Public Company Accounting Oversight Board

Public Company Accounting Oversight Board. The Public Company Accounting Oversight Board is a nonprofit corporation established by the United States Congress to oversee the audits of public companies and other issuers in order to protect investors. Created in the wake of major accounting scandals such as those at Enron and WorldCom, its formation was a central provision of the Sarbanes–Oxley Act of 2002. The board sets auditing standards, inspects registered audit firms, and enforces compliance with its rules and relevant securities laws.

History and establishment

The board was established on July 30, 2002, as a direct legislative response to a crisis of confidence in financial reporting precipitated by the collapses of Enron and WorldCom. These events revealed severe failures in the existing system of self-regulation by the accounting profession, which was then overseen by the American Institute of Certified Public Accountants. The Sarbanes–Oxley Act, sponsored by Paul Sarbanes and Michael G. Oxley, mandated its creation to restore trust in capital markets. The Securities and Exchange Commission was tasked with appointing its initial five board members, with the first chairman being former Federal Reserve Chairman Paul Volcker.

Structure and governance

The board is composed of five members appointed to staggered five-year terms by the Securities and Exchange Commission. No more than two members may be Certified Public Accountants. The chair is designated by the commission, with recent chairs including James R. Doty and the current chair, Erica Y. Williams. It is funded through annual accounting support fees assessed on issuers, as outlined in the Dodd–Frank Wall Street Reform and Consumer Protection Act. Key operational divisions include the Offices of the Chief Auditor, Registration and Inspections, and Enforcement and Investigations.

Powers and responsibilities

Its primary authority includes registering public accounting firms that prepare audit reports for issuers, brokers, and dealers. The board establishes auditing standards, quality control standards, and ethics standards for registered firms, a function previously held by the American Institute of Certified Public Accountants. It also has the power to investigate and discipline registered firms and associated persons for violations of its rules, the Sarbanes–Oxley Act, securities laws, and professional standards. Its standards apply to audits of companies listed on U.S. exchanges like the New York Stock Exchange and NASDAQ.

Inspection and enforcement programs

The inspection program involves both annual reviews of firms that audit more than 100 issuers and triennial reviews of other registered firms. These inspections assess compliance with the board's standards and Generally Accepted Auditing Standards. The enforcement division conducts investigations, which can lead to formal disciplinary proceedings before the board. Sanctions can include revocations of registration, monetary penalties, and limitations on a firm's activities. Notable enforcement actions have involved major firms such as Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers.

International activities and cooperation

Given the global nature of audit firm networks, the board engages extensively with non-U.S. regulators. It has entered into cooperative arrangements with oversight bodies in numerous jurisdictions, including the European Union, the United Kingdom, Switzerland, Japan, and China. A significant achievement was the 2013 agreement with the China Securities Regulatory Commission for the production of audit work papers, resolving a longstanding impasse. These agreements are crucial for the inspection of firms like Deloitte that audit foreign issuers listed on U.S. markets.

Criticism and controversies

The board has faced criticism since its inception, including legal challenges to its constitutionality. In 2010, the Supreme Court of the United States ruled in Free Enterprise Fund v. Public Company Accounting Oversight Board that the appointment process for board members violated the Appointments Clause, leading to a change allowing the Securities and Exchange Commission to remove members at will. Some in the business community argue its regulations, particularly inspection findings, create excessive costs and a defensive audit culture. Debates also persist about the scope of its standard-setting authority versus that of the Securities and Exchange Commission.