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13 February 2014
Public Company Accounting Oversight Board
Public Company Accounting Oversight Board (PCAOB) is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports (Messier). Another regular work that PCAOB registers is that the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection since 2010 (Messier). Now PCAOB is responsible for a program of regular inspection of assess the degree of compliance of registered public accounting firms with SOX, PCAOB and SEC rules, and professional standards. The PCAOB also has broad investigative and disciplinary authority over registered audit firms.
PCAOB is created by the Sarbanes-Oxley Act of 2002 to prevent the cases like Enron happening again. Enron case was a hit to the US accounting field at that time and it was also a caution to show the importance of auditing work. PCAOB was set in that situation with five official members from 25 October 2002, including 2 CPAs. Founding board members are appointed to staggered terms including: Kayla J. Gillan, Daniel L. Goelzer, Bill Gradison, and Charles D. Niemeier. James R. Doty has been the chairman since 2011, and Lewis H. Ferguson, Jeanette M. Franzel, Jay D. Hanson and Steven B. Harris are the rest board members. All members in PCAOB are full-time employers with similar salary level as FASB employers. The first PCAOB office was opened at Washington. Then in Atlanta, Chicago, Denver, New York and other four cities, offices are established brick by brick. By 13 November, 2013, there were 2,363 public accounting firms registered with the PCAOB, and 911of them are outside the United States (Annual Report 2013). PCAOB is becoming more international and is regarded as credited standards all global through these 12 years.
Though PCAOB is a nonprofit organization, expenditures are needed to maintain daily operations. The funds are collected to cover PCAOB’s annual budget, less registration and annual fees, and other operational supplies. The sources of funding for the PCAOB are varied, but the largest source comes from the companies whose financial statements are needed audited by the PCAOB’s registered auditing firms. However, the funds from the issuers’, brokers’ and dealers’ applying fee are not enough for the annual budget and officials’ salaries; they are just defined as the Board's "accounting support fee." The Board's budget and accounting support fee are approved annually by the SEC (official website). In 2011, the new amendments came out from SEC to redefined the allocations of “accounting support fee” paid by issuers, brokers and dealers. The new amendments are guided with two preferential principles. One is that the fee must be allocated in a manner that reflects the proportionate sizes of issuers, brokers, and dealers. The other one refer that the fee must be allocated in an equitable manner. The reason why these principles made is that audit workload is based on the entity size to some degree. Through the 2014 fiscal-year budget, it is said the total outlays are 258,414,485, a 5 percent increase over this past year (Cohn). According the budget statements, the Division of Registration and Inspections share the largest part of budget and Division of Enforcement and Investigations, Office of Information Technology, Office of Administration occupy large shares as well. As the organization to oversee the audits of public companies, PCAOB’s financial statements can be open to the public to show reliability and convince the public. PCAOB will also present an annual report each year to show their financial statements, statements of activities and investing lists.
Accounting principles and standards can be revised each year and PCAOB should adjust its strategies tied to the current situation. Every year, PCAOB will have a strategic plan which contains the newly updated goals for the following five year. In PCAOB’s latest strategic plan (2013-2017), PCAOB continued to refine their strategies and review the approach to the developments and circumstances that affect their programs, operations, and resource needs. Core value, missions and liabilities are always similar from year by year but SWOT analysis is needed to present before PCAOB set their new goals. There are no absolute strengths or weaknesses for one organization, and opportunities this year may be the threats in the future; so updated SWOT analysis is necessary. In PCAOB’s 2013-2017 strategic plan, the organization keeps its independence and institutional credibility as their main strength. PCAOB also has a lot of experienced and knowledgeable auditors who register on the board to work with. PCAOB is also an institution authorized by the government and has closing work relation with other authoritative organization including SEC, FASB, and FINRA (Financial Industry Regulatory Authority). The largest weakness PCAOB faced in these years is that it does not have public nature of the Board's disciplinary process under the Sarbanes-Oxley Act. Under the current situation, market has big interest in PCAOB information and the PCAOB's potential to enhance competition on the basis of audit quality. PCAOB also regards their global network as their opportunity to gain more sophisticated information, data for analysis. PCAOB also envisages the potential threats though they are in the boom period now. PCAOB should hire and retain their experienced and knowledgeable auditors in this competitive market.
