Getting to Know the Public Company

Accounting Board
Product of BKMSH

Getting to Know the Public

Company Accounting Board
The enactment of the Sarbanes-Oxley Act (SOX) on July 30, 2002 led to the establishment of the Public
Company Accounting Oversight Board (PCAOB). A private-sector, non-profit entity governed and
supervised by the Securities and Exchange Commission (SEC), PCAOB was formed to supervise
accounting professionals, particularly the auditors of publicly traded corporations, with a view of
safeguarding the investors interests and to assure the public that companies audit reports are
informative, trustworthy, and impartial. In addition, the Board oversees broker-dealer audits. These
include submitted compliance reports in adherence to federal security laws and policies.

Timeline of PCAOB Since the Legislation of SOX in 2002

On October 25, 2002, the SEC proclaimed that Judge William H. Webster will be the chairman of the
Board while Charles D. Niemeier, Daniel L. Goelzer, Willis D. Gradison Jr., and Kayla J. Gillian will be
the founding members of PCAOB.
The first board meeting happened on January 9, 2003. Since then, several important roundtable
meetings occurred. The Reporting on Internal Control, Audit Documentation, Non-U.S. Auditor, and
Auditor Independence and Tax services are among the items that were on the preceding agenda for
discussion. In addition, various rules, policies, regulations, and statements were adopted and
consequently released. Some of the significant ones, during the first three years of PCAOB, were the
rules on inspection, investigations and adjudications, audit firm registration, and oversight of non-U.S.
audit firms; and Auditing Standards No. 1: References in Auditors Reports to the Standards of the
Public Company, Auditing Standards No. 2: An Audit of Internal Control over Financial Reporting
Performed in Conjunction with an Audit of Financial Statements, Auditing Standards No. 3: Audit
Documentation, and Auditing Standards No. 4: Reporting on Whether a Previously Reported Material
Weakness Continues to Exist.
More guidelines, rules, and standards were implemented by PCAOB in the subsequent years. These
include Staff Audit Practice Alerts, Attestation Standards, and new Auditing Standards. As of this writing,
the most recent news release of PCAOB is on Audit Quality Indicators and Engagement Partner
Transparency. In addition, the Board had issued the Audit Committee Dialogue, discussed updates on
some standard-setting projects, and conducted an open board meeting whereby the Supplemental
Request for Comment Related to Improving Audit Transparency and Concept Release on Audit Quality
Indicators was discussed.

The Board Members of PCAOB

The SEC has been mandated to appoint five members of the PCAOB after conferring with the Chairman
of the Board of Governors of the Federal Reserve System. These members have staggered five-year
terms. Currently, James R. Doty is the Chairman of the Board while Jeanette M. Franzel, Lewis H.
Ferguson, Steven B. Harris, and Jay D. Hanson make up the membership of the Board.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

Getting to Know the Public

Company Accounting Board
According to the International Forum of Independent Audit Regulators (IFIAR), the SOX requires that
out of the five members of the Board, only two must be or must have been Certified Public
Accountants (CPAs). If and when the Chairman of the Board is a CPA, he/she should not be providing
services as a CPA for at least five years prior to his/her conscription to the Board. In addition, all the
members of the Board must work full-time and, concurrent with the service on the Board, must not
engage in other business or professional endeavors.
In reference to the Boards Ethics Code, there is a cool-off period of 12 months, which starts on the
date of appointment. During this period, a Board member cannot partake in decision-making events
that will have or has a relative material effect on the Board members previous employer, clients, and
business partners five years prior to his/her recruitment to the Board. Moreover, in the event of a
conflict of interest, either directly or indirectly, he/she shall recuse himself/herself for the said Board
function or activity.

Responsibilities and Authority of the PCAOB

Generally, the Board has four responsibilities. These are:
Registration of accounting firms that conduct audits of publicly traded entities
Inspection of registered accounting firms.
Establishment of auditing, quality control, independence, and ethics standards, as well as
attestations for registered accounting firms.
Investigation and discipline of registered auditing firms and their associated persons for infractions
or transgressions of law or professional guidelines.
As per the SOX provision, auditing firms must register with the PCAOB. Moreover, foreign auditing
firms that plan, provide, or participate in the preparation of audit disclosures for any issuers, brokers,
and dealers based in the country must comply with the rules of PCAOB. In addition, PCAOB can
inspect and regulate public auditing firms and the people associated with the firm for non compliance
with SOX, SEC policies, and other requirements and specifications on audits of public corporations,
brokers, and dealers. Regulatory compliance is guaranteed by the PCAOB since they are allowed to
examine the audit reports, audit performance, issuance of audit reports, logs and other pertinent
documents by the accounting firm

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

Getting to Know the Public

Company Accounting Board
SOX obliges PCAOB to perform annual inspections on firms that cater for more than 100 issuers, and
at least once in 3 years for firms that provide audit reports for less than 100 issuers. If infractions or
transgressions are discovered, PCAOB can suspend or revoke an auditors registration, suspend or bar
an individual, and impose fines.

PCAOBs Budget
Section 109 of SOX instructs issuers, brokers, and dealers to pay the accounting support fee that will
support the undertakings of the Board. Based on the yearly budget of PCAOB that is approved by SEC,
the Board will calculate the cumulative amount of fees that will be exacted to brokers, dealers, and
issuers. Aside from the accounting support fees, public accounting firms are required to pay a certain
amount that is used to cover the costs of processing and reviewing registration applications. Noncompliance is a violation of the Securities and Exchange Act of 1934.

PCAOB Inspection
As discussed earlier, domestic or foreign auditing firms that provide audit reports of U.S. public
corporations, brokers, and dealers, and those that have a major role in preparing or issuing such audits
are compelled to register with the Board. PCAOB is obliged to carry out a continuing program of
inspections of the said firms wherein adherence to SOX, to the Boards and SECs rules and policies,
and to the professional standards will be evaluated.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com