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Public Company Accounting Oversight Board; Will it Protect Investors?
The Public Company Accounting Oversight Board (PCAOB) was created by Sarbanes-Oxley Act of 2002. This board was created to oversee the audit of public companies, subject to the securities laws, in order to protect the interests of investors (15 USC 7201, 2002). It was created in wake of the recent financial scandals of Enron, WorldCom, and Global Crossing to name a few. This “Act” established by Congress is to create an oversight board, so that such scandals will never occur again. Will this oversight board work and will its work restore public confidence and encourage individuals to invest in the stock market again?
The PCAOB is not a tax-payer funded agency. It is supported by over 8800 companies and mutual funds that benefit from independent audits (Epstein). The PCAOB principle duties are;
1. Register public accounting firms that prepare audits.
2. Establish and/or adopt standards relating to the preparation of audit reports for issuers.
3. Conduct inspections of registered public accounting firms.
4. Conduct investigations and disciplinary proceedings.
5. Promote high professional standards and improve the quality of audit services offered by registered public accounting firms.
6. Enforce compliance with the Sarbanes-Oxley act (15 USC 7201, 2002).
Before the establishment of Sarbanes-Oxley and the PCAOB, there was no oversight board. Public accounting firms would perform “peer reviews” to verify that audits were being performed with due diligence. However, these reviews were not high priority, thus uncovering errors/negligence made by the public accounting firms by peers were rarely discovered. It was only after the massive failures of Enron and WorldCom that this gross negligence by the public accounting firm performing the audit came to light. It was clear that an independent review board was necessary to ensure due diligence is being followed when a public accounting firm audits a corporation.
The PCAOB will examine yearly those public accounting firms with more than 100 publicly-traded audit clients. All others will be examined every three years. Any violations of Sarbanes-Oxley or SEC and the PCAOB may fine or disqualify firms from public accounting audits (Epstein). The power to fine or disqualify a public accounting firm from ...
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It is still too early to tell if the PCAOB will be effective or not. Only time will tell if the actions of the PCAOB and the public accounting firms will restore investor confidence to invest in the stock market, again.
Works Cited
“Accountability in the Era of Global Markets.” The Fletcher School. Feb. 2004: Tufts University. 16 May 2004.
Calabro, Lori. “New Attestation Standards for Internal Controls Put More Power in the Hands of Auditors.” CFO Magazine. May 2004: Economist.com. Lexis-Nexis. Baker University.
16 May 2004 .
Epstein, Jonathan. “Watchdog Says Accounting Firms Have Much to do to Restore Credibility.” Buffalo News. 19 April 2004: Knight Ridder/Tribune Business News. Lexis-Nexis. Baker University. 16 May 2004 .
Griggs, Linda L. “Audits of Internal Control over Financial Reporting: What do they Mean?” Prentice Hall Law & Business Insights. 29 April 2004: Lexis-Nexis. Baker University. 16 May 2004 .
Michaels, Adrian. “Accountants Urged to take Moral Stand.” Financial Times. 19 Dec. 2004:
Financial Time Limited. Lexis-Nexis. Baker University. 16 May 2004.
Sarbanes-Oxley Act of 2002. Pub. L. 107-204. 30 July 2002. Stat. 116.745
Arens, Alvin A., Elder, Randall J., and Beasley, Mark S. (2012). Auditing and Assurance Services:
A company that announces deficiencies in its internal control will more than likely have a fall in their stock prices. Investors will not trust that company’s financial information. The investors know that the company will be hit with fines for not complying with the regulations. No honest investor wants to be involved with a company that defies the government.
According to PCAOB Ethics and Independence Rule 3520 a registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period. Independence is required for all audit engagements. The auditor must be independent of an entity when performing an engagement according to General Accepted Auditing Standards (GAAS). Independence is very significant to the audit profession, because the primary purpose of an audit is to provide financial statement users with reasonable assurance an on whether the financial statements are presented fairly. The auditor’s report gives credibility to an entity financial statement and without an auditor’s report the financial statement would be consider worthless. Reliance on management for the fair presentation of a financial statement would often result with a bias and impressive financial statements that doesn’t reflect a true picture of the entity’s financial position. An auditor’s independence should not in anyway be influenced by any relationship between their client and
In July of 2002, Congress swiftly passed the Public Company Accounting Reform and Investors Protection Act at the time when corporations like Arthur Anderson, Enron and WorldCom fell due to fraudulent accounting practices and bad internal control. This bill, sponsored by Mike Oxley (R-OH) and Paul Sarbanes (D-MD), became known as Sarbanes-Oxley Act (SOX).It sought to restore public confidence in publicly traded companies and their accounting practices, though the companies listed above were prosecuted on laws that were already in place before SOX. Many studies have examined the effects of SOX on corporations in the past eleven years. The benefits are hard to quantify and the cost are rather hard to estimate including the effect on market efficiency.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The PCAOB has the authorization to provide rules governing the following areas; ethics, independence, and quality control for any registered accounting firm...
