Who is the PCAOB?
PCAOB, fully abbreviated as ‘Public Company Accounting Oversight Board,’ is a not for profit organization that has the mandate of regulating publicly traded companies’ auditors. The main reason for establishing PCAOB is to help reduce audit risks. PCOAB was created with the passage of the SOX Act of 2002 (Sarbanes-Oxley Act). The SOX Act was established as a response to several accounting scandals that were experienced in the late 1990s (Lamoreaux, 2016). The PCAOB board protects the investors and the public companies’ stakeholders by ensuring that the companies’ financial statements auditors observe and adhere to strict guidelines put in place by the board. The Securities and Exchange Commission (SEC) has been overseeing the PCOAB since 2010, and PCOAB oversees the SEC-registered dealers and brokers audits.
What is PCOAB authority?
The PCAOB has the authority to discipline and investigate the registered public accounting persons and firms related to those firms for not being compliant to the SOX Act of 2002. The SEC rules, PCAOB rules, and several other laws and the professional guidelines and standards that govern the process of an audit of public companies, dealers, and brokers. PCAOB has the powers to enforce the appropriate sanctions against the non-compliant audit firm. The PCAOB has been given several authorities and powers listed in the Act section 101. The first authority is the power to decree the cataloging of the public accounting companies that are mandated with the preparation of the reports. This authority is further supported by section 102 that prohibits unregistered persons or companies from participating in the audits (PCAOB, 2019). The second powers and authority given to PCAOB is the power to right to establish and implement auditing, independence, quality control, ethics, and other relevant standards and regulations. These guidelines and standards were implemented by different accounting firms, but PCAOB was mandated as the primary regulator above them. The third and another important authority that PCAOB has been given is the legal mandate to carry out an inspection on all the cataloged and registered public accounting firms to ensure they observe the SOX Act and the already implemented ones. Additionally, PCAOB has the mandate to carry out an inspection of all the accounting companies that do audits of less than a hundred public companies every three years (once), and the audit firms auditing over 100 companies per year. The last PCAOB authority is the right to approve and consent auditors and audit firms by holding disciplinary and investigatory proceedings.
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What is the PCAOB Relevance to the business community?
The main importance of PCAOB to the public companies is helping them build and restore public confidence. PCAOB’s main job is to instill confidence in financial reporting and auditing. The public companies and their advisors have a big stake in PCAOB success. The audit failures, companies collapse, and several restatements evidenced in the past years have created public anger and deep cynicism (Gipper, Leuz, & Maffett, 2019). It is an evident knowledge that every company that raises capital from the public and trades in the securities market has a greater interest in having confidence and trust from the public in terms of their auditing and financial reporting. PCAOB helps public companies gain the trust of the public. PCAOB helps in sanitizing the process of auditing. Auditing is a way of evaluating companies internal control inefficiency ( Nolder, & Palmrose, 2018) . Retaining an effective internal controls and effective system is very critical for the companies in terms of precluding fraud, gaining trustful financial reporting, precluding assets misuse and minimizing capital markets costs. For these reasons, the PCAOB’s job is very important, not just to the audit firms and the auditors but also to the public companies.
References
Gipper, B., Leuz, C., & Maffett, M. (2019). Public Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime. The Review of Financial Studies .
Lamoreaux, P. T. (2016). Does PCAOB inspection access improve audit quality? An examination of foreign firms listed in the United States. Journal of Accounting and Economics , 61 (2-3), 313-337.
Nolder, C., & Palmrose, Z. V. (2018). Economic analysis of proposed PCAOB standards: Finding a path forward. Accounting Horizons , 32 (2), 183-200.
PCAOB (2019). PCAOB Sanctions Two Firms and One Individual for Auditor Independence Violations. Accessed 7 th May 2020 from https://pcaobus.org/News/Releases/Pages/PCAOB-Sanctions-Two-Firms-and-One-Individual-for-Auditor-Independence-Violations.aspx
