At least every three years, if not more frequently, public accounting firms face that dreaded moment when “the letter” arrives. Yes, THE letter, otherwise known as the inspection notification letter from the U.S. audit regulator, the Public Company Accounting Oversight Board (the “PCAOB” or the “Board”), which is sometimes preceded by a telephone call from the Division of Registration and Inspections. Once the firm receives notification, a myriad of thoughts often run through the reader’s mind:

• Already another inspection?
• Aren’t we still in remediation for the last inspection?
• Do we have time and resources to devote to this?
• What will they find this year?
• Will the PCAOB ever really be satisfied?
• How do we get our engagement teams best prepared for this inspection?
• Where do we start?

The team at JGA has been there before. On both sides of the table, actually. All those questions are valid.

Under the Sarbanes Oxley Act of 2002, every accounting firm that audits at least one public company (referred to as an “issuer”) must register with the PCAOB. Firms that issue at least one audit opinion of an issuer are then subject to continuous inspection by the PCAOB. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the PCAOB oversight of auditors of broker-dealers registered with the Securities and Exchange Commission (“SEC”), and this PCAOB authority includes inspections over the auditors of broker-dealers. As broker-dealers are generally required to file compliance or exemption reports, along with examination or review reports that are prepared by the same firms that prepared the audit reports, these audits, examinations, and reviews are all required to be performed in accordance with the PCAOB standards.

Over the last two decades, what firms face in an inspection, and what stakeholders see reported in inspection reports, has evolved. There is no disputing that each evolution results in a more comprehensive and robust process, which undoubtedly has improved audit quality. At the same time, this evolution translates to higher levels of stress to meet these performance expectations on firms.

When we were regulators working for the PCAOB, we were acutely aware of the pressures firms were facing. However, our role as inspectors was simply to conduct the inspection and let the firms figure out how to fix the problems. Now as Johnson Global Accountancy (“JGA”), in our role as advisors to firms, we witness the scale of pressure firms face during a PCAOB inspection and throughout the year, as firms grapple with how to drive continuous audit quality improvement. Regardless of how often a firm is inspected, the recurring theme from our discussions with firms and engagement teams is that all of them feel they are perpetually in some stage of the inspection or remediation process. That is because the process is long and involved and requires an enormous amount of planning, coordination, and communication.

COMMON PAIN POINTS WE HEAR FROM FIRMS

Since JGA’s founding, we have partnered with firms of all sizes to assist them through this process and have observed a few common themes:

1. Even though most firms have been through an inspection from start to finish, the process feels wholly new or foreign by the time the next inspection cycle rolls around.
2. Many firms, especially those who are not inspected on an annual basis, feel confused and overwhelmed by all phases of the inspection process.
3. Turnover and leadership changes within firms and engagement teams adds to the state of confusion.
4. Most feel that there is not sufficient guidance about inspections and how to adequately plan for and successfully navigate the entire process.
5. Once the notification letter arrives, firms feel as though they are re-discovering the process, always two steps behind the PCAOB.
6. The inspection process is time consuming for firms and dedication of resources during the process can be challenging.

With this in mind, we started to think about how we could help firms prepare for inspections and make the most of opportunities learned during the process to drive continuous audit quality improvement. Pulling from our extensive experience advising and working with a variety of firms through each step of the process, we have compiled our observations into this whitepaper. The goal of this document is to provide firm management and engagement teams’ step-by-step guidance throughout the inspection process. This document is intended to not only be a “how-to” guide of the process but to also provide thoughtful considerations to help steer firms in the right direction. There may be nuances and differences in each inspection cycle given the unique nature of each firm and the priorities of the PCAOB, but the general process described herein remains the same. The content of this guide breaks

each chapter into the major phases of the inspection cycle:

Whether you are new to this process or not, we hope this whitepaper will serve as your guide throughout the inspection process. Please share with your staff so that everyone involved can successfully navigate the PCAOB inspection process. As always, we welcome your comments and questions and we are always here to help discuss and provide advice on your firm’s particular situation.