Public Company Accounting Oversight Board

The Public Company Accounting Oversight Board (PCAOB) is a private-sector, nonprofit corporation created by the Sarbanes–Oxley Act of 2002 to oversee the audits of public companies and other issuers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection. All PCAOB rules and standards must be approved by the U.S. Securities and Exchange Commission (SEC).

In creating the PCAOB, the Sarbanes-Oxley Act required that auditors of U.S. public companies be subject to external and independent oversight for the first time in history. Previously, the profession was self-regulated. Congress vested the PCAOB with expanded oversight authority over the audits of brokers and dealers registered with the SEC in 2010 through the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The PCAOB has four primary functions in overseeing these auditors: registration, inspection, standard setting and enforcement.

Registered accounting firms that issue audit reports for more than 100 issuers (primarily public companies) are required to be inspected annually. This is usually around 10 firms. Registered firms that issue audit reports for 100 or fewer issuers are generally inspected at least once every three years. Many of these firms are international non-U.S. firms. In addition, the PCAOB annually inspects at least 5 percent of all registered firms that play a substantial role in the audit of an issuer but that do not issue audit reports for issuers themselves. In 2011, the Board adopted an interim inspection program for the audits of broker-dealers, while the Board considers the scope and other elements of a permanent inspection program.

In 2017, auditors began filing information on the names of engagement partners and other audit firms that participate in the audits of U.S. public companies. The PCAOB created a searchable database called AuditorSearch for investors and others to know more about who is leading and participating in audits through these filings, adding more specific data points to the mix of information that can be used when evaluating audit quality.

The PCAOB also adopted a new standard in 2017 to enhance the usefulness of the standard auditor's report by providing additional and important information to investors, such as the critical audit matters (CAMs) that auditors communicate to the audit committees of the public companies they are auditing. These are matters that are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment. The CAMs requirement goes into effect in 2019 and 2020. Beginning in 2017, the updated auditor's report also includes the tenure of the auditor with that company.

Public Company Accounting Oversight Board
Agency overview
HeadquartersWashington, D.C., U.S.

Organizational overview

The PCAOB has five Board members, including a Chairman, each of whom is appointed by the SEC, after consultation with the Chairman of the Board of Governors of the Federal Reserve System and the Secretary of the Treasury. Two Board members must be Certified Public Accountants.[1] If the PCAOB Chairman is one of them, he or she may not have been a practicing CPA for at least five years prior to being appointed to the board. Each member serves full-time, for staggered five-year terms. The Board's budget, approved by the SEC each year, is funded by fees paid by the companies and broker-dealers who rely on the audit firms overseen by the Board. The organization has a staff of about 800 and offices in 11 states in addition to its headquarters in Washington.

The PCAOB's current Chairman is William D. Duhnke III, who was sworn in on January 2, 2018, by the Securities and Exchange Commission. Previously, he served as Staff Director and General Counsel to three Senate Committees.[2] From 2011-2017, James R. Doty served as Chairman, a former SEC General Counsel and a former partner at the law firm of Baker Botts LLP.[3] He was preceded by Mark W. Olson, a former member of the Federal Reserve Board of Governors. The first Chairman in place at the PCAOB was former President and Chief Executive Officer of the Federal Reserve Bank of New York, William Joseph McDonough. The SEC first appointed William H. Webster to the position, a prominent lawyer and former Director of both the FBI and CIA. He resigned after several weeks and prior to the Board's first official meeting (as explained below).


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

  • register public accounting firms that prepare audit reports for issuers and broker-dealers;
  • set auditing, quality control, ethics, independence and other standards relating to the preparation of audit reports of issuers;
  • conduct inspections of PCAOB-registered public accounting firms;
  • conduct investigations and disciplinary proceedings, and impose sanctions, against 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 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, as set out by the Sarbanes-Oxley Act to attract the highly skilled and experienced professionals needed to oversee global accounting firms);
  • 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.

Auditors of public companies are prohibited by the Sarbanes-Oxley Act to provide non-audit services, such as consulting, to their audit clients. Congress made certain exceptions for tax services, which are therefore overseen by the PCAOB. This prohibition was made 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 may 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 bar 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.

The Board's Office of the Chief Auditor advises the Board on the establishment of auditing and related professional practice standards. [4]

Government oversight

Each of these powers is subject to approval and oversight by the SEC. 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.

