Compliance Blog

The PCAOB issued its report on Small Firm Inspections on October 22, 2007. The Center for Audit Quality plans to hold a webcast on Thursday, Nov. 29, from 1:30 to 3:30 p.m. Eastern time that will allow public company auditing firms to hear from the PCAOB about the most common deficiencies they found, and ask questions.


The report details some areas where smaller audit firms were found to be deficient in their audit practices of public companies for Sarbanes-Oxley Section 404. They were specifically in the areas of:

• Revenue Recognition - more specifically that firms often did not go into enough detail surrounding the contracts and industry specific practices to understand whether the revenue was in fact correct. Further, they relied on substantive testing of Accounts Receivable and Inventory too often to justify the revenue. Thresholds for further investigation were often not set leading to suspect conclusions about revenue recognition.



• Related Party Transactions - Lack of understanding of the existence and implications of related party transactions as well as potential improper levels of disclosures of their existence. Further, such transactions can have implications for other indebtedness or other such arrangements that may not be recorded properly on company accounting records.



• Equity Transactions - Since newer companies have more difficulty raising money, they often do not properly record and account for the equity transactions according to GAAP. Audit firms in many situations failed to determine whether firms had properly complied with SFAS No. 123 - Accounting for Stock based compensation. Numerous deficiencies were found in the firms' testing of fair value of such compensation.



• Business Combinations and Impairment of Assets - Where auditors have failed to identify the the accounting acquirer; these transactions were not always properly researched.

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.