The Public Company Accounting Oversight Board

First, Congress saw the need to create an independent body to oversee the audit of public companies that are subject to the securities laws. PCAOB was established to protect the investors and further the public interest in the preparation of informative, accurate, and independent audit reports for public companies. Before the SOX, The

However, the application of SOX has brought on regulations that public companies must put in place and follow to prohibit these unethical occurrences. One major advantage for associated with SOX is that more thorough audits are being conducted by auditing firms. Audits being conducted more thoroughly will provide accuracy and an increased reliability of financial data. This will affect taxes in a positive way and provide firms with an advantage. Causholli, Chambers, and Payne (2014) suggest that prior to the implementation of SOX in 2002, “an auditor’s opportunity to sell additional non-audit services in the subsequent year, coupled with the client’s willingness to buy services, intensified the economic bond between auditor and client, in turn reducing auditor independence and the quality of financial reporting” (p.681). The regulation of auditor provided non-audit tax services has increased the reliability of tax and financial reporting within companies. Seetharaman, Sun, and Wang (2011) explain that “in a post-Sarbanes-Oxley environment, the benefits of auditor-provided non-audit tax services (NATS) seem to manifest themselves in higher quality tax-related financial statement management assertions” (p. 677).

Section 105 gives PCAOB authority to conduct investigations and obtain all relevant information. PCAOB also has the power to suspend auditors, revoke the registration of the accounting firms and impose penalties for violations or unwilling to corporate with an investigation (Philipp, CPA, & CGMA, 2