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Comments Sought on Plans to Revise PCAOB Inspections of Some Small Firms

The SEC issued a proposal to solicit comments on the PCAOB’s plan to modify its inspections for small firms that do not regularly issue audit reports but do play a secondary role in some public company audits. Typically the firms should get inspected every three years, but the regulatory board thinks its inspectors can be better deployed if they focus on the accounting firms that issue the audit reports for public companies and brokers.

The SEC on April 7, 2016, issued Release No. 34-77558, Public Company Accounting Oversight Board; Notice of Filing of Proposed Amendments to Board Rules Relating to Inspections, to gather comments on the PCAOB’s plans to modify its inspection process for some smaller audit firms that do not issue audit reports.

Comments are due 21 days after publication in the Federal Register , which normally occurs within a few weeks after a rule is posted on the SEC’s website. The Sarbanes-Oxley Act of 2002 requires the SEC to approve all major PCAOB decisions, such as rules and the annual budget. The SEC also picks the five board members.

The board filed the changes to Rule 4003(b), Frequency of Inspections, and Rule 4003(h) with the SEC on March 24 for accounting firms that have fewer than 100 public company audit clients. The small firms get inspected at least every three years.

The revision deals with small firms that participate in the audit “substantially” but do not issue the audit reports.

“The revised proposed amendment provides that the board will, in each year, select some ‘substantial role only’ firms for inspection, with the number of firms to be a number that is at least 5 percent of the number of firms,” Release No. 34-77558 said. These will be firms that played a substantial role in audits in one of the four reporting periods without having issued an audit report in any of those periods.

The board estimates that the 5 percent threshold will be about four to six firms each year.

The audit regulator believes that the 5 percent threshold would involve review of “substantial role only” work that is appropriate and sufficient to provide for a useful, ongoing focus on that segment of the population of firms.

“The board can always inspect a larger portion of that population in a given year without a rule,” the release said. “The board has determined to commit to a minimum of five percent through a rule.”

As of 2015, 571 accounting firms said they issue audit reports for one to 100 public companies or brokerage firms, and 103 accounting firms reported having played a substantial role in at least one public company audit without having issued an audit report for any issuers.

Release No. 34-77558 said, after having considered the SEC’s views and the PCAOB inspection’s staff’s identification of audit deficiencies in some inspections of “substantial role only” firms, the board slightly revised its previously adopted approach to such firms.

The SEC is also considering the PCAOB’s addition of Rule 4003(e), which will give the board more discretion in deciding when to forego inspection of a particular firm. The flexibility will let the PCAOB deploy its inspection staff more efficiently, the SEC said.

“Because of delays caused by obstacles to board inspections of registered firms in certain countries, the current rule’s deadline for the initial inspections of firms in those countries, on the basis of their having issued audit reports for issuers, has long since passed, and some of those firms have long since stopped issuing audit reports for issuers,” the SEC said in Release No. 34-77558. Some of these firms have stopped auditing clients listed on U.S. stock markets. There are 19 audit firms overseas awaiting inspections that have not issued audit reports since 2012, and 13 of the firms have not issued reports since 2010.

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