In my opinion, lacking of registered firms outside the U.S is also a barrier for PCAOB becomes more international. Though the absolute number of firms is large enough now, over 60% of those firms are U.S companies. I think this threat will exist for long time because the accounting principles and standards are very different in different countries. In the United State, Generally Accepted Accounting Principles (GAAP) is followed in all firms but International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) are more acceptable in some other countries like China. On the current globalization situation, more and more large firms are multinational and it is a heavy workload and it is impossible for PCAOB to audit those firms using different standards. My suggestion is that PCAOB may collaborate more with other national auditing organization. In this way, PCAOB may entrust those organizations to do some international audit case and those work should be creditable as well.
Based on the SWOT analysis, PCAOB set up three goals for the 2013-2017 period. The first goal is to effective use of the unique knowledge and insight into audit practices, risks, and trends to design and implement the most effective audit oversight programs and regulatory activities that will further investor protection and the public interest in informative, accurate and independent audit reports (2013-2017 Strategic Plan). There was a report PCAOB made in the end of 2013 said that registered firms did not always result in “an appropriately executed engagement quality review” although they are followed the AS 7 standards (Cohn). PCAOB decides to improve transparency into the audit process to help improve this situation and reduces the audit risks. Meanwhile, to understand the root causes of audit risks and respond to the known or potential trends in audit risks, the organization will use the comparative analysis more often in firms' policies for internal inspections. PCAOB has also been making process on reducing its backlog of remediation submissions since 2013(Staff). These submissions can date back to 2010 and they are submitted to SEC in early January.
The second goal for the future five year is to make a positive difference in the market for audit services and advance trends for quality financial reporting. PCAOB pays a great attention to accounting firms’ burgeoning consulting practices (Cohn). This objective will be so important in the current year that there is a large share of 2014 budget goes to the object. Improving education related to audit quality is another objective in the plan. This action can be used by CPA firms, continuing education providers, and college audit professors in order to improve training and educational programs, with the goal of avoiding similar violations in the future (Coppage 46). As for improving the relevance and usefulness of the audit report for the investing public, PCAOB plans to seek insight changes to audit report through research and economic analysis and adopt standards and rules. The third goal is to establish a harmonious workplace culture that promotes excellence, integrity, diversity, respect, fairness, accountability, continuous learning and careful stewardship of the resources in execution of their mission (2013-2017 Strategic Plan).
I appreciate PCAOB’s way to make their strategic plan. A five-year period is not a short term for an organization which only has twelve-year history so the strategic plan can regard as a long-term plan for PCAOB. However, every year, the organization makes adjustments for updated situations to suit the newest accounting principles. In the plan, goals are set accurate and reasonable, and objectives are well-rounded. For my own knowledge, I suggest PCAOB to build more detailed standards about the computer auditing because the computer technologies are broadly used in accounting nowadays. Computer frauds may happen besides the traditional cheating in the financial reports. Developing new and detailed standards of computer auditing will make PCAOB’s work more accurate and creditable.
In summary, PCAOB does a good job as a young auditing supervisory organization. Though PCAOB was created only decade years ago, it has specific framework of the organization and detailed budgets for every-year’s operations. PCAOB also suits the constantly changing accounting principles and standards in order to promote the better auditing work. Its plans are aspiring, realizable and detailed. I think PCAOB has a wonderful strategic plan to meet the future challenges in the following years.
Cohn, Michael. "CAQ Points to Risks in 2013 Audit Cycle." Accounting Today (USA) 17 Dec. 2013, Newswire: NewsBank. Web. 5 Feb. 2014.
Cohn, Michael. "PCAOB to Focus on Accounting Firms’ Growing Consulting Businesses." Accounting Today (USA) 26 Nov. 2013, Newswire: NewsBank. Web. 5 Feb. 2014.
Coppage, Richard, and Trimbak Shastri. "Using PCAOB Settled Disciplinary Orders To Improve Audit Quality Education." CPA Journal 83.7 (2013): 46-51. Business Source Premier. Web. 17 Feb. 2014.
Messier, Glover & Prawitt, Auditing and Assurance Services, McGraw-Hill Irwin Publishing, 8th edition. Print.
The official website of PCAOB http://pcaobus.org/Pages/default.aspx
Staff, Editorial. "profession watch." Accounting Today (USA) 1 Feb. 2014, profession watch: 6. NewsBank. Web. 5 Feb. 2014.