Inspections of non-U.S. audit firms present a “significant risk” to the Public Company Accounting Oversight Board, with a backlog of incomplete inspection reports dating back to 2006 almost certain to embarrass the board if not resolved soon.

That’s the conclusion of a self-assessment of the international inspection program just published by the PCAOB and presented to the Securities and Exchange Commission. Even inspections that are already complete are at risk because of inconsistencies in approach and documentation, the report suggests, should the board ever need to defend the methodology used in completed inspections.

The PCAOB has owned up to problems inspecting audit firms that are registered to do U.S. audit work but are not located inside the United States, citing cultural differences and conflicts between U.S. and other countries’ laws that have become obstacles. The report presented to SEC Chairman Mary Schapiro, however, provides the most candid public account yet of how the board’s own evolving internal processes have created a backlog of unpublished inspection reports for field work performed in 2006, 2007, and 2008.

The report says field work for 143 inspections had been completed through early August 2009, but only 42 reports had been issued. Of the 101 reports not issued, 82 constituted a “backlog” for inspections dating back to 2006.

More than one-third of inspections planned for 2009 had not yet been scheduled, some of them suspended pending the outcome of international negotiations. “Questions had arisen as to the rigor of some international inspections, particularly as concerned documentation, scope, consideration of risk, and reliance on foreign regulators,” the report says.

George Diacont, director of registration and inspections, conceded the program lacked a system of accountability, but also said guidance specifically tailored to international inspections developed at a slower pace than for domestic inspections, contributing to inconsistency.

In his cover letter to Schapiro, PCAOB acting Chairman Daniel Goelzer says 82 inspection reports resulting from field work performed in 2006 through 2008 have been held up in a “retrospective review” of the quality and consistency of the inspections. As a result of the study, the board has made “significant changes” in the way international inspections will be done in the future, said Goelzer.

“The board has recognized the need to increase its focus on the quality control mechanisms of large, global network firms as well as on referred work,” such as work performed by non-U.S. audit firms other than the firm signing the audit report, Goelzer told Schapiro. The board decided to hold up the reports and reassess its non-U.S. inspection program in the face of “revelations of widely reported audit failures outside the U.S., coupled with internal concerns regarding the manner in which international inspections were being performed,” he said.

The board is working on a plan to address the situation, including creating a “national office” structure for the international program, establishing greater staff accountability for international inspection work, and revising the international inspection methodology, said Goelzer.

But the board also needs more resources, he said. The PCAOB recently submitted a 2010 budget request to the SEC proposing a 16-percent increase in large part to increase staffing and technology. The SEC has not yet acted on that request.

While the report concludes that the international inspection program represents a significant risk for the PCAOB, it also notes the full extent of the risk remains a point of debate that the staff is trying to define, “relying, in part, on technology systems still in development.”