What is the PCAOB, and what does it do?
PCAOB stands for the Public Company Accounting Oversight Board. It is a non-profit regulatory board that manages the audits of public companies by regulating the auditors of publicly traded companies.
There are various benefits of PCAOB as it sets a standard for auditing and minimizes audit risk. Specifically, PCAOB auditors oversee the audits of all public companies, brokers, and dealers registered with the US Securities and Exchange Commission (SEC).
This article discusses the function of PCAOB in detail, along with its history.
History of PCAOB
As part of the Sarbanes-Oxley Act (SOX), which was implemented in reaction to a number of accounting crises (such as Enron and Worldcom), the PCAOB was established by Congress in 2002 to better regulate the auditing sector.
Before the PCAOB was established, the auditing industry was self-regulated. But in the early 2000s, it seemed that this strategy was falling short with the public.
The Securities and Exchange Commission (SEC), in charge of safeguarding investors and preserving the US securities markets, receives reports from the PCAOB. The SEC is also responsible for overseeing the PCAOB auditors.
What is PCAOB and Why Does it Matter?
The Public Company Accounting Oversight Board (PCAOB) is an independent organization established to oversee the audits of public companies in the United States.
Created by the Sarbanes-Oxley Act of 2002, the PCAOB’s primary mission is to protect investors and ensure the integrity of financial statements. Understanding the role of PCAOB is essential for businesses, auditors, and investors who rely on accurate and transparent financial reporting.
Objectives of PCAOB
PCAOB has well-documented goals and objectives that serve as an inspiration to many auditors and accountants all over the world, including audit firms in Malaysia. Following are the four main objectives of PCAOB:
- Register public accounting firms that prepare audit reports for brokers, dealers, and issuers.
- Adopt modern auditing standards for quality control, ethics compliance, and achieving independence.
- Inspect the audit and quality control systems of the registered firms.
- Investigate and discipline the registered accounting firms for violating the law, rules, and accounting standards.
Let’s look at these core activities of PCAOB in detail.
1. Registration
Public accounting companies are registered with the PCAOB. The PCAOB has to be aware of the businesses to monitor them. All entities that conduct financial audits of publicly traded corporations are required to register with the PCAOB.
2. Auditing Standards
The professional auditing standards that licensed auditing companies must follow are set by the PCAOB board. These guidelines are used to keep an eye on accounting companies. The AICPA established guidelines before the PCAOB.
The PCAOB rearranged the standards to combine them into a single, integrated numbering system, added its own, and essentially embraced the AICPA’s auditing standards. For a complete list of all the standards, please visit the PCAOB website.
The public, not the customer, should be a CPA or CPA firm’s main priority. To prevent CPAs from losing their independence, the Code specifies rules. It offers advice, as well as illustrations of interactions and pursuits that pose a danger to one’s real or perceived independence.
An auditor having financial ties to a client or close connections to individuals holding important positions inside the client’s business serves as examples.
The Code describes the steps a company or a person may take to remove or lessen risks to independence. So that businesses can prove their attempts to maintain independence, activities made to preserve independence should be recorded.
Here is a link to the professional Code of conduct for the AICPA. Ultimately, PCAOB auditors have to enforce the Code to maintain auditing standards throughout the board. Accounting services in Malaysia also follow a similar code of conduct.
3. Inspection
The PCAOB conducts inspections to assess how well businesses adhere to the requirements specified above. The PCAOB focuses its inspections on businesses that annually audit 100 or more public corporations.
At least once every three years, the PCAOB inspects businesses that audit fewer than 100 publicly traded corporations. The inspections will concentrate on locations that are thought to be at greater risk, according to the PCAOB.
Internal control over financial reporting, identifying and mitigating the risks of substantial misstatement, and accounting assumptions are some of these topics.
The PCAOB chooses audit engagements for the assessment using a risk-based methodology. The purpose of these inspections is to ascertain if an accounting company’s audit methods and documents include mistakes and whether the audit firm has suitable quality controls in place.
Audit shortcomings are noted in the inspection report posted on the PCAOB website if the PCAOB finds insufficient evidence to support the auditor’s assessment.
4. Enforcement
If the PCAOB auditors find that any major violation occurred as a consequence of the inspections, an enforcement hearing may be held. The PCAOB has the authority to penalize companies and individual auditors.
As a recent example, the SEC/PCAOB fined KPMG $50 million for malfeasance, including revising work documents to reduce the possibility of receiving inspection results from the PCAOB.
The Role and Functions of PCAOB
The PCAOB carries out its mission through the following core functions:
1. Auditor Registration
Public accounting firms that audit publicly traded companies must register with PCAOB.
2. Inspections of Audits
Regular inspections ensure that audit firms comply with professional standards and legal requirements.
3. Enforcement and Disciplinary Actions
PCAOB has the authority to investigate audit firms and enforce disciplinary measures in case of non-compliance.
4. Setting Auditing Standards
The organization establishes auditing rules that firms must follow to maintain high-quality financial reporting.
Why PCAOB Compliance is Important for Businesses
For companies operating in industries requiring public financial reporting, PCAOB compliance ensures credibility, builds investor trust, and mitigates financial fraud risks.
Compliance with PCAOB auditing standards is particularly crucial for firms planning IPO listings, mergers, or attracting foreign investments.
Key Differences Between PCAOB and Other Regulatory Bodies
While the PCAOB plays a critical role in auditing, other regulatory bodies also oversee financial reporting, including:
SEC (Securities and Exchange Commission)
Oversees overall securities regulation and investor protection.
AICPA (American Institute of Certified Public Accountants)
Develops guidelines for private company audits.
IAASB (International Auditing and Assurance Standards Board)
Establishes international auditing standards used outside the U.S.
Recent Developments in PCAOB Regulations
Keeping up with regulatory changes is crucial for audit firms and publicly traded companies. Recent amendments to PCAOB standards include:
Stricter quality control requirements for audit firms.
Increased transparency and disclosures for public company audits.
Enhanced measures to detect and prevent fraud within financial reporting
How PCAOB Affects Malaysian and International Companies
Although PCAOB is a U.S.-based organization, its regulations impact multinational companies, including those in Malaysia, Singapore, and other ASEAN markets. Malaysian firms working with U.S.-listed corporations or engaging in cross-border financial transactions must adhere to PCAOB auditing standards.
How to Ensure PCAOB Compliance in Auditing
To meet PCAOB requirements, companies and auditors should:
1. Stay Updated
Regularly review PCAOB updates and amendments.
2. Enhance Internal Controls
Implement strong financial reporting controls to reduce audit risks.
3. Engage PCAOB-Registered Auditors
Work with audit firms that are PCAOB-compliant.
4. Conduct Pre-Audit Assessments
Identify potential compliance gaps before undergoing formal audits.
In Closing
The bottom line is that PCAOB and other such relevant accounting and auditing authorities play an integral role around the world in monitoring audit firms and maintaining investors’ and the public’s trust in accounting and auditing procedures.
Such rules and regulations allow audit firms in Malaysia to operate within a standard framework and offer reliable services.
