Audit Firm: US PCAOB regulation of US Audit Firms

The Public Company Accounting Oversight Board (PCAOB) is a private-sector, nonprofit corporation established by the U.S. Congress to oversee the audits of public companies in United States in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. In U.S in early 2000, when the Enron and WorldCom Scandal came to surface, the congress felt the need for more strict regulations for the audit firms and thus promulgated the Sarbanes Oxley Act on July 30, 2002. This act mandated the formation of PCAOB to oversee the audit of public companies that are subject to the securities laws, 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 public investors.

Before the Sarbanes-Oxley Act of 2002, the audit profession was self-regulated in U.S., but after its promulgation, it required that auditors of U.S. public companies be subject to external and independent oversight for the first time in history. In passing this Act, Congress sought to restore investor confidence and address serious gaps in the U.S. regulatory framework that were identified through the financial scandals of 2001-2002. The PCAOB comprises of five members, including the Chairman and are appointed to staggered five-year terms by the Securities and Exchange Commission (SEC).

The PCAOB has five primary responsibilities:

·         Registration of public accounting firms (including non-US firms) that audit public companies (including non-US issuers) trading in US securities markets;

·         Inspections of registered public accounting firms;

·         Establishment of auditing and related attestation, quality control, ethics, and independence standards for registered public accounting firms; and

·         Investigation and discipline of registered public accounting firms and their associated persons for violations of specified laws or professional standards.

·         Enforcing compliance with Sarbanes-Oxley Act.

Additional Thoughts

Although the Sarbanes-Oxley Act, through establishment of PCAOB, introduced much strict regulations for the audit profession, but the WorldCom and Enron scandal alongwith the dissolution of the then big five firm Arthur Andersen which was found guilty of fudging Enron accounts, brought a great disrepute for the profession. Audit firms need to develop a sense of self-regulation and high ethical standards so that the investors and public in general endow trust upon the profession.

Reference: https://goo.gl/YU1dgc

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