Inspection reports

The PCAOB periodically issues Inspection Reports of registered public accounting firms. While a large part of these reports is made public (called "Part I"), portions of the inspection reports that deal with criticisms of, or potential defects in, the audit 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 (called "Part II"), 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.[5]


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, and the audit firm for both companies, Arthur Andersen. Prior to the creation of the PCAOB, the audit profession was self-regulated through its trade group, the American Institute of Certified Public Accountants (AICPA). The AICPA's 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 profession (a proposal which would evolve into the PCAOB).

Appointment of Chairman Webster

The SEC named William H. Webster, to be the first PCAOB Chairman. He was 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 had previously agreed with them to appoint TIAA-CREF Chairman John Biggs as PCAOB Chairman). In one of the most contentious SEC public hearings, 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 approved (and debated) can be heard at 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-technology 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 (Nov. 4, 2002). Webster himself announced his resignation from the PCAOB a week later -– less than three weeks after the PCAOB was set up.[6]

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 violated the "Appointments Clause" of the U.S. Constitution, since PCAOB Board 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 clause, since the organization has quasi-executive, -legislative and -judicial functions.

On Aug. 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 clause.[7]

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.[8]

Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, et al., was argued on Dec. 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, filed briefs in the case.[9]

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 to be 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.[10]

See also


  1. ^ </ (Section 101(e)(2))
  2. ^ "William D. Duhnke III".
  3. ^ "James R. Doty".
  4. ^ "Standards".
  5. ^ "Firm Inspection Reports".
  6. ^ "Webster Ends His Brief Stint on S.E.C. Oversight Board", DAVID STOUT, November 12, 2002, NY Times
  7. ^ Hilzenrath, David (2008-12-23). "Sarbanes-Oxley Upheld By Court as Constitutional". The Washington Post. pp. D01. Retrieved 2008-08-24.
  8. ^ United States Supreme Court (2009-05-18). "08-861 FREE ENTERPRISE FUND V. PUBLIC CO. OVERSIGHT BD. (Questions presented)" (PDF). Retrieved 2009-11-28. Internal citations omitted.
  9. ^ United States Supreme Court (2009-11-23). "Docket for 08-861". Archived from the original on October 6, 2009. Retrieved 2009-11-28.
  10. ^ Russell, Kevin (June 28, 2010). "Provision of Sarbanes-Oxley unconstitutionally interferes with presidential authority". SCOTUSblog. Retrieved 2010-07-05.

External links

2009 term United States Supreme Court opinions of Stephen Breyer

== References ==

Appointments Clause

The Appointments Clause is part of Article II, Section 2, Clause 2 of the United States Constitution, which empowers the President of the United States to nominate and, with the advice and consent (confirmation) of the United States Senate, appoint public officials. Although the Senate must confirm certain principal officers (including ambassadors, Cabinet secretaries, and federal judges), Congress may by law delegate the Senate's advice and consent role when it comes to "inferior" officers (to the President alone, or the courts of law, or the heads of departments).

Audit Integrity and Job Protection Act

The Audit Integrity and Job Protection Act (H.R. 1564) is a bill that was introduced into the United States House of Representatives during the 113th United States Congress. The bill would "amend the Sarbanes-Oxley Act of 2002 (SOX) to deny the Public Company Accounting Oversight Board any authority to require that audits conducted for a particular issuer of securities in accordance with SOX standards be conducted by specific auditors, or that such audits be conducted for an issuer by different auditors on a rotating basis," according to a summary by the Congressional Research Service. The bill passed the House 321-62 on July 8, 2013.

Auditor's report

The auditor's report is a disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit, as an assurance service in order for the user to make decisions based on the results of the audit.

An auditor's report is considered an essential tool when reporting financial information to users, particularly in business. Since many third-party users prefer, or even require financial information to be certified by an independent external auditor, many audiotapes rely on auditor reports to certify their information in order to attract investors, obtain loans, and improve public appearance. Some have even stated that financial information without an auditor's report is "essentially worthless" for investing purposes.

Crowe (company)

Crowe is one of the largest public accounting, consulting, and technology firms in the U.S. Crowe is an independent member of Crowe Global.

Damon Silvers

Damon Silvers is a lawyer and policy director for the AFL-CIO. Silvers led the AFL-CIO legal team that won severance payments for laid off Enron and WorldCom workers.He is a member of the Public Company Accounting Oversight Board Standing Advisory Group, the Financial Accounting Standards Board User Advisory Council, and the American Academy of Arts and Sciences Corporate Governance Task Force

On November 14, 2008 Mr. Silvers was appointed by Speaker of the House Nancy Pelosi and the majority leader of the Senate Harry Reid (following consultation with the minority leaders of Congress ) to serve on the five-member Congressional Oversight Panel created to oversee the implementation of the Emergency Economic Stabilization Act.

