The PCAOB and Convergence of the Global Auditing and Accounting Profession

By Giles, Jill P.; Venuti, Elizabeth K. et al. | The CPA Journal, September 2004 | Go to article overview

The PCAOB and Convergence of the Global Auditing and Accounting Profession


Giles, Jill P., Venuti, Elizabeth K., Jones, Richard C., The CPA Journal


The Sarbanes-Oxley Act of 2002 represents the most significant Securities law reforms since the Securities Act of 1933 and the Securities Exchange Act of 1934. Due to widespread outrage over financial frauds, including Enron and WorldCom, Congress acted swiftly to pass laws that increase federal oversight of all matters related to corporate governance, in order to restore investor confidence in the U.S. securities markets. By increasing auditor independence requirements, articulating the professional and ethical responsibilities of auditors, directors, and officers, and enhancing disclosure requirements, Sarbanes-Oxley increases oversight of the audit and accounting profession and attempts to improve the quality and transparency of the financial statements issued by publicly traded corporations. The most sweeping audit reform introduced by Sarbanes-Oxley was the creation of the Public Company Accounting Oversight Board (PCAOB), which was established to oversee audits of public companies and their auditors.

Sarbanes-Oxley gives the PCAOB the authority to set auditing standards and auditor independence rules. It also has the authority to perform inspections to ensure that auditors are in compliance with the act, with the mies of the PCAOB and the sec, and with other professional standards. Furthermore, the PCAOB has the power to investigate and bring disciplinary action against public accounting firms and persons associated with those firms who are accused of and found to be in violation of the provisions of the act, the rules of the PCAOB, or the SEC.

Prior to Sarbanes-Oxley, the AlCPA set standards on auditing, quality control, independence, and ethics. The Public Oversight Board (POB), an independent private-sector body charged with overseeing and reporting on the peer review program of the sec Practice Section (SECPS) of the AICPA Division of Firms, reviewed the quality of audits and the firms performing those audits. The SECPS established quality-control requirements for member firms and required each member firm (all firms that audited SEC registrants) to undergo peer review every three years. The SECPS was also responsible for reviewing allegations of audit failure to determine if there was any breakdown in a firm's quality-control system. Sarbanes-Oxley shifts all of these regulatory responsibilities from the AICPA, the POB, and the secPS to the PCAOB, effectively ending the profession's self-regulation. This change in oversight and standards-setting responsibility temporarily derailed the efforts of global standards setters to attain convergence of global auditing and assurance standards.

The Exhibit summarizes the regulatory and standards-setting responsibilities before and after the Sarbanes-Oxley Act.

The PCAOB's Powers

The full-time PCAOB is a five-person board appointed by the SEC with consultation from the Board of Governors of the Federal Reserve and the secretary of the Treasury. The PCAOB must report on its operations to the sec, and the sec must report to various Congressional oversight committees annually.

The PCAOB has been granted extensive regulatory powers over the audit and accounting profession, including the following:

* Registering firms that audit public companies, and collecting registration and annual fees from these companies.

* Establishing standards for conducting audits of public companies.

* Establishing quality-control, ethics, and independence rules for auditing firms.

* Conducting inspections of registered auditing firms. Inspections will be conducted annually for firms that audit 100 or more public companies, and once every three years for firms that audit fewer than 100 public companies.

* Establishing procedures for investigating and disciplining public accounting firms for violations of provisions of the act.

In addition, the act permits, but does not require, the PCAOB to adopt preexisting rules established by other professional groups, such as those issued by the AICPA through its various committees. …

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