Sarbanes-Oxley Act of 2002: Definition, Summary

pcaob definition

The 2007 annual report will be the first year that the management assessment will need to be included. As I mentioned, public accounting firms that are required to register with the PCAOB are subject to the Board’s inspection program.

Accordingly, upon adoption of this standard, a reference to generally accepted auditing standards in auditors’ reports is no longer appropriate or necessary. The Public Company Accounting Oversight Board (PCAOB) was established with the passage of the Sarbanes-Oxley Act of 2002. The act was passed in response to various accounting scandals of the late 1990s. The board protects investors and other stakeholders of public companies by ensuring that the auditor of a company’s financial statements has followed a set of strict guidelines. PCAOB is overseen by the Securities and Exchange Commission and, since 2010, the PCAOB has overseen the audits of SEC-registered brokers and dealers.

Registered firms that issue audit reports for 100 or fewer issuers are generally inspected at least once every three years. 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.

Understanding the Public Company Accounting Oversight Board

firms should continue to evolve, particularly as our non-U.S. I am encouraged, as I mentioned a moment ago, that in recent years we have seen a number of countries undertake similar efforts to enhance auditor oversight. While auditor oversight bodies around the world may be taking a variety of approaches in implementing auditor oversight models, we all share the objective of improving public confidence in the credibility of audits of financial statements.

The Board

If closely coordinated, this will help to limit regulatory arbitrage and promote a global confidence in financial reporting, and more specifically audited financial statements. As I mentioned, the PCAOB faces an interesting challenge with respect to the inspection of registered firms located outside of the United States. Section 404 of the Sarbanes-Oxley Act requires public companies’ annual reports to include the company’s own assessment of internal control over financial reporting, and an auditor’s attestation.

What is Pcaob?

The Public Company Accounting Oversight Board (PCAOB) is a non-profit organization that regulates auditors of publicly traded companies. The purpose of PCAOB is to minimize audit risk.

Audits of companies that are SEC registrants use both standards. The PCAOB periodically issues Inspection Reports of registered public accounting firms. Those portions are made public (called “Part II”), however, if the Board determines that a firm’s efforts to address the criticisms or potential defects were not satisfactory, or the firm makes no submission evidencing any such efforts. To illustrate the importance of regulatory coordination to the PCAOB, more than 750 of the over 1750 firms registered with the PCAOB are in countries outside the United States, although they may be affiliated with large, U.S. based audit firms.

  • The PCAOB investigates and enforces compliance at the registered accounting firms.
  • Furthermore, SOX led to the creation of the Public Company Accounting Oversight Board (PCAOB), which sets standards and rules for audit reports.

It requires all auditors of public companies to register with them. The PCAOB inspects, investigates, and enforces the compliance of these firms. It prohibits accounting firms from doing business consulting with the companies they are auditing. But the lead audit partners must rotate off the account after five years. When violations are found, the PCAOB can impose appropriate sanctions.

As required by the Sarbanes-Oxley Act, many of these firms are registered with the PCAOB because they audit non-U.S. companies whose securities trade in U.S. markets and are required to file audited financial statements with the SEC. In addition, as also provided for in the Act and the Board’s rules, a number of other non-U.S. firms are registered because they audit or wish to audit significant non-U.S. With respect to both categories of firms, the PCAOB continues to work closely with its foreign counterparts to minimize unnecessary overlap and achieve our shared objectives in the oversight of these non-US firms.

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Furthermore, SOX led to the creation of the Public Company Accounting Oversight Board (PCAOB), which sets standards and rules for audit reports. Under SOX, all accounting firms that audit public companies are required to register with the PCAOB. The PCAOB investigates and enforces compliance at the registered accounting firms. The Sarbanes-Oxley Act of 2002 authorized the Public Company Accounting Oversight Board (“PCAOB”) to establish auditing and related professional practice standards to be used by registered public accounting firms. PCAOB Rule 3100, Compliance with Auditing and Related Professional Practice Standards, requires the auditor to comply with all applicable auditing and related professional practice standards of the PCAOB.

Audit reports issued prior to the effective date of this standard were required to state that the audits that supported those reports were performed in accordance with generally accepted auditing standards. The PCAOB adopted those generally accepted auditing standards, including their respective effective dates, as they existed on April 16, 2003, as interim standards.

The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection. Part II of the Public Company Accounting Oversight Board (PCAOB) inspection report is released only when firms fail to remediate quality control criticisms and is intended to be a public signal of audit quality. The purpose of this paper is to reexamine whether audit clients react to the release of Part II of the PCAOB inspection report as a signal of audit quality. The PCAOB performs inspections to evaluate firms’ compliance with the standards mentioned earlier. The PCAOB’s inspections focus on firms that audit 100 or more public companies each year.


The PCAOB inspects firms that audit fewer than 100 public companies at least once every three years. The PCAOB stated that the inspections will focus on areas of considered higher risk. These areas include internal control over financial reporting, assessing and responding to risks of material misstatement, and accounting estimates. Registered accounting firms that issue audit reports for more than 100 issuers (primarily public companies) are required to be inspected annually.

PCAOB inspections replaced the audit profession’s previous peer reviews, which focused on compliance with applicable standards but did not address the overall audit environment. PCAOB inspections are risk-based and designed to identify auditing problems at an early stage and focus firms on correcting them.

Since the law was enacted, however, both requirements have been postponed for smaller public companies. The requirement of an auditor’s attestation won’t apply to most smaller public companies until their 2008 annual reports.

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To give you context, I should give those of you who may not have dealt with the PCAOB before a brief synopsis of our mandate. As I just mentioned, the Sarbanes-Oxley Act established the PCAOB as the independent auditor oversight body in the United States. The PCAOB’s mission is to oversee the auditors of public companies, protect the interests of investors, and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB does this through its standards setting, inspections, enforcement, and outreach programs.

The American Institute of Certified Public Accountants (AICPA) issues Statements on Auditing Standards with the AU prefix that can be found here. The Public Company Accounting Oversight Board (PCAOB) issues General Auditing Standards with the AS prefix that can be found here.