Public Company Accounting Oversight Board


Public Company Accounting Oversight Board

The Public Company Accounting Oversight Board (or PCAOB) is a private-sector, non-profit corporation created by the Sarbanes–Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies. Its stated purpose is to 'protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports'. Although a private entity, the PCAOB has many government-like regulatory functions, making it in some ways similar to the private "self-regulatory organizations" (SROs) which regulate stock markets, broker-dealers, etc. in the United States.

Contents

Organizational overview

The PCAOB has five members, including a chairman, each of whom is appointed by the U.S. Securities and Exchange Commission (SEC). Precisely two members of the PCAOB must be or have been a Certified Public Accountant. However, if the chairman of the PCAOB is one of those two members, he or she may not have been a practicing certified public accountant for at least five years prior to being appointed to the Board. Each member serves full-time, for staggered five-year terms. As of 2009, the salary of the PCAOB's chairman is $672,676 per year, while the salaries of other board members are $546,891 annually[1]. The Board's annual budget of approximately $180 million[2], which must be approved by the SEC each year, is funded by fees paid by U.S. securities issuers. The organization has a staff of over 600, and its headquarters is in Washington, D.C.

The PCAOB's first chairman was the former New York Federal Reserve president, William J. McDonough. The Board's immediate past Chairman is Mark Olson, a former Federal Reserve Board governor. The PCAOB's current Chairman is James R. Doty.

PCAOB powers

Under Section 101 of the Sarbanes-Oxley Act, the PCAOB has the power to:

  • register public accounting firms that prepare audit reports for issuers;
  • set auditing, quality control, ethics, independence and other standards relating to the preparation of audit reports by issuers;
  • conduct inspections of registered public accounting firms;
  • conduct investigations and disciplinary proceedings concerning, and impose appropriate sanctions where justified upon, registered public accounting firms and associated persons of such firms (including fines of up to $100,000 against individual auditors, and $2 million against audit firms);
  • perform such other duties or functions as the Board (or the SEC) determines are necessary or appropriate to promote high professional standards among, and improve the quality of audit services offered by, registered public accounting firms and their employees;
  • sue and be sued, complain and defend, in its corporate name and through its own counsel, with the approval of the SEC, in any Federal, State or other court;
  • conduct its operations, maintain offices, and exercise all of its rights and powers in any part of the United States, without regard to any qualification, licensing or other provision of State or municipal law;
  • hire staff, accountants, attorneys and other agents as may be necessary or appropriate to the PCAOB's mission (with salaries set at a level comparable to private sector self-regulatory, accounting, technical, supervisory, or other staff or management positions);
  • allocate, assess, and collect accounting support fees that fund the board; and
  • enter into contracts, execute instruments, incur liabilities, and do any and all other acts and things necessary, appropriate, or incidental to the conduct of its operations and the exercise of its powers under the Sarbanes-Oxley Act.

Part of the PCAOB's power to set rules of the auditing industry includes the power to regulate the non-audit services that audit firms may offer their audit clients (such as consulting or tax services). This power was given to the PCAOB as a result of allegations, in cases such as Enron and Worldcom, that auditors' independence from their clients' managers had been compromised because of the large fees that audit firms were earning from these ancillary services.

In addition, as part of the PCAOB's investigative powers, the Board is empowered to require that audit firms, or any person associated with an audit firm, provide testimony or documents in its (or his or her) possession. If the firm or person refuses to provide this testimony or these documents, the PCAOB may suspend or debar that person or entity from the public audit industry. The PCAOB may also seek the SEC's assistance in issuing subpoenas for testimony or documents from individuals or entities not registered with the PCAOB.

Under Section 103 of the Sarbanes-Oxley Act of 2002, PCAOB was to establish auditing and related attestation, quality control, ethics, and independence standards and rules to be used by registered public accounting firms in the preparation and issuance of audit reports as required by the Act or the rules of the Securities and Exchange Commission.

The Board’s Office of the Chief Auditor advises the Board on the establishment of such auditing and related professional practice standards. As of 2011, PCAOB has issued fifteen broad Auditing Standards[1].

Government oversight of the PCAOB

Each of these powers is subject to approval and oversight by the Securities and Exchange Commission. Individuals and audit firms subject to PCAOB oversight may appeal PCAOB decisions (including any disciplinary actions) to the SEC and the SEC has the power to modify or overturn PCAOB rules. The PCAOB is subject to SEC inspections and enforcement and the Sarbanes-Oxley Act gives the SEC the power to censure or remove PCAOB members for cause.

