Two sides of oversight
For audit firms that audit public companies or broker-dealers, the Public Company Accounting Oversight Board conducts inspections and can open investigations and disciplinary proceedings. For companies, the SEC's Division of Corporation Finance reviews filings and issues comment letters, and the Division of Enforcement may become involved when accounting issues look serious. The audit committee sits between the two and is responsible for overseeing the outside auditor. An inspection finding about an audit does not by itself mean the company's financial statements were wrong, but it can prompt questions that lead there.
Handling inquiries and comment letters
Responses to regulators become part of a record that may be reviewed later, so accuracy matters more than speed. Audit firms should involve counsel before answering requests that look like the start of an investigation, and should take particular care with workpapers, since altering audit documentation after the fact is treated very seriously. Companies answering comment letters should make sure accounting, legal, and the auditor agree on the response. If a comment points to a possible error in previously issued financial statements, the analysis of whether a restatement is needed should begin promptly, with the audit committee involved. When an audit committee hears of a significant inspection finding on its company's audit, it will usually want to discuss with the auditor what the finding means for the current year's work.
When a review becomes an investigation
PCAOB investigations and disciplinary proceedings are generally nonpublic until resolved, but the consequences for firms and individual auditors can be significant. Individual auditors may need counsel separate from their firm. For companies, a restatement can lead to SEC inquiries, shareholder claims, and compensation clawbacks under exchange listing standards. Firms should also check whether their professional liability coverage calls for notice of a regulatory inquiry, and individual auditors should ask what support the firm will provide. We begin with the inquiry itself, the accounting question at issue, and the people involved, and then set out how to respond and who belongs in the room.
