By:  Cydney Posner

Has the PCAOB has taken the hint? In its statement, released yesterday, announcing the commencement of its 2006 inspections of registered public accounting firms, the PCAOB indicated that a key emphasis of the 2006 inspections will be the "efficiency" of the firms' performance of their internal control audits, consistent with prior PCAOB guidance. "Efficiency" is defined as the achievement of the objectives "with the least expenditure of effort and resources."

To assess efficiency, the inspectors will evaluate:

  • the degree to which the audit of internal control over financial reporting and the audit of financial statements were performed as a single, integrated and mutually reinforcing process;
  • whether auditors use a top-down approach in which company-level controls were identified as the first step in planning the audit;
  • whether auditors properly assessed risk and used a risk-based approach to determine the nature, timing, and extent of internal control testing; and
  • whether auditors took full advantage of the opportunities available to use the work of others, such as the company's internal audit staff.

Public portions of the 2005 PCAOB inspection reports are available by clicking here.

Of course, all this presumes that Kenneth Starr, the former Independent Counsel in the Monica Lewinsky investigation, is not successful in his efforts, on behalf of The Free Enterprise Fund, a conservative think tank, to have the PCAOB declared unconstitutional.  Starr contends that the PCAOB "excessive delegation of power by the executive branch" in violation of the mandated separation of powers among the three branches of government. The Washington Post reports that he said that "It is quite likely that the Supreme Court would be interested in this case eventually."

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