The tiny audit firm of Beckstead and Watts has achieved another first in the brief history of audit firm regulation. It has successfully killed a previously published inspection report.

The small Nevada firm just outside of Las Vegas first made a name for itself when it led a charge to the U.S. Supreme Court challenging the existence of the Public Company Accounting Oversight Board, especially focusing on the way in which PCAOB members are appointed. The PCAOB largely prevailed in that action, still regulating the audit profession more or less the way it has since the board was formed under the Sarbanes-Oxley Act.

More recently, Brad Beckstead, managing partner at the firm, says the firm settled a lawsuit with the PCAOB over the firm's unflattering 2005 inspection report, getting the PCAOB to withdraw the report and drop an investigation into its audit practices. The PCAOB confirmed the settlement in U.S. District Court, agreeing to withdraw one of two inspection reports that have been published on the firm to settle Beckstead's pending litigation against the board.

However, the PCAOB pointed out that the agreement was based on “the unique circumstances of the case,” and the board does not consider the settlement to be any kind of admission or concession, said spokesman Colleen Brennan in a written statement. Even further, the board propped a door for future action. “Consistent with its general practice, the board advised Beckstead and Watts that the PCAOB had concluded its earlier formal investigation of the firm, without prejudice to the board's authority to institute a future investigation in connection with any past or future conduct,” said Brennan.

The 2005 inspection report, now absent from the PCAOB's Website, described problems with eight audits, two of them leading to restatements. According to the inspection team, the firm failed to perform and document its procedures related to the acquisition of a rental property, possible impairments, fair value of equity securities, various liabilities, revenue recognition, and a going-concern analysis, among other issues.

Beckstead said the inspection process involved seven inspectors spending 14 days picking through 16 audit files. “The time I spent with my staff reacting to and complying with the inspection requests put significant burdens on our ability to conduct a profitable business,” he wrote in his statement.

Jeff Mahoney, general counsel for the Council of Institutional Investors and a member of the PCAOB's Standing Advisory Group, said he's not familiar with the details of the case but hopes the settlement won't water down the inspection process. “I am hopeful that the language of the PCAOB statement is an indication that the settlement will not reduce the rigor of PCAOB inspections or the quality of its inspection reports,” he says.