The PCAOB 101

Internal Auditor, June, 2008 by Tom Olach

SECTION 101 OF THE U.S. SARBANES-OXLEY ACT of 2002 established the Public Company Accounting Oversight Board (PCAOB)--a private-sector, non-profit corporation--to oversee auditors of public organizations. Endowed with both private and legislative powers, the PCAOB maintains its headquarters in Washington, D.C., with offices in Ashburn, Va.; Atlanta; Chicago; Dallas; Denver; Irvine, Calif.; New York; and San Francisco.

Although some market participants believe the PCAOB directly regulates publicly listed companies registered with the U.S. Securities and Exchange commission (SEC), this activity does not fall within the board's purview. Instead, its stated objective is to "protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports." The board has the authority to inspect the audit operations of public accounting firms that audit public companies, and it can impose disciplinary actions for violations of the Sarbanes-Oxley Act as well as PCAOB and SEC rules.

Although most internal auditors are likely familiar with the PCAOB, some may not be aware of its specific activities or the rules that govern its authority. The board's financial reporting hierarchy, for example, or its standard-setting process, may be unknown even to internal auditors at companies that are subject to Sarbanes-Oxley requirements. Because of the PCAOB's impact on organizations worldwide, internal auditors should be familiar not only with its requirements, but also with the way in which it operates and governs financial reporting processes. As the PCAOB continues to issue standards and rules, its influence will likely grow, making knowledge of its activities even more important to those in the audit profession.

HIERARCHY AND LEADERSHIP

The PCAOB's powers and rule-making authority are subject to SEC oversight. While the SEC serves as primary overseer of U.S. financial reporting processes, the PCAOB provides assistance by functioning as a liaison between registered accounting firms and the SEC. Similar to the SEC, the board seeks to protect investors by overseeing financial reporting processes. Although the PCAOB has been assigned specific tasks, such as writing and modifying audit standards, it must obtain approval from the SEC before taking any significant actions.

The SEC also oversees PCAOB leadership appointments. After consulting with the U.S. secretary of the Treasury and the chairman of the U.S. Federal Reserve Board, the SEC appoints PCAOB members, including its chairman. In May 2003, the SEC unanimously appointed William Webster as PCAOB chairman, who was succeeded in June 2006 by Mark Olson. The board comprises four other members: Kayla Gillan, Daniel Goelzer, Bill Gradison, and Charles Niemeier. Each PCAOB member is elected to a five year term and must serve on a full-time basis. Two members of the PCAOB must be, or have been at some time in the past, certified public accountants (CPAs). The other three members must not be, or have ever been, CPAs.

RESPONSIBILITIES

The PCAOB has several specific responsibilities, as established under Sarbanes-Oxley Section IOI. These include:

* Registering public accounting firms that prepare audit reports for corporate issuers.

* Establishing, adopting, or modifying standards related to auditing, quality control, ethics, independence, and anything else pertaining to the preparation of audit reports.

* Routinely inspecting registered public accounting firms.

* Enforcing compliance with Sarbanes-Oxley and securities laws by investigating and disciplining violators.

* Preparing and submitting a budget each year to the SEC for approval.

The PCAOB can also perform other duties or functions when necessary to promote high professional standards, improve the quality of independent financial statement audits, and protect the public's interests. These duties all have one thing in common: They focus on promoting the public's confidence in financial reporting processes and enhancing participation in U.S. and international markets.

REGISTRATION OF ACCOUNTING FIRMS Sarbanes-Oxley Section 102 requires registered public accounting firms to register with the PCAOB--the board approves or disapproves applicants within 45 days. The PCAOB can deny registration to any non-U.S. public company accounting firm that plays a substantial role in preparing audit reports but does not actually issue them. As of April 2008,I,848 accounting firms were registered with the board, five of which had pending withdrawals. Approximately 43 percent of the registered accounting firms are based outside the United States, located across 82 countries. For all U.S. organizations that are not subject to either Sarbanes-Oxley or SEC rules, audit reports must be conducted in accordance with the American Institute of Certified Public Accountants' (AICPA's) Auditing Standards Board.

Both the PCAOB and the SEC have the power to sanction and revoke registrations. In September 2007, the SEC charged 69 auditors for issuing audit reports without registering with the PCAOB. Hence, internal auditors can assist their audit committee by making sure the company's financial statement auditors are registered with the PCAOB at its Web site: www.pcaobus.org/Registration/Registered_Firms.pdf.>