The enactment of the Sarbanes-Oxley Act (SOX) on July 30, 2002 led to the establishment of the Public Company Accounting Oversight Board (PCAOB). A private-sector, non-profit entity governed and supervised by the Securities and Exchange Commission (SEC), PCAOB was formed to supervise accounting professionals, particularly the auditors of publicly traded corporations, with a view of safeguarding the investors’ interests and to assure the public that companies’ audit reports are informative, trustworthy, and impartial. In addition, the Board oversees broker-dealer audits. These include submitted compliance reports in adherence to federal security laws and policies.
Timeline of PCAOB since the Legislation of SOX in 2002
On October 25, 2002, the SEC proclaimed that Judge William H. Webster will be the chairman of the Board, while Charles D. Niemeier, Daniel L. Goelzer, Willis D. Gradison Jr., and Kayla J. Gillian will be the founding members of PCAOB.
The first board meeting happened on January 9, 2003. Since then, several important roundtable meetings occurred. The Reporting on Internal Control, Audit Documentation, Non-U.S. Auditor, and Auditor Independence and Tax services are among the items that were on the preceding agenda for discussion. In addition, various rules, policies, regulations, and statements were adopted and consequently released. Some of the significant ones, during the first three years of PCAOB, were the rules on inspection, investigations and adjudications, audit firm registration, and oversight of non-U.S. audit firms; and Auditing Standards No. 1: References in Auditors’ Reports to the Standards of the Public Company, Auditing Standards No. 2: An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements, Auditing Standards No. 3: Audit Documentation, and Auditing Standards No. 4: Reporting on Whether a Previously Reported Material Weakness Continues to Exist.
More guidelines, rules, and standards were implemented by PCAOB in the subsequent years. These include Staff Audit Practice Alerts, Attestation Standards, and new Auditing Standards. As of this writing, the most recent news release of PCAOB is on Audit Quality Indicators and Engagement Partner Transparency. In addition, the Board had issued the Audit Committee Dialogue, discussed updates on some standard-setting projects, and conducted an open board meeting whereby the Supplemental Request for Comment Related to Improving Audit Transparency and Concept Release on Audit Quality Indicators was discussed.
The Board Members of PCAOB
The SEC has been mandated to appoint five members of the PCAOB after conferring with the Chairman of the Board of Governors of the Federal Reserve System. These members have staggered five-year terms. Currently, James R. Doty is the Chairman of the Board while Jeanette M. Franzel, Lewis H. Ferguson, Steven B. Harris, and Jay D. Hanson make up the membership of the Board.
According to the International Forum of Independent Audit Regulators (IFIAR), the SOX requires that out of the five members of the Board, only two must be or must have been Certified Public Accountants (CPAs). If and when the Chairman of the Board is a CPA, he/she should not be providing services as a CPA for at least five years prior to his/her conscription to the Board. In addition, all the members of the Board must work full-time and, concurrent with the service on the Board, must not engage in other business or professional endeavors.
In reference to the Board’s Ethics Code, there is a “cool-off period” of 12 months, which starts on the date of appointment. During this period, a Board member cannot partake in decision-making events that will have or has relative material effect on the Board member’s previous employer, clients, and business partners five years prior to his/her recruitment to the Board. Moreover, in the event of conflict of interest, either directly or indirectly, he/she shall recuse himself/herself for the said Board function or activity.
Responsibilities and Authority of the PCAOB
Generally, the Board has four responsibilities. These are:
- Registration of accounting firms that conduct audits on publicly traded entities
- Inspection of registered accounting firms
- Establishment of auditing, quality control, independence, and ethics standards, as well as attestations for registered accounting firms
- Investigation and discipline of registered auditing firms and their associated persons for infractions or transgressions of law or professional guidelines.
As per the SOX provision, auditing firms must register with the PCAOB. Moreover, foreign auditing firms that plan, provide, or participate in the preparation of audit disclosures for any issuers, brokers, and dealers based in the country must comply with the rules of PCAOB. In addition, PCAOB can inspect and regulate public auditing firms and the people associated with the firm for noncompliance with SOX, SEC policies, and other requirements and specifications on audits of public corporations, brokers, and dealers. Regulatory compliance is guaranteed by the PCAOB since they are allowed to examine the audit reports, audit performance, issuance of audit reports, logs and other pertinent documents by the accounting firm
SOX obliges PCAOB to perform annual inspections on firms that cater for more than 100 issuers, and at least once in 3 years for firms that provide audit reports for less than 100 issuers. If infractions or transgressions are discovered, PCAOB can suspend or revoke an auditor’s registration, suspend or bar an individual, and impose fines.
Section 109 of SOX instructs issuers, brokers, and dealers to pay the “accounting support fee” that will support the undertakings of the Board. Based on the yearly budget of PCAOB that is approved by SEC, the Board will calculate the cumulative amount of fees that will be exacted to brokers, dealers, and issuers. Aside from the accounting support fees, public accounting firms are required to pay a certain amount that is used to cover the costs in processing and reviewing registration applications. Non-compliance is a violation of the Securities and Exchange Act of 1934.
As discussed earlier, domestic or foreign auditing firms that provide audit reports of U.S. public corporations, brokers, and dealers, and those that have a major role in preparing or issuing such audits are compelled to register with the Board. PCAOB is obliged to carry out a continuing program of inspections of the said firms wherein adherence to SOX, to the Board’s and SEC’s rules and policies, and to the professional standards will be evaluated.