By Marcy Gordon
The Associated Press

WASHINGTON - Limited inspections of the Big Four accounting firms uncovered "significant" problems in their audits of companies' books, the head of the board overseeing the accounting industry said Thursday.

William J. McDonough, chairman of the independent board created to shore up investor confidence, also warned auditors against the sort of shortcuts or bending to pressure to please corporate clients that fueled the accounting scandals of 2002.

The Public Company Accounting Oversight Board, established by Congress to replace the accounting industry's own regulators amid the wave of scandals, has subpoena power and the authority to discipline auditors.

Its inspectors did only limited reviews of the Big Four firms' work in 2003, its first year of operations, but full inspections began this year.

"We expect the prospect of scrutiny to alter the relative risks and rewards to individual (auditors) who might otherwise consider short-cutting audit steps or bending to pressures to please clients," McDonough said.

In testimony at a House subcommittee hearing, McDonough said the four firms - Ernst & Young, PricewaterhouseCoopers, KPMG and Deloitte & Touche - agreed to the voluntary limited inspections, which used as a sample their auditing work for several "high-risk" client companies with complex finances.

In the inspections, the oversight board "identified significant audit and accounting issues," McDonough said.

"There's room for improvement," he told the lawmakers.

The board raised its concerns about auditing quality control to the firms, "and we will continue to look hard at whether the firms' conduct mirrors their words," he said.