The audit committee a part of the board of directors plays an important role in preventing fraud. They are directly responsible for overseeing the work of any public accounting firm, such as PwC, employed by the company. They also must preapprove all audit services provided by the auditors.
Ernst & Young performed an audit of the consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ending January 31, 2006 for the Wal-Mart Stores, Inc. and January 28, 2006 for the Target Corporation. The responsibility of Ernst & Young is to express an opinion on the financial statements given by Wal-Mart and Target, holding both corporations responsible that the statements being audited are accurate and true. The audits have to be in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB), which require that the audit must have sufficient evidence that the financial statements do not contain any false material.
The law requires auditors to report any fraudulent activities discovered during the course of an audit to the SEC. This is when Article I of Section 51 of the AICPA Code of Professional Conduct comes into play. The auditor may uncover illegal acts or fraud while auditing the financial statements of a company. In such instances, the auditor must determine his or her responsibilities in making the right judgment and report their discovery or suspicions of the said fraudulent activities. Tyco International is an example of the auditors’ failure to uphold their responsibilities. Tyco’s former CEO Dennis Kozlowski and ex-CFO Mark Swartz sold stocks without investors’ approval and misrepresented the company’s financial position to investors to increase its stock prices (Crawford, 2005). The auditors (PricewaterhouseCoopers) helped cover the executives’ acts by not revealing their findings to the authorities as it is believed they must have known about the fraud taking place. Another example would be the Olympus scandal. The Japanese company, which manufactures cameras and medical equipment, used venture capital funds to cover up their losses (Aubin & Uranaka, 2011). Allegedly, thei...
The other reason for erosion can be that the accounting and auditing profession in particular needs to regain trust. People of America from last two decades have witnessed high profile scandals and in which the accountants and auditors have failed in their fiduciary responsibilities. The removal of self regulation in the auditing profession can serve as a wakeup call to all the leaders and professionals of all types.
Giroux, G. (Winter 2008). What went wrong? Accounting fraud and lessons from the recent scandals. Social Research, 75, 4. p.1205 (34). Retrieved June 16, 2011, from Academic OneFile via Gale:
Corporate governance changed drastically after the case of Andersen Auditors, Enron’s auditing service showed that they contributed to the scandal. Andersen was originally founded in 1913, and by taking tough stands against clients, quickly gained a national reputation as a reliable keeper of the people’s trust (Beasley, 2003). Andersen provided auditing statements with a ‘clean’ approval stamp from 1997 to 2001, but was found guilty of obstructing justice by shredding evidence relating to the Enron scandal on the 15th June 2002. It agrees to cease auditing public companies by 31 August (BBC News, 2002).
This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such scandals.
4) . One of the largest bankruptcies in history was enabled by accountants hiding debt and destroying the evidence to avoid implication (Buckstein, part 2 pgs. 1, 2, and 3). These unfortunate events led to the need for increased scrutiny and regulations, including the Sarbanes-Oxley Act (Buckstein, part 3 pg 1). This legislation inspired the creation of the Canadian Public Accountability Board (CPAB) (Buckstein, part 3 pg 1). These changes have led to an increased awareness of the need for auditor independence as well as higher standards for accounting and business in general (Buckstein, part 3 pg 1). While these measures have helped to reassure the public, there is still the question of why Accountancy is not a protected
The evolution of auditing is a complicated history that has always been changing through historical events. Auditing always changed to meet the needs of the business environment of that day. Auditing has been around since the beginning of human civilization, focusing mainly, at first, on finding efraud. As the United States grew, the business world grew, and auditing began to play more important roles. In the late 1800’s and early 1900’s, people began to invest money into large corporations. The Stock Market crash of 1929 and various scandals made auditors realize that their roles in society were very important. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. The auditors’ job became more difficult as the accounting principles changed, and became easier with the use of internal controls. These controls introduced the need for testing; not an in-depth detailed audit. Auditing jobs would have to change to meet the changing business world. The invention of computers impacted the auditors’ world by making their job at times easier and at times making their job more difficult. Finally, the auditors’ job of certifying and testing companies’ financial statements is the backbone of the business world.