PCAOB Inspection
A PCAOB inspection is a regulatory examination conducted by the Public Company Accounting Oversight Board of a registered public accounting firm's audit work, quality control systems, and compliance with applicable professional standards, designed to assess whether audits of U.S. public companies are being performed in accordance with PCAOB rules and auditing standards.
The Public Company Accounting Oversight Board was created by the Sarbanes-Oxley Act of 2002 in response to the audit failures that accompanied the Enron, WorldCom, and other major accounting scandals of the early 2000s. One of its core mandates is to inspect registered accounting firms on a regular cycle — annually for firms that audit 100 or more public companies, and at least every three years for firms that audit fewer than 100 public companies — to assess the quality of audits being performed on U.S. public company financial statements.
During an inspection, PCAOB staff select a sample of completed audit engagements for review. Inspectors examine the audit documentation to evaluate whether the auditor obtained sufficient appropriate audit evidence to support the conclusions reached, whether the auditor properly identified and tested significant accounting estimates and judgments, whether internal control testing was adequately designed and executed, and whether the auditor's report was appropriate given the evidence gathered. The inspection also evaluates the firm's system of quality control — the policies and procedures the firm uses to ensure consistent audit quality across all its engagements.
When inspectors identify deficiencies in individual audit engagements, they are reported in Part I of the inspection report, which is made public. Deficiencies range from instances where the auditor failed to perform a required procedure on a specific area to situations where the evidence in the audit file was insufficient to support a key conclusion. Critically, a PCAOB inspection finding does not necessarily mean the underlying financial statements are misstated — it means the auditor did not gather enough evidence to support the conclusions reached, which is a different but still important distinction.
Quality control criticisms are reported in Part II of the inspection report, which historically was kept confidential for 12 months to give firms an opportunity to remediate. Persistent Part II criticisms that were not adequately addressed could be made public after that window. The PCAOB has periodically updated its inspection framework and transparency rules.
For investors, PCAOB inspection reports are publicly available on the PCAOB website and provide a form of independent quality assessment of the auditors of the companies they hold. A firm with persistent and material inspection deficiencies — particularly in areas such as internal control over financial reporting, revenue recognition, or complex estimates — represents an audit quality risk that is worth factoring into an investor's assessment of the reliability of financial statements audited by that firm.