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.
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. 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. 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. 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:
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. 
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.
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.
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).
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-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 (Nov. 4, 2002). Webster himself announced his resignation from the PCAOB a week later -– less than three weeks after the PCAOB was set up.
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.
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.
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.