With a looming Sarbanes-Oxley deadline for smaller companies, can smaller entities cope when there is an expected shortage of auditors? After December 15, between 13,000 and 14,000 companies will for the first time have to comply with complex auditing requirements of the Sarbanes-Oxley Act. And a report released this week by the Public Company Accounting Oversight Board suggests they'll be struggling after identifying "significant and frequent deficiencies" in audits performed by smaller audit firms.

The report focussed on 497 smaller firms, those with 100 or fewer audit clients, over the past three years.

One of the most glaring deficiencies was in the area of revenue. In some cases, auditors did not review significant contracts or gauge whether the revenue figures were recorded in the appropriate reporting period. Worse still, the PCAOB also found auditors frequently relied on management assertions without corroborating evidence. "Heightened sensitivity may be especially important in the audits of smaller companies where investors may perceive revenue as a key indicator of the company's prospects," the report said.

The report also identified problems with the way the firms audited related party transactions. That included checking the validity and classification of expenditures made by a controlling shareholder and testing the validity and accuracy of payables owed to related parties. Fairly basic stuff you would think.

There were also problems with the way the firms evaluated the work of specialists, such as actuaries, engineers, and environmental consultants. According to the report, some failed to evaluate the relationship between the specialist and the company that could have a bearing on the specialist's objectivity. Firms also failed to understand the specialist's methods and assumptions.

With a looming auditor shortage, these fundamental errors are a warning as the reach of Sarbanes-Oxley continues to be extended.