Public Company Accounting Oversight Board Objectives

BACKGROUND AND HISTORY

Congress created the Public Company Accounting Oversight board (PCAOB) as a response to the Enron, WorldCom, and other accounting-related scandals. The Sarbanes-Oxley Act of 2002 created new requirements for publicly held companies and others (Chapter 4 discusses that Act in more detail) and revamped the regulatory system for auditors of public companies. The authority for standard-setting for audits of financial statements of publicly held companies and for quality control for firms that perform those audits was taken from the American Institute of Certified Public Accountants (AICPA), where it had been since the 1930s, and bestowed on the PCAOB.



The PCAOB opened its doors in January 2003 and held its first meeting that month. The Securities and Exchange Commission (SEC) reported, on April 25, 2003, that the PCAOB was organized and had the capacity to carry out its legislated duties, the final critical step in its establishment.





PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD AUTHORITY




Sarbanes-Oxley defines the PCAOB’s authority and revises the Securities Act of 1934 to recognize it. PCAOB was established to:

oversee the audit of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors [sec. 101(a)].

The PCAOB’s authority is subordinate to that of the SEC. Sarbanes-Oxley did not affect the SEC’s authority to enforce the nation’s securities laws, including regulating auditors, taking action against them, or setting accounting, auditing, or independence standards. The SEC maintains budgetary authority over the PCAOB and must approve proposed substantive rules before they take effect. The PCAOB regulates auditors of issuers, which are described under Sarbanes-Oxley as follows:

The term “issuer” means an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 USC 78c)), the securities of which are registered under section 12 of that Act (15 USC 78l), or that is required to file reports under section 15(d) (15 USC 78o(d)), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 USC 77a et seq.), and that it has not withdrawn [sec. 2(a)(7)].

It has authority over both domestic and foreign auditing firms that prepare or issue audit reports on U.S. public companies, or that play a substantial role in the preparation or issuance of such reports.

The PCAOB’s primary public-interest functions include:

• Registering accounting firms that audit public companies.

• Establishing and maintaining standards for auditing, quality control, ethics, and independence related to the preparation of audit reports for public companies.

• Conducting inspections of registered firms.

• Conductinginvestigationsand disciplinaryproceedings against registered firms and associated individuals, including imposing sanctions when justified.




The PCAOB is not charged with standard-setting or regulatory authority over audits on nonpub- lic companies. Those audits are regulated at the state level and the state boards of accountancy (or similar bodies) continue to recognize the AICPA as the standard-setter for those audits. Although state boards of accountancy can choose to adopt PCAOB standards instead of those of the AICPA, Sarbanes-Oxley §209 explicitly notes that “the standards approved by the [PCAOB] should not be presumed to be applicable ...for small and medium sized nonregistered public accounting firms.”