The Public Company Accounting Oversight Board

The Sarbanes-Oxley Act created the Public Business Accounting Oversight Board (PCAOB) to presume the responsibility of managing the auditors of public business. The PCAOB is a private-sector, non-profit corporation. It was established to "protect the interests of investors and even more the general public interests in the preparation of informative, reasonable, and independent audit reports". (The PCAOB) Although the PCAOB is a personal sector organization, it has lots of government-like regulatory functions. The PCAOB was created in response to an increasing variety of accounting restatements by public companies during the 1990s and a series of recent prominent scandals like Enron and WorldCom.

Prior to the PCAOB, the audit market was self-regulated through the general public Oversight Board of the AICPA, however with the current scandals and restatements something needed to be altered.

The PCAOB consists of five members, of which one of them is the chairperson. All members are selected by the Securities and Exchange Commission and serve a 5 year term.

Get quality help now

writer-marian

Verified writer

Proficient in: Accounting

4.8 (309)

“ Writer-marian did a very good job with my paper, she got straight to the point, she made it clear and organized ”

+84 relevant experts are online

Hire writer

Two members of the PCAOB need to be or have actually been a licensed public accounting professional. Nevertheless, if the chairman is one of the CPAs, they might not have been a practicing Certified Public Accountant for at least five years. The organization has a staff of over 500 and its head office is in Washington D.C. The PCAOB has been offered numerous powers and obligations under area 101 of the Sarbanes-Oxley Act. They have the power to sign up public accounting firms that prepare audit reports for public business. The PCAOB sets auditing, quality assurance, ethics, independence and other requirements relating to the preparation of audit reports.

They conduct examinations of registered public accounting firms. They also carry out investigations and disciplinary procedures concerning offenses of guidelines and impose suitable sanctions where required versus public accounting firms. The PCAOB has the power to perform other tasks or functions that are identified essential to promote high professional requirements. The PCAOB conducts its operations and exercises its power throughout the United States. Under Area 105 of the Sarbanes-Oxley Act, the PCAOB has the power to investigate and discipline registered companies and their associated members.

The PCAOB's enforcement staff conducts investigations into possible violations of any provisions of the Sarbanes-Oxley Act, any professional standards, any rules of the PCAOB or the SEC, or any provisions of the United States securities laws relating to the preparation and issuance of audit reports. When violations are detected, the PCAOB will hold a hearing and, if necessary, impose sanctions against the organization. In December of 2006, Ibarra Firm was imposed sanctions like board members being revoked, a two year suspension, and a requirement of 200 hours of continuing professional educating before being allowed to issue any audits of financial statements. These sanctions were imposed by the PCAOB because they offered an unqualified opinion of Triad's financial statements even though they were substantially inaccurate.

In 2005, the PCAOB adopted "Ethics and Independence Rules Concerning Independence, Tax Services, and Contingent Fees." (Holstrom & Ray) This was their first independence and ethics rulemaking document. It addressed issues regarding tax services, contingent fees, personal accountability for independence infractions, and certain general independence and ethics roles. After the adoption of this document, Rule 3523 was created. Rule 3523: "Tax services for persons in financial reporting oversight roles", states that if auditors or their affiliates provide tax services to public company managers during the audit and professional engagement period, their independence is impaired. The rule will not become fully in effect until April 30, 2007, so firms have the opportunity to finish their current tax service obligations.

Rule 3523 has brought up some controversy because this rule limits the number of tax service engagements a firm may perform. The rule does not allow firms to provide tax services to managers or their families. Many firms are upset by this rule because of its limitations. However, I believe that this new rule is a good idea. Previous engagements between firms and clients have been given a large notice of when the rule will be in effect. They are given plenty of time to finish their engagements. This new rule may allow small firms more possibilities to increase their clientele. We may be moving away from having a small number of large firms doing all the services to having many firms providing the services. Also, Rule 3523 will ensure independence.

Another issue that has arisen since the establishment of the PCAOB is the increased compliance costs. In 2007, the PCAOB has been awarded a budget of 136,429,000 dollars by the SEC. Of that amount, 79,514,000 dollars will be used to pay for salaries. (The PCAOB) The PCAOB's budget is paid by public companies through fees and audit firms through fines. These fines can reach 100,000 dollars for individual auditors and up to 2 million dollars for audit firms. Many firms have increased their audit fees due to the increase in costs, partly due to the PCAOB. The PCAOB continues to grow each year. Their powers and responsibilities continue to grow, which in turn will lead to a larger budget. The SEC should take into consideration these additional fees for businesses and auditing firms when they determine the salaries of employees. The average salary for each employee is over 150,000 dollars, which is a substantial amount considering the organization is only a few years old and that at the rate they are growing, their budget will greatly increase.

I believe the PCAOB has been effective and will continue to be in regaining the trust from investors and those who look at financial statements. Recent scandals and numerous restatements of financial reports have hurt the accounting industry. The PCAOB has established many new regulations regarding independence and financial reporting that should minimize and prevent future scandals and restatements. I believe that the PCAOB will continue to grow and review more and more audit reports.

With the increase in the number of reviews, it should become less likely that an organization or audit firm may create a scandal because of the likelihood of being caught. Right now, audits may take longer and include more work, but after a few years they may become more efficient. Many audit failures may be due to isolated errors or systematic factors. These errors may be corrected by a further review by the auditors. Supervisors should inspect the reports before they turn to audit failures. This procedure could greatly reduce the need for financial report restatements and reduce the need for the PCAOB.

The PCAOB has had some criticisms brought forward since their creation, but audit firms must work with them to ensure their profession continues to serve the business community and its investors. The organization is designed to regain the trust of investors and of the accounting profession itself by ensuring informative, fair, and independent audit reports.

References

Holstrom, Gary & Ray, Thomas. PCAOB Standards-Setting Update Prepared for the Auditor's Report (Summer 2006). Retrieved on February 7, 2007, from http://aaahq.org/audit/Pubs/Audrep/06summer/item04.htmMcDonnell, Patrick. The PCAOD and the Future of Oversight. Retrieved February 7, 2007, from http://www.aicpa.org/pubs/jofa/dec2004/mcdonn.htmThe PCAOB. Annual Report for 2005 & 2007 Annual Budget. Retrieved on February 7, 2007, from http://www.pcaobus.orgWebCPA. Online Expo Center. Retrieved on February 12, 2007 from http://www.webcpa.com/