The Public Company Accounting Oversight Board (or PCAOB, sometimes jokingly pronounced "Peek-a-boo") is a private-sector, non-profit corporation created by the Sarbanes-Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies.
Its stated purpose is to 'protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports'. Although a private entity, the PCAOB has many government-like regulatory functions, making it in some ways similar to the private Self Regulatory Organizations (SROs) that regulate stock markets and other aspects of the financial markets in the United States.
The PCAOB has five members, including its chairman, each of whom is appointed by the U.S. Securities and Exchange Commission (SEC). Two members of the PCAOB (and only two members) must be or have been a certified public accountant. However, if the chairman of the PCAOB is one of those two members, he or she may not have been a practicing certified public accountant for at least five years prior to being appointed to the Board.
Each PCAOB member serves full-time, for staggered five-year terms. The salary of the PCAOB's chairman is currently $556,000 per year, while the salaries of other board members are $452,000 annually.
The Board's annual budget of approximately $180 million(Board Approves its 2010 Budget and Related Strategic Plan), which must be approved by the SEC each year, is funded by fees paid by U.S. issuers.
The organization has a staff of over 600, and its headquarters is in Washington, D.C.
The PCAOB's first chairman was the former New York Federal Reserve president, William J. McDonough.
The Board's immediate past Chairman is Mark Olson, a former Federal Reserve Board governor.
The Board's current Chairman is Daniel Goelzer, former General Counsel of the SEC and a Partner at the law firm Baker & McKenzie in Washington, D.C.
Under Section 101 of the Sarbanes-Oxley Act, the PCAOB has the power to:
- register public accounting firms that prepare audit reports for issuers;
- set auditing, quality control, ethics, independence and other standards relating to the preparation of audit reports by issuers;
- conduct inspections of registered public accounting firms;
- conduct investigations and disciplinary proceedings concerning, and impose appropriate sanctions where justified upon, registered public accounting firms and associated persons of such firms (including fines of up to $100,000 against individual auditors, and $2 million against audit firms);
- perform such other duties or functions as the Board (or the SEC) determines are necessary or appropriate to promote high professional standards among, and improve the quality of audit services offered by, registered public accounting firms and their employees;
- sue and be sued, complain and defend, in its corporate name and through its own counsel, with the approval of the SEC, in any Federal, State or other court;
- conduct its operations, maintain offices, and exercise all of its rights and powers in any part of the United States, without regard to any qualification, licensing or other provision of State or municipal law;
- hire staff, accountants, attorneys and other agents as may be necessary or appropriate to the PCAOB's mission (with salaries set at a level comparable to private sector self-regulatory, accounting, technical, supervisory, or other staff or management positions);
- allocate, assess, and collect accounting support fees that fund the board; and,
- enter into contracts, execute instruments, incur liabilities, and do any and all other acts and things necessary, appropriate, or incidental to the conduct of its operations and the exercise of its powers under the Sarbanes-Oxley Act.
Part of the PCAOB's power to set rules of the auditing industry includes the power to regulate the non-audit services that audit firms may offer their audit clients (such as consulting or tax services). This power was given to the PCAOB as a result of allegations, in cases such as Enron and Worldcom, that auditors' independence from their clients' managers had been compromised because of the large fees that audit firms were earning from these ancillary services.
In addition, as part of the PCAOB's investigative powers, the Board is empowered to require that audit firms, or any person associated with an audit firm, provide testimony or documents in its (or his or her) possession. If the firm or person refuses to provide this testimony or these documents, the PCAOB may suspend or debar that person or entity from the public audit industry. The PCAOB may also seek the SEC's assistance in issuing subpoenas for testimony or documents from individuals or entities not registered with the PCAOB.
Under Section 103 of the Sarbanes-Oxley Act of 2002, PCAOB was to establish auditing and related attestation, quality control, ethics, and independence standards and rules to be used by registered public accounting firms in the preparation and issuance of audit reports as required by the Act or the rules of the Securities and Exchange Commission.
The Board’s Office of the Chief Auditor advises the Board on the establishment of such auditing and related professional practice standards. As of 2010, PCAOB has issued seven broad Auditing Standards.
Government oversight of the PCAOB
Each of these powers is subject to approval and oversight by the Securities and Exchange Commission. Individuals and audit firms subject to PCAOB oversight may appeal PCAOB decisions (including any disciplinary actions) to the SEC and the SEC has the power to modify or overturn PCAOB rules. The PCAOB is subject to SEC inspections and enforcement and the Sarbanes-Oxley Act gives the SEC the power to censure or remove PCAOB members for cause.
PCAOB seeks to make reviews public
- Source: Accounting Board Seeks Public Enforcement Wall Street Journal, September 2, 2010
The U.S. board overseeing company auditors has sent a draft bill to Congress to make its enforcement proceedings public.
The Public Company Accounting Oversight Board's proposal would repeal a requirement that its disciplinary actions remain secret, according to a copy of the document reviewed by Dow Jones.
The public now is denied access to information about accountants that have been sanctioned or charged by the PCAOB, acting Chairman Daniel Goelzer said in an Aug. 24 letter to several members of the Senate Banking Committee and House Financial Services Committee.
The private nature of the proceedings gives firms and auditors an incentive to drag out litigation, sometimes for years, while the public remains unaware, the letter said.
The cases also consume considerable board resources; three recent cases have used 17,000 hours of board staffers' time, the letter said. Two of those cases are still pending. One has settled.
The PCAOB's proposal comes as lawmakers are considering technical changes to the financial-overhaul law, changes that could be enacted in the next year. Lawmakers also are mulling legislation this year to give the public more access to enforcement documents from the Securities and Exchange Commission, which oversees the PCAOB, a nonprofit.
