Board Issues Releases on Process for Firms to Address Quality Control Criticisms

Washington, DC, Mar. 21, 2006

The Public Company Accounting Oversight Board today issued two releases concerning the Board's implementation of a provision of the Sarbanes-Oxley Act of 2002 that gives registered accounting firms an incentive to address quality control criticisms in Board inspection reports within 12 months after the Board issues the reports.

The Act provides that “no portions of the inspection report that deal with criticisms of or potential defects in the quality control systems of the firm under inspection shall be made public if those criticisms or defects are addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.”

In the first release issued today, the Board provided information about its process for determining whether a registered accounting firm has satisfactorily addressed quality control criticisms in an inspection report. The Release describes the Board's approach to implementing the Act's incentive-based framework and describes the meaning and effect of a Board determination.

In the second release, the Board described observations about efforts undertaken by the four largest U.S. accounting firms to address quality control concerns identified during the Board's initial, limited inspections of those firms. Reports on those inspections were issued in August 2004. During the 12-month period that followed issuance of those reports, each firm engaged in substantial dialogue with the Board's staff concerning the firm's efforts to address the concerns, and each firm made a timely submission of evidence to describe those efforts.

“The Sarbanes-Oxley Act envisioned that firms could be genuinely motivated by the prospect of keeping the Board's quality control criticisms confidential,” said PCAOB Acting Chairman Bill Gradison. “The Board's process builds on the incentive provided by the Act and seeks through constructive dialogue to encourage firms to improve their practices and procedures.

“Our initial experience with the process generally validates the premise of the approach set out by Congress,” Mr. Gradison said. “The large firms were responsive to the Board's supervisory model, and as a result of the process, the Board believes that the firms have crafted and undertaken important steps that, if conscientiously implemented, will have beneficial effects on audit quality.”

The second Release includes a general summary of some of the types of steps taken by the firms to address the Board's quality control concerns in areas such as audit performance, evaluation and compensation of partners, independence, acceptance and continuance of clients, and supervision of foreign affiliates.

The two releases are available on the Board’s website,