Public Company Accounting Oversight Board (PCAOB)

The Public Company Accounting Oversight Board (PCAOB) is a nonprofit corporation that oversees the auditors of public companies whose securities trade in the United States, and the auditors of brokers and dealers registered with the Securities and Exchange Commission (SEC). Its stated purpose is to protect investors and the public interest by promoting informative, accurate and independent audit reports. It registers audit firms, sets auditing and related professional standards, inspects firms' work and disciplines firms and individuals who break the rules.

The PCAOB was created by the Sarbanes-Oxley Act of 2002, passed after the accounting scandals at Enron, WorldCom and other companies and the collapse of their auditor, Arthur Andersen. Before then, the audit profession in the United States had largely regulated itself through the American Institute of Certified Public Accountants (AICPA) and a system of peer review. The SEC oversees the PCAOB, appoints its board members and must approve its rules, standards and budget.

The PCAOB is governed by a five-member board appointed by the SEC, after consultation with the Chair of the Federal Reserve and the Secretary of the Treasury, for staggered five-year terms. Two members must be, or have been, certified public accountants; the other three must not be. The board's work is funded mainly by annual accounting support fees charged to public companies, in proportion to their market capitalization, and to brokers and dealers, rather than by fees from the audit firms it oversees. In 2010, the US Supreme Court ruled in Free Enterprise Fund v. PCAOB that the original limits on removing board members were unconstitutional, but it left the board itself in place.

• Registration: any accounting firm, US or foreign, that prepares or plays a substantial role in an audit report for an SEC issuer or registered broker-dealer must register with the PCAOB.
• Standards: the PCAOB sets auditing standards (known as AS), as well as standards on attestation, quality control, ethics and independence for registered firms. It initially adopted the AICPA's existing standards and has since replaced many of them, for example with AS 2201 on audits of internal control over financial reporting and the requirement to report critical audit matters in the auditor's report.
• Inspections: the PCAOB reviews selected audits and each firm's quality control system, and publishes inspection reports, with criticisms of quality controls made public if not fixed within a year.
• Enforcement: it investigates possible violations and can impose sanctions, including fines, censures and bars from auditing public companies.

Under the Sarbanes-Oxley Act, a registered firm that issues audit reports for more than 100 issuers in a year must be inspected annually, while firms with 100 or fewer issuer clients are inspected at least once every three years. For example, a Big Four firm auditing several thousand issuers is inspected every year, with inspectors choosing a sample of higher-risk audits to review in depth. A regional firm with 25 issuer clients would typically see inspectors once every three years. Each inspection report identifies audits in which the firm failed to obtain sufficient evidence to support its opinion, giving investors and audit committees a view of audit quality.

Because foreign firms that audit US-listed companies must register, the PCAOB also inspects auditors abroad, often through cooperative agreements with local regulators. Long-running obstacles to inspecting audit firms in mainland China and Hong Kong led Congress to pass the Holding Foreign Companies Accountable Act in 2020, which threatened to delist companies whose auditors could not be inspected; in 2022 the PCAOB announced that it had secured complete access for the first time. Critics have argued at different times that the PCAOB is too slow to update standards, that its fines are small relative to the size of large firms, or that it imposes excessive costs on smaller companies and audit firms. Its work complements that of the FASB, which sets accounting standards, and of state boards of accountancy, which license individual certified public accountants and supervise their wider practice, including audits of non-public companies.

• Public Company Accounting Oversight Board