Mr. Silvers received his J.D. with honors from Harvard Law School. He received his M.B.A. with high honors from Harvard Business School and is a Baker Scholar. Mr. Silvers graduated from Harvard College in 1986, summa cum laude, and has studied history at Kings College, Cambridge University. At Harvard, Silvers was a leader of the anti-apartheid Divestment movement, and was one of two undergraduates invited by Local 26 of the union which represented Harvard's dining hall staff to join their negotiating team in 1986. He attended Bellevue Elementary School and Open High School in Richmond, Virginia.

Free Enterprise Fund v. Public Company Accounting Oversight Board

Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010), was a case decided by the United States Supreme Court on June 28, 2010. The court held, on a 5-4 vote, that the method through which members of the Public Company Accounting Oversight Board, which supervises compliance with the Sarbanes–Oxley Act, are removed violates the United States Constitution's separation of powers.Under the Sarbanes–Oxley Act, officers of the Public Company Accounting Oversight Board (PCAOB) enjoyed dual layers of "for cause" protection against presidential removal. PCAOB officers could be removed only "for good cause shown" by officers of the Securities and Exchange Commission (SEC). Officers of the SEC could be removed by the President for "inefficiency, neglect of duty, or malfeasance in office." This meant that although the President could remove high ranking members of the SEC, he was unable to govern and execute power to the board, thus providing a "dual layer" of protection. Sarbanes-Oxley Act's dual for-cause limitations on removal of members of Public Company Accounting Oversight Board, under which the President was restricted in his ability to remove principal officers, who was in turn restricted in his ability to remove inferior officer, even though that inferior officer determined policy and enforced laws of the United States, contravened Constitution's separation of powers. The President could not "take Care that the Laws be faithfully executed" within meaning of Article II if he could not oversee faithfulness of officers who executed them. U.S.C.A. Const. Art. 2, § 1, cl. 1]; U.S.C.A. Const. Art. 2, § 3]; Sarbanes-Oxley Act of 2002, §§ 101(e)(6), 107(d)(3), 15 U.S.C.A. §§ 7211(e)(6)], 7217(d)(3)]. These dual layers of limitation on the President's ability to remove PCAOB officers led to separation of powers violations of the Appointments Clause and instead PCAOB officers exercised executive branch powers by determining policy and enforcing the laws of the United States.

Holdings: The Supreme Court, Roberts], Chief Justice, held that:

1] provision of Securities Exchange Act, allowing aggrieved parties to challenge final order or rule of Securities and Exchange Commission (SEC) in a court of appeals, did not strip District Court of jurisdiction;

2] Sarbanes-Oxley Act's dual for-cause limitations on removal of members of Board contravened Constitution's separation of powers;

3] such limitations were severable; and

4] appointment of members of Board by SEC did not violate Appointments Clause.

Affirmed in part, reversed in part, and remanded.

Generally Accepted Auditing Standards

Generally Accepted Auditing Standards, or GAAS are sets of standards against which the quality of audits are performed and may be judged. Several organizations have developed such sets of principles, which vary by territory. In the United States, the standards are promulgated by the Auditing Standards Board, a division of the American Institute of Certified Public Accountants (AICPA).

AU Section 150 states that there are ten standards: three general standards, three fieldwork standards, and four reporting standards. These standards are issued and clarified Statements of Accounting Standards, with the first issued in 1972 to replace previous guidance. Typically, the first number of the AU section refers to which standard applies. However, in 2012 the Clarity Project significantly revised the standards and replaced AU Section 150 with AU Section 200, which does not explicitly discuss the 10 standards.In the United States, the Public Company Accounting Oversight Board develops standards (Auditing Standards or AS) for publicly traded companies since the 2002 passage of the Sarbanes-Oxley Act; however, it adopted many of the GAAS initially. The GAAS continues to apply to non-public companies.

Investor Protection and Securities Reform Act of 2010

The Investor Protections and Improvements to the Regulation of Securities is a United States Act of Congress, which forms Title IX, sections 901 to 991 of the much broader and larger Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Its main purpose is to revise the powers and structure of the Securities and Exchange Commission, credit rating organizations, and the relationships between customers and broker-dealers or investment advisers. This title calls for various studies and reports from the SEC and Government Accountability Office (GAO). This title contains nine subtitles.

List of accountancy bodies

This is a list of the various professional bodies and organisations that seek to provide regulation and oversight over individuals and firms operating in the accountancy industry.

