Understanding the Role of the PCAOB

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The Public Company Accounting Oversight Board (‘PCAOB’ or ‘Board’) is a non-profit organization that regulates the auditors of publicly traded companies.  The PCAOB was established as part of the Sarbanes-Oxley Act of 2002 (SOX), which was passed to provide protection to investors and stakeholders of public companies after the significant number of accounting scandals in the late 1990s and early 2000s.  The primary way that the Board protects investors is by ensuring the auditor of a company’s financial statements has followed a set of strict guidelines.  The Board is governed by the Securities and Exchange Commission (SEC).

Primary Responsibilities of the PCAOB

The four primary duties of the Board are:

  1. Register public accounting firms that prepare audit reports for issuers, brokers, and dealers.  All firms that perform financial audits of publicly traded companies must be registered with the Board for monitoring purposes.

  2. Establish or adopt auditing and related attestation, quality controls, ethics, and independence standards.  The Board dictates the auditing standards that registered accounting firms must use in their audits.  While the Board has adopted many of the American Institute of Certified Public Accountants’ (AICPA) standards, they have added their own standards and reorganized the standards into a single numbering system.

  3. Inspect registered firms’ audits and quality control systems.  

    • For firms that perform over 100 public company audits, the PCAOB conducts inspections annually.

    • For firms that perform less than 100 public company audits, the PCAOB conducts inspections every three years.

  4. Investigate and discipline registered public accounting firms and their associated persons for violations of specified laws, rules, or professional standards.  The Board conducts enforcement hearings if a serious violation has occurred.  They also impose sanctions and fines to firms or individual auditors.

PCAOB Audits v. AICPA Audits

The PCAOB and the AICPA have many overlapping standards, but the two organizations have very different roles.  While the Board has not adopted all of the AICPA standards, they have adopted the AICPA Professional Code of Conduct, which is considered the independence standard for both organizations.  This code establishes the guidelines for maintaining a CPA’s independence.

The AICPA is a professional member association that provides guidance for accounting professionals through the issuance of accounting standards.  The Board is a non-profit corporation that provides guidance for accounting professionals, however, it also has the duty of monitoring accounting firms.  Firms cannot be members of the PCAOB as the Board’s first duty is to serve the public. The Board deals with a much smaller number of accounting firms since it is only looking at firms performing audits of publicly traded companies.  The AICPA issues guidance for accounting professionals providing many types of services for many types of companies.

PCAOB audits are focused on providing stakeholders and the investing public with accountability.  A PCAOB audit typically has a lower materiality threshold, which means that nearly every area of an audit will be tested.  Board audits are considered to be more stringent and meticulous due to the lower materiality threshold and the public nature of the company being audited.  Often a Board audit will be performed on an accelerated schedule, which can cause the work to be completed at a frantic pace.