An Analysis of Audit Deficiencies Based on PCAOB Inspection Reports Issued During 2005

Abstract

Audit deficiencies have far-reaching implications on the users of financial reports, accounting firms and their clients, and the accounting profession. Section 104 of the Sarbanes-Oxley Act of 2002 (USHR 2002) requires the Public Company Accounting Oversight Board to conduct inspections of each registered public accounting firm. The inspection process is the Board's core function. It is the fundamental tool Congress gave the Board to restore public confidence in audited financial reporting (PCAOB 2005n, 1). This paper contributes to the literature and debate on the Sarbanes-Oxley Act and its Section 104 inspection process by providing a comprehensive analysis of the inspection reports issued during 2005.

Understanding common audit deficiencies may help accounting professionals when conducting future engagements. Educators need to understand the types of common audit deficiencies that occur in practice in order to better prepare accounting students for today's complex audit environment (Carmichael 2004). To that end, this analysis examines the accounting firms inspected during 2004 and 2005 and evaluates their audit deficiencies. Specific examples of deficiencies are identified in small, regional, national, and Big-4 accounting firms. Some common errors in the issuer's application of generally accepted accounting principles (GAAP) and procedural deficiencies that violate generally accepted auditing standards (GAAS) are summarized and discussed. Some final conclusions are presented.

Keywords: audit, accounting regulation, Sarbanes-Oxley, PCAOB

JEL Classification: M49, D80, G34, G38, K22, L51, L86, M41, M44