The draft bill from the PCAOB could be part of either measure.
The PCAOB's letter said public disciplinary hearings would conform to the longstanding practice at the SEC for public enforcement hearings.
"Virtually all other administrative proceedings brought by the SEC (including those against brokers, dealers, investment advisers, and public companies) and all SEC injunctive actions are public," the letter said.
The PCAOB was created under the Sarbanes-Oxley accounting law to inspect accounting firms for compliance, impose disciplinary sanctions, and set auditing standards.
European Commission to exchange audit working papers with PCAOB
- Source: European Commission Gives Green Light to Exchange of Audit Working Papers with PCAOB Jim Hamilton's World of Securities Regulation, September 8, 2010
The European Commission has formally recognized the adequacy of the auditor oversight of the PCAOB to fulfill the requirements of the EU’s Audit Directive and, particularly, the Board’s capacity to enter into reciprocal working arrangements with EU states on the exchange of audit working papers and other relevant documents.
The Commission’s decision also covers the preservation of the confidentiality of audit working papers that the PCAOB may receive from EU authorities. These reciprocal arrangements will, in the Commission’s view, reinforce international audit oversight cooperation and increase investor protection.
The documents covered by the Commission’s decision are those defined under Article 47 of the Statutory Audit Directive (2006/43/EC), which are audit working papers or other documents held by auditors or audit firms relating to the audits of companies which have issued securities in the US or which form part of a group issuing statutory consolidated accounts in the US. The SEC was included in the Commission’s decision because the PCAOB falls under the oversight of the SEC.
Commissioner for the Internal Market Michel Barnier said that the exchange of audit working papers is an important step in achieving the ultimate objective of equivalence of PCAOB and EU audit oversight systems. Companies have gone global and are listed on capital markets in different continents. Their auditors have followed them. Since the auditing of financial statements has moved beyond national borders, noted Commissioner Barnier, global cooperation and coordination is needed to ensure that high quality audits are carried out world-wide. One form of cooperation is the exchange of audit working papers or other documents held by auditors and audit firms.
EU members may allow the PCAOB access to audit working papers or other documents held by EU auditors or audit firms only for the exercise of the functions of public oversight, quality assurance, investigations and penalties over auditors and audit firms. Statutory audit means an audit of annual or consolidated accounts of listed companies, banks and insurance companies as required by EU law. Further, bilateral working arrangements between EU audit oversight authorities and the PCAOB have to be agreed upon before any transfer of audit working papers or other documents held by EU statutory auditors or audit firms is made to the PCAOB.
EU authorities must ensure that the bilateral working arrangements which allow for the transfer of audit working papers or other documents contain appropriate safeguards regarding the protection of personal data as well as the protection of professional secrets and sensitive commercial information mentioned in the transferred documents. This protection covers the companies whose financial statements are audited as well as the auditors of those companies. The persons employed or formerly employed by the PCAOB that receive the information must be subject to obligations of professional secrecy.
It is the individual responsibility of each EU Member State to define how an exchange of audit working papers or other documents can be carried out. A non-exhaustive list of possible ways to exchange audit working papers would be physical or electronic transmission of documents; access to documents during joint inspections of EU audit firms carried out by the EU audit regulator together with the PCAOB; and access to documents during observation of the work of EU audit regulators by the PCAOB
Former Commissioner Charlie McCreevy earlier noted that the EU's overall goal has always been to move towards full reliance on the audit inspections of the PCAOB and other public oversight bodies in non-EU countries. In practice, this would mean that audit firms from these countries would no longer have to be inspected by EU public oversight bodies since the EU could rely on the audit inspections that were carried out by their counterparts in these countries. In return, EU oversight bodies would expect the same treatment for EU audit firms. Former PCAOB Chair Mark Olson has presciently stated that there will be a transition period to full reliance during which the Board and its EU counterparts will agree on specific procedures through the execution of bilateral agreements.
SEC appoints Doty as new Chairman
- Source: SEC Appoints James R. Doty as Chairman, Jay D. Hanson and Lewis H. Ferguson as Members of PCAOB SEC, January 7, 2010
Securities and Exchange Commission Chairman Mary L. Schapiro today announced that the Commission has appointed James R. Doty as Chairman and Jay D. Hanson and Lewis H. Ferguson as members of the Public Company Accounting Oversight Board (PCAOB)...
..."Jim, Jay, and Lew bring a deep and diverse perspective to the Board through their substantial experience and commitment to the interests of investors and the public," said SEC Chairman Mary L. Schapiro. "These prominent individuals have in-depth knowledge of the financial reporting system and auditing framework, which will serve the PCAOB well as it executes its rigorous agenda."
Mr. Doty is currently a Partner at Baker Botts LLP in Washington, D.C. He has represented clients on a wide range of securities law matters. He also counsels boards of directors and audit committees on problems arising under the Sarbanes-Oxley Act and related issues. Mr. Doty served as the SEC's General Counsel from 1990 to 1992. He received an LL.B. from Yale Law School, an M.A. from Harvard University, an A.B. from Oxford University, and a B.A. from Rice University.
- Dear PCAOB Board: Your Job Is To Serve And Protect Investors re: The Auditors, January 16, 2011
- The PCAOB Is Finally Invited to Europe's Financial Statement Party Junior Deputy Accountant, January 10, 2011
- Modesti, PCAOB Director of Enforcement and Investigations, Calls For More Transparency re: The Auditors, December 8, 2010
- SEC Considers Insiders to Head Audit-Industry Watchdog Bloomberg, December 6, 2010
- Guest Post @FEI Blog: PCAOB Open Meeting August 5th, 2010 re: The Auditors, August 6, 2010
- Do Prospective Inspections of Broker-Dealer Auditors Present An Opportunity? Going Concern, July 15, 2010