Management assertions

Management assertions or financial statement assertions are the implicit or explicit assertions that the preparer of financial statements (management) is making to its users. Financial statements include assertions related to the recognition, measurement, presentation, and disclosure of the financial information contained within such statements. The role of the auditor in a financial statement audit is to obtain evidence as to whether management's assertions can be supported.Both United States and International auditing standards include guidance related to financial statement assertions. The PCAOB and the IFAC address financial statement assertions in AS 15 and ISA 315, respectively. Auditors generally classify assertions into three categories:

Transactions and events

Occurrence — the transactions recorded have actually taken place.

Completeness — all transactions that should have been recorded have been recorded.

Accuracy — the transactions were recorded at the appropriate amounts.

Cutoff — the transactions have been recorded in the correct accounting period.

Classification — the transactions have been recorded in the appropriate caption.

Accounts balances as of period end

Existence — assets, liabilities and equity balances exist.

Rights and Obligations — the entity legally controls rights to its assets and its liabilities faithfully represent its obligations.

Completeness — all balances that should have been recorded have been recorded.

Valuation and Allocation — balances that are included in the financial statements are appropriately valued and allocation adjustments are appropriately recorded.

Presentation and disclosure

Occurrence — the transactions and disclosures have actually occurred.

Rights and Obligations — the transactions and disclosures pertain to the entity.

Completeness — all disclosures have been included in the financial statements.

Classification — financial statements are clear and appropriately presented.

Accuracy and Valuation — information is disclosed at the appropriate amounts.

Mark W. Olson

Mark Walter Olson (March 17, 1943 – September 12, 2018) was an American economist and politician who was a member of the Board of Governors of the U.S. Federal Reserve from 2001 to 2006. Filling an unexpired term to end on January 31, 2010, he resigned on June 21, 2006 in order to run the Public Company Accounting Oversight Board.

Myers v. United States

Myers v. United States, 272 U.S. 52 (1926), was a United States Supreme Court decision ruling that the President has the exclusive power to remove executive branch officials, and does not need the approval of the Senate or any other legislative body.In 1920, Frank S. Myers, a First-Class Postmaster in Portland, Oregon, was removed from office by President Woodrow Wilson. An 1876 federal law provided that "Postmasters of the first, second, and third classes shall be appointed and may be removed by the President with the advice and consent of the Senate." Myers argued that his dismissal violated this law, and he was entitled to back pay for the unfilled portion of his four-year term.

Chief Justice William Howard Taft, writing for the Court, noted that the Constitution does mention the appointment of officials, but is silent on their dismissal. An examination of the notes of the Constitutional Convention, however, showed that this silence was intentional: the Convention did discuss the dismissal of executive-branch staff, and believed it was implicit in the Constitution that the President did hold the exclusive power to remove his staff, whose existence was an extension of the President's own authority.

The Court therefore found that the statute was unconstitutional, for it violated the separation of powers between the executive and legislative branches. In reaching this decision, it also expressly found the Tenure of Office Act, which had imposed a similar requirement on other Presidential appointees and played a key role in the impeachment of President Andrew Johnson, to have been invalid; it had been repealed by Congress some years before this decision.

PKF International

PKF International (previously known as Pannell Kerr Forster) is a global network of accountancy firms. Member firms operate under the PKF brand in 440 cities and operate in 150 countries across 5 continents. PKF International is ranked the 15th largest global accounting network in 2016 according to a survey by International Accounting Bulletin..

In 2018 PKF was ranked as 11th largest global accounting firm in the United Kindgom according to

Early 2019, the International Accounting Bulletin placed PKF at 15th globally based on their world survey, conducted in February 2019.

Sarbanes–Oxley Act

The Sarbanes-Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July 30, 2002), also known as the "Public Company Accounting Reform and Investor Protection Act" (in the Senate) and "Corporate and Auditing Accountability, Responsibility, and Transparency Act" (in the House) and more commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law that set new or expanded requirements for all U.S. public company boards, management and public accounting firms. A number of provisions of the Act also apply to privately held companies, such as the willful destruction of evidence to impede a federal investigation.The bill, which contains eleven sections, was enacted as a reaction to a number of major corporate and accounting scandals, including Enron and WorldCom. The sections of the bill cover responsibilities of a public corporation's board of directors, add criminal penalties for certain misconduct, and require the Securities and Exchange Commission to create regulations to define how public corporations are to comply with the law.

William Joseph McDonough

William Joseph McDonough (April 21, 1934 – January 22, 2018) was a former vice chairman and special advisor to the chairman at Merrill Lynch & Co. Inc., responsible for assisting senior management in the company's business development efforts with governments and financial institutions. He retired in 2009.

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