Did you know smaller audit firms face PCAOB inspections at a higher rate than the Big Four? I didn’t. I learned that in my recent Earmark Podcast conversation with Christina Ho, a PCAOB Board Member appointed in 2021.
I asked Christina a simple question: if an audit firm does 100 audits, what percentage gets inspected by the Public Company Accounting Oversight Board (PCAOB)?
Her answer revealed a system that seems to favor the largest firms. For the "global network firms" (Big Four plus Grant Thornton and BDO), the PCAOB inspects about 50 audits from each Big Four firm annually. Since these firms audit thousands of public companies, their inspection percentage is quite low - likely way under 10%.
But what about mid-sized firms? Those with more than 100 issuers get inspected annually at a rate of about 10% of their audits. That's a higher percentage than their larger competitors despite having fewer resources.
"I personally think our inspection program is disproportionately burdensome on these firms," Christina said.
Christina also told me that some mid-sized firms are actually trying to reduce their client base to dip below the 100-issuer threshold. Why? Because then they'd only face inspections every three years instead of annually.
When I pointed out how unfair this seemed, Christina agreed. She's particularly concerned about the broader impact. Smaller public companies often rely on these mid-tier audit firms since the Big Four typically won't take them on. If the regulatory burden discourages growth in this sector, it affects the entire market.
Want to hear the full conversation about PCAOB inspection rates and their real-world impact? Check out Episode 88 of the Earmark podcast: "Behind the Numbers: The Truth About PCAOB Deficiency Rates."
