On Oct. 7, The Public Company Accounting Oversight Board adopted final rules relating to inspections of registered public accounting firms.
Background
According to Section 104 of Sarbanes-Oxley, the PCAOB must conduct a continuing program of inspections to assess how public accounting firms are complying with the Act and subsequent rule-making and professional standards.
On July 28, the Board proposed rules establishing a procedural framework for conducting inspections (see link at right for original proposal) and sought comment on the proposal.
Inspections
According to the new rule, public accounting firms would be subject to "regular and special inspections" as the Board may from time to time conduct.
The rules would establish a schedule for regular inspections that include:
Annual inspections for firms that do the largest volume of audit work; and
At least triennial inspections for other firms that do some volume of audit work.
Special inspections are not subject to a schedule and would be conducted as necessary or appropriate to address issues that come to the Board's attention.
Reporting
The rules would also empower the PCAOB to report information indicating possible violations of law or professional standards to a variety of parties, including:
The Securities and Exchange Commission;
Appropriate state regulatory authorities, and
Other regulators and law enforcement authorities.
Similarly, the rules would implement the Board's authority to commence its own investigation or disciplinary proceeding based on such information.
Comments & Confidentiality
The rules would set forth a process by which a firm may submit written comments on a draft inspection report before the Board issues a final inspection report.
The firm's response to the draft inspection report would be attached to and made part of the final inspection report.
In addition, the rules would implement the Act's requirement that portions of a final inspection report that deal with criticisms or potential defects in a firm's quality control systems may be made public only if the firm fails to address those matters to the Board's satisfaction within 12 months after the issuance of the final inspection report.
The rules would provide that the Board may, at any time, publish "general reports" concerning the procedures, findings, and results of its various inspections. These reports may include discussion of criticisms of, or potential defects in, quality control systems of any firm or firms that were the subject of a Board inspection. These published reports, however, would not identify the firm or firms to which the criticisms relate, or at which the defects were found, unless the information had previously been made public pursuant to the Board's rules or other lawful means.
The inspections rules must be approved by the Securities and Exchange Commission.
NOTE: Please note that this is a summary of a proposed PCAOB rule, and should not be construed to be a complete or final rule. Please refer to the PCAOB's Web site for updated and final rule information.
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