The Public Company Accounting Oversight Board (PCAOB) is a 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).
Purpose
In creating the Public Company Accounting Oversight Board (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.
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, and only two 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 chair is Erica Y. Williams, who was sworn in on January 10, 2022, by the SEC. From 2017 to 2021, the chairman was William D. Duhnke III, a former staff director and general counsel to three Senate committees. From 2011 to 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).