Two Mississippi companies that conduct accounting for public companies received the best score possible when their work was reviewed recently by the Public Company Accounting Oversight Board (PCAOB) set up by the Sarbanes-Oxley Act.
No deficiencies were found in PCAOB audits of the public accounting work done by Shearer, Taylor & Co., P.A., Ridgeland, and T.E. Lott & Co., in Columbus. The two Mississippi firms were among four of 17 inspection reports that generated no negative comments regarding either audit performance or quality controls from the PCAOB.
“That is pretty good for Mississippi,” says Bob Shearer, a shareholder and audit partner with Shearer, Taylor & Co., P.A.
Shearer feels confident about the work the firm does primarily for public company financial institutions in the state. But this was the first review by the PCAOB, so it wasn’t known what issues might arise.
After the Sarbanes-Oxley Act of 2002 was passed, firms with public company clients had to register with the PCAOB, which has its own set of auditing standards that are somewhat different and expanded from the auditing standards for non-public companies.
“In connection with PCAOB, any firm that audits public companies is subject to inspection by the PCAOB every three or four years,” Shearer says. “This is somewhat similar to peer review requirements CPA firms have had for many years where CPA firms come in and audit what you do. But this is government regulated and not CPA firm regulated.”
The very largest firms must be inspected on an annual basis, while other firms are audited on a three- to four-year cycle.
Shearer said the firm was concerned because this was a new process, and an adverse report could have negative consequences for the firm as well as its public company clients. The PCAOB did its inspection the week of April 30, and Shearer, Taylor & Co. got its official report July 16.
PCAOB looked at public company audits that were done to review work papers to make sure there were no deficiencies in auditing approach and procedures. That part was to make sure there was appropriate documentation and appropriate audit work.
“The review did not identify any audit performance issues that, in the inspection team’s view, resulted in the firm failing to obtain sufficient, competent evidential matter to support its opinion on the relevant financial statements,” Shearer says. “If they had found some deficiencies, they would have actually listed them in the report.”
The second part of inspection involved a review of quality control systems, the firm’s overall policies and procedures. It deals with issues such as training and compliance with independent standards.
The report said, “The inspection team did not identify anything that it considered to be quality control defect that warrants discussion and a board inspection report.” Had it found any deficiencies, it would have been listed in confidential part of report and the firm would have had a year to fix the problems.
There have been concerns in the business community that the Sarbanes-Oxley legislation placed an undue burden on public companies. Shearer says he believes initially it was a burden because no one knew what to expect.
“Everybody was extremely cautious and conservative,” Shearer says. “From that standpoint, it is a burden. But it also helped everybody focus on the things that are important. In my opinion, there is no substitute for honest clients who want to do things the right way, and competent auditors who are willing to do their jobs.”
Shearer says since the firm has had good results over the years with peer review reports, it felt confident of its work.
“We feel like we do things the right way,” he said. “But you still don’t know until you have regulators look at you and issue their report.”
People are getting used to Sarbanes-Oxley.
“As the PCAOB looks at their rules, what they expect audit firms to do, I think they are trying to keep everybody’s eye on the ball and not forcing you to do things just to be going things,” Shearer says.
Mike Hawkins, president of T.E. Lott & Co. was also initially uncertain about the review.
“This was our first review by the PCAOB,” Hawkins says. “We had three reviewers on site. There were very professional. We were uncertain about the methodology of their review. We have five SEC clients and they reviewed three of those. Their review revealed no deficiencies in those audits. Then, as part of the review, they do a review of the quality control system of the firm. They found no deficiency in our quality controls.”
The PCAOB looked at the practices, policies and procedures the firm has in place in the firm concerning the performance of the audit engagements. During review, it looks at the high-risk areas of the audit engagement. Its emphasis is on that.
“For a financial institution or bank, the allowance for loan losses — whether a loan is collectable or not — would be a high-risk area,” Hawkins says. “You are used to dealing with regulators in banks, so in some ways you already know what the emphasis is going to be. But you are unsure with the PCAOB for the first time.”
Hawkins believes Sarbanes-Oxley put an unnecessary burden on public reporting companies.
“I believe the focus of Sarbanes-Oxley, which was to improve internal controls over financial reports within the company, was good,” Hawkins says. “But they went too far into areas that were not significant to the company. I believe they are correcting this with the issuance of the new auditing standards. The documentation standards in the original auditing standard are very burdensome. So I’m hoping this new auditing standard will cut back on that.”
Hawkins says Sarbanes-Oxley also put a burden on the smaller accounting firms in obtaining adequate staff for two reasons: National firms needed additional staff and they hired a lot of graduates out of college. And the companies that are subject to Sarbanes Oxley needed additional accounting staff to comply with the requirements.
“It has put a burden on us and limited the capability of the smaller firms to take on additional Sarbanes-Oxley work,” Hawkins says.
For more information about inspection reports, go to the Website http://www.pcaobus.org/Inspections/Public_Reports/index.aspx.
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.