It's finally happened. The Public Company Accounting Oversight Board has been conducting inspections of audit work for a few years now. At last, we have good analysis of the kind of audit mistakes the firms have been making. Radford University assistant professor of accounting, Helen M. Roybark, also provides interesting insights in her paper, An analysis of audit deficiencies based on PCAOB inspection reports issued during 2005.

The paper looks at all the mistakes, including the bloopers of the big firms.

These include failures to identify or appropriately address errors in the issuer's application of GAAP, covering areas like inventory and cost of sales transactions, transactions related to the purchase and/or impairment of goodwill and revenue recognition. Not exactly insignificant mistakes as they could have huge material impact on a company's accounts. Other deficiencies include making a proper assessment of the clients' internal controls, work paper discrepancies and the quality of audit evidence, inappropriate use of analytical procedures, inadequate sample sizes and sampling errors.

Once again, these are not insignificant deficiencies.

The report also highlights some problems with PCAOB. Like, for example, the amount of time that passes between the PCAOB inspection and the date it issues its report. For example, it did an inspection of E&Y from July to December 2004 but it didn't release the report until November 2005.

But as the report says, the big problem with PCAOB is that there is important information that isn't made public. One of the more ridiculous features of Sarbanes-Oxley is that it prohibits the PCAOB from disclosing criticisms of a firm's quality controls, unless that firm fails to correct deficiencies within 12 months. In other words, a year can pass and investors would be left in the dark. Related to that is that the PCAOB criticizes an audit firm's work with a client but the client is not identified. Once again, investors are left in the dark.

Given the intention of Sarbanes-Oxley was to protect investors, this is simply not good enough.