Learn how audit committees can work with their external auditor to understand the results of the most recent PCAOB inspection and what the results mean to SEC registered companies - Peterson Sullivan - Delaware CPA Firm.

1. APRIL 2013
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Unlocking the mysteries of PCAOB inspections
A corporate audit committee plays a critical role in ensuring the integrity and transpar-
ency of a public company’s financial reports. One of the committee’s key responsibilities
is to hire and oversee a company’s external auditors.
Understandably, committees are keen to
know the results of audit firm inspections
by the Public Company Accounting
Oversight Board (PCAOB, or the
“Board”), but such information can be
hard to come by. A recent PCAOB
release should help audit committees. It
describes the Board’s inspection process
and suggests strategies for initiating
discussions with external auditors about
their inspection results.
Much-needed assistance
In past years, the PCAOB inspection
process has been something of a
mystery. Audit firms were reluctant to
discuss their inspection results. And audit
committee members didn’t fully under-
stand the inspection process or meaning
of the results, or how to get more
information about their auditors’ perfor-
mance.
Last year, to assist audit committees in
fulfilling their oversight responsibilities,
the Board issued a 26-page release
entitled Information for Audit Commit-
tees About the PCAOB Inspection
Process. It explains how PCAOB inspec-
tions evaluate a registered public
accounting firm’s compliance with the
Sarbanes-Oxley Act, SEC rules, profes-
sional standards, and other laws and
regulations in connection with audits of
public companies. Firms that regularly
provide audit reports for more than 100
companies are inspected annually. Other
firms are inspected at least once every
three years.
Inside the inspection process
During inspections, the Board examines
certain aspects of audits the firm has
performed as well as its quality control
system. The Board selects, on a risk-
weighted basis, a limited number of
individual audits to examine, focusing on
the most difficult or inherently uncertain
aspects of the financial statements.
For each inspection, the Board prepares
a written report, recounting its findings in
Parts I and II. Part I, which is made public
and can be found on the PCAOB’s
website, describes audit deficiencies
caused by the auditor’s failure to gather
sufficient evidence to support an audit
opinion. These deficiencies may relate to
opinions that the financial statements are
fairly stated or that the company’s
internal control is effective.
Part II describes deficiencies in the firm’s
quality control system that raise doubts
as to whether the system provides
reasonable assurances that professional
standards are met. These findings aren’t
made public unless the firm fails to

2. 2 PUBLIC COMPANY INSIGHTS | APRIL 2013
Should your company provide earnings guidance?
The Commission on the Regulation of U.S. Capital Markets in the 21st Century recommended, in a 2007 report, that public
companies stop issuing earnings guidance. The Commission suggests that companies move from quarterly earnings guidance
with a single EPS number to annual guidance that provides a range of EPS numbers.
Unfortunately, if your company currently provides quarterly earnings guidance, discontinuing the practice or reducing its
frequency can be risky. Regardless of your motives, the market may interpret the change as signaling a negative short-term
outlook, uncertainty over the company’s prospects or a move toward less transparency.
If you do decide to discontinue providing earnings guidance to your investors and analysts, be sure to manage the process
carefully. Clearly communicate that the purpose of the change is to reflect your company’s focus on long-term performance. To
emphasize your commitment to transparency, consider replacing quantitative earnings guidance with qualitative information
about your company’s long-term strategies and any material trends or developments that might possibly affect future earnings.
remediate the deficiencies within 12
months.
Questions to ask
To develop a deeper understanding of an
inspection’s findings and implications, the
PCAOB’s release suggests that audit
committees ask their company’s audit
firm several questions, including:
• Are Was the company’s audit
selected for inspection?
• Did the Board identify deficien-
cies in other audits that involved
issues similar to those presented
in the company’s audit?
• What were the audit firm’s
responses to the Board’s
findings?
• What topics are included in the
Part II findings?
The Part II findings are private and many
audit firms are reluctant to share the
details with their clients. Nevertheless,
the release urges audit committees to
ask for generic information about the
findings, such as:
• Is the firm making changes to
address any quality control
deficiencies?
• What’s the progress of the
quality control remediation
process and what submissions
has the firm made to the Board
in connection with that process?
• For which years has the Board
made a final determination
regarding the firm’s remediation
efforts and what was the nature
of that determination?
• Has the Board provided initial
indications that the firm may not
have sufficiently remediated any
items?
Most audit firms are willing to discuss
these issues. Knowing the right questions
to ask can help audit committees initiate
a dialogue.
Launching meaningful discussions
Information contained in the PCAOB’s
release, together with the suggested
questions, helps equip audit committees
to engage their audit firms in a meaning-
ful discussion about Board inspection
results. This, in turn, should help commit-
tees evaluate the quality of audits and
better fulfill their oversight responsibili-
ties.