Inspection Reports

PCAOB periodically issue Inspection Reports of registered public accounting firms. While a large part of such reports are made public, portions of an inspection report that deal with criticisms of, or potential defects in, the firm's quality control systems are not made public if the firm addresses those matters to the Board's satisfaction within 12 months after the report date. Those portions are made public, however, if (1) the Board determines that a firm's efforts to address the criticisms or potential defects were not satisfactory, or (2) the firm makes no submission evidencing any such efforts. [2]

Public Registered Accounting Firms

Per Section 102 of Sarbanes Oxley Act, accounting firms that intend to perform public audits on U.S. public companies have to register with PCAOB. Section 106(a) of the Act provides that any non-U.S. public accounting firm that prepares or furnishes an audit report with respect to any U.S. public company is subject to the Board's rules to the same extent as a U.S. public accounting firm. As of April of 2009, there are close to two thousand registered firms. [3]

History

The PCAOB was created in response to an ever-increasing number of accounting "restatements" (corrections of past financial statements) by public companies during the 1990s, and a series of high-profile accounting scandals and record-setting bankruptcies by large public companies, notably those in 2002 involving WorldCom and Enron. Prior to the creation of the PCAOB, the audit industry was essentially self-regulated through the Public Oversight Board, a private organization whose members were appointed by the auditing industry. The Public Oversight Board was formally dissolved on March 31, 2002, though its members had resigned en masse in January 2002 to protest then-SEC Chairman Harvey Pitt's proposal for a new private auditor oversight body to regulate the industry (a proposal which would evolve into the PCAOB).

Appointment of chairman Webster

The first chairman of the PCAOB was William H. Webster, a prominent lawyer and former director of both the FBI and CIA. This appointment was controversial, however, for while Webster was widely recognized for his integrity and intellect, two of the SEC's five commissioners believed that SEC Chairman Harvey Pitt had not properly vetted the candidates or consulted with them on the appointment (and, indeed, had previously agreed with them on appointing TIAA-CREF chairman John Biggs as PCAOB chairman). In one of the most contentious SEC public hearings in recent memory, these two commissioners (Harvey Goldschmid and Roel Campos) publicly criticized the process of the appointment (though not Webster himself). Webster nonetheless was approved by the SEC by a 3-2 vote to become the PCAOB's first chairman. An audio recording of this contentious October 25, 2002 SEC public hearing at which Webster's nomination was voted on (and debated) can be listened to here.

Just a few weeks after Webster was appointed to the PCAOB, however, another controversy erupted when newspapers reported that Webster had served on the board audit committee of U.S. Technologies, a high-tech company being investigated for accounting irregularities. Pitt, whose tenure as SEC chair had already proven controversial, found himself in an untenable position. One of the claims made by Goldschmid during the rancorous October SEC hearing was that the candidates put forward by Pitt had not been properly vetted. Goldschmid's criticisms seemed prescient, and this, combined with other pressures, led Pitt to announce his resignation from the SEC on election day (November 4, 2002). Webster himself announced his resignation from the PCAOB a week later.

Constitutional challenge

In February 2006, the Free Enterprise Fund and Beckstead and Watts, LLP (a small Nevada-based accounting firm) filed a lawsuit in federal court challenging the constitutionality of the PCAOB. According to the lawsuit, the provision of the Sarbanes-Oxley Act establishing the PCAOB violates the "Appointments Clause" of the U.S. Constitution, since the PCAOB members should be viewed as "officers of the United States" because of the public purposes PCAOB serves, and, as such, must either be appointed by the President of the United States, with the advice and consent of the U.S. Senate, or by the "head" of a "department," whereas PCAOB's board is appointed by the SEC, rather than by the Chairman of the SEC. The lawsuit also challenged the PCAOB as violating the Constitution's separation of powers, since the organization has quasi-executive, quasi-legislative and quasi-judicial functions.

On August 22, 2008, the U.S. Court of Appeals for the District of Columbia Circuit upheld the PCAOB as constitutional. The court found that board members are inferior officers not required to be appointed by the President, and that the President retains sufficient control of the Board via the SEC that the Board does not violate the separation of powers.[3]

The United States Supreme Court granted certiorari on May 18, 2009, to consider three questions:

  1. Whether the Sarbanes-Oxley Act of 2002 violates the Constitution's separation of powers by vesting members of the [PCAOB] with far-reaching executive power while completely stripping the President of all authority to appoint or remove those members or otherwise supervise or control their exercise of that power, or whether, as the court of appeals held, the Act is constitutional because Congress can restrict the President's removal authority in any way it "deems best for the public interest."
  2. Whether the court of appeals erred in holding that, under the Appointments Clause, PCAOB members are "inferior officers" directed and supervised by the [SEC], where the SEC lacks any authority to supervise those members personally, to remove the members for any policy-related reason or to influence the members' key investigative functions, merely because the SEC may review some of the members' work product.
  3. If PCAOB members are inferior officers, whether the Act's provision for their appointment by the SEC violates the Appointments Clause either because the SEC is not a "Department" [] or because the five commissioners, acting collectively, are not the "Head" of the SEC.[4]

Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, et al. was argued on December 7, 2009. In addition to the PCAOB, the United States (represented by Solicitor General Elena Kagan) also appeared as a respondent in the case and argued separately, defending the constitutionality of the Sarbanes-Oxley Act. Thirteen amici, ranging from libertarian think-tanks like the Cato Institute to managers of state public-employee pension funds, have filed briefs in the case.[5]

On June 28, 2010, in a five-justice majority opinion written by Chief Justice John G. Roberts, the Supreme Court found the appointment provisions of the act constitutional, but struck down the for-cause removal provision. The Court did not accept petitioners' argument that the constitutional infirmity made all of the Board's prior activity unconstitutional; rather, it simply severed the for-cause removal clause from the rest of Sarbanes-Oxley, leaving the Board itself intact.[6]

References

External links


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