The Public Company Accounting Oversight Board (PCAOB)
is a nonprofit corporation created by Congress to supervise the audits of the
public company. The main focus was to safeguard the interest of investors and
public. PCAOB also oversees the audits of broker-dealers, including compliance
reports filed in accordance to federal securities laws, to boost investor
protection.
PCAOB was created in the aftermath of Enron, WorldCom, Tyco and
the series of other financial reporting scandal that destroyed the securities
market and shook the public confidence during the last several years.
The responsibilities are similar to the mission of Securities and
Exchange Commission (SEC), and the board operates under the supervision of SEC.
However, the Board is not part of the government, and the members of the staff
are not government employees.
The
Board has a staff of about 120 employees in which 90 are permanent, and 30 are temporary
employees. The offices of PCAOB are in Washington and New York.
The
PCAOB's responsibilities include the following:
·
Registering public accounting firms;
·
Establishing audit, quality control, ethics,
independence, and other standards related to public company audits;
·
Conducting inspections, investigations, and
disciplinary proceedings of registered accounting firms; and
·
Enforcing compliance with Sarbanes-Oxley.
When
Congress created the PCAOB, it gave SEC the power to regulate PCAOB's
operations, including appointing or removing members, approving the PCAOB's
budget and rules, and to consider appeals of PCAOB inspection reports and
disciplinary actions.
1. Registration of Public accounting firms
All the
accounting firms who get involved in preparing audit reports on U.S. public firms
must register with the board. After the registration,
the board can implement other authorities such as compliance with Board
auditing standards and conducting inspection.
2. Inspection
After the registration, public company will be subject to Board
inspection. If any auditing firm which audits more than 100 public companies,
the act requires annual inspection. There are eight such firms. For other
accounting firms, inspections must take place at least once every three years.
The focus of inspection is on “professionalism” -- the factor that
make auditing a learned profession, rather than merely a trade.
These professionalism factors include such things as:
§
"Tone at the Top": Organizations
have a propensity to adopt the culture of their leadership. The Board seeks to
inspect and determine the kind of philosophy regarding professionalism and
commitment to the public interest at the highest level.
§
Partner
Evaluation, Compensation, and Promotion:
Another litmus test of an organization's values is what it rewards.
§
Client Acceptance and Retention: The board
will explore how firms make a decision to accept the new audit clients and
whether they retain the existing client. The board will also understand how the
firms assess the risk of their clients and how they balance audit and reputation
risk against probable revenue.
Much of the Board’s focus will be on firms’ culture in the first
year rather than on a firm’s mechanics.
3. Professional
Discipline
The Board will administer a disciplinary regime. Most of
the board work will be remedial which focuses on assisting these firms to raise
their standards and intensifying their quality controls. The Board can also
impose fines and expel individuals and firms from public company auditing.
4. Auditing
Standards
Finally, the Board must set up the auditing and other
professional standards that administer public company audits. Prior to Sarbanes-Oxley,
that task was the area of the accounting profession itself, acting principally
through the Auditing Standards Board of the American Institute of Certified
Public Accountants. Now this responsibility vests in the Board.
The Board will appoint an advisory group to help it in
standard-setting. There will be approximately 25 members comprising the
advisory group which will include practicing auditors, financial statement
preparers, and investors.
5. Investigation
After the decision on investment
is taken, PCAOB has to decide as to what type of investigation should be
carried between the two types of investigations. There are two types of
enquiries one is “informal inquiry” and the other is “order of Formal
Investigation”. In deciding whether to investigate, the PCAOB is not limited to
the information coming from an inspection. It can receive information from any
source and then decide what sort of inquiry to commence with.
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