deficiencies in the audit procedures performed by auditing firms on such areas as:

Fair value reporting

The PCAOB has noted several financial reporting deficiencies related to fair value measurements and disclosures which are required by U.S. generally accepted accounting principles (GAAP).

Related party reporting

The PCAOB noted instances of failure to properly present and disclose material related party transactions that could affect the financial statements and of common ownership or management control relationships for which FASB Statement No. 57  requires disclosure.

Revenue recognition

The PCAOB noted continuing issues related to revenue recognition policies employed by issuers and the manner in which such policies are adopted.

Independence

During the inspection process, the PCAOB noted instances where the auditor’s documentation did not include evidence of written communications to the audit committee regarding Independence Standard Board Statment No. 1, Independence Discussions with Audit Committees, which requires the auditor to disclose all relationships between the issuer and the auditor’s firm that in the auditor’s professional judgement may have a bearing on independence. 

Additional “hot button” issues identified during the inspection process include: going concern considerations, principal auditor issues, control of issuer use of reports, understanding of contractual arrangements / substance of transactions, and prohibited loans.

For more information, contact Joe Beach at 215-564-1900 .

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