PCAOB Issues Report on 2007-2010 Inspections of Domestic Firms that Audit 100 or Fewer Public Companies

The Public Company Accounting Oversight Board today released a report summarizing inspection observations identified in the 2007 through 2010 inspections of U.S. firms that audited 100 or fewer public companies. Such firms must be inspected at least once every three years (triennially inspected firms).

Overall, the results show a reduced rate of reported "significant audit performance deficiencies" when compared to a 2007 report the Board issued addressing observations from inspections of triennially inspected firms from 2004 through 2006. Significant audit performance deficiencies are those that result in the audit firm lacking sufficient evidence to support its audit opinion.

The report notes lower rates of significant audit performance deficiencies overall in the group of firms that had second inspections during the 2007-2010 period. Of firms that had a second inspection during that period, 36 percent had at least one such deficiency in their second inspection, compared to 55 percent in their initial inspection.

Despite the decrease in the rate of significant audit performance deficiencies noted in second inspections, the persistence of such deficiencies in audits performed by a large number of domestic triennial firms is of concern to the Board.

"The Board has issued this report to highlight areas where audit firms can focus their attention to enhance the quality of their audits," said James R. Doty, PCAOB Chairman. "We also encourage firms to identify and address the root causes of any audit performance deficiencies identified during the inspections process."

According to the report, 44 percent of the audit firms inspected during the 2007-2010 period had at least one "significant audit performance deficiency" compared to 61 percent in the 2004 — 2006 period .

Of the individual audits inspected between 2007 and 2010, 28 percent had at least one significant audit performance deficiency compared to 36 percent of the audits inspected between 2004 and 2006.

Audit areas with frequent inspection findings in the 2007-2010 period related to:

• auditing revenue recognition;
• auditing share-based payments and equity financing instruments;
• auditing convertible debt instruments;
• auditing fair value measurements;
• auditing business combinations and impairment of intangible and long-lived assets;
• auditing accounting estimates;
• auditing related party transactions;
• use of analytical procedures as substantive tests; and
• audit procedures to respond to the risk of material misstatement due to fraud.

The "Report on 2007-2010 Inspections of Domestic Firms that Audit 100 or Fewer Public Companies" includes observations from 748 inspections of 578 domestic triennial firms conducted in the 2007—2010 period, and encompasses Inspection staff reviews of aspects of 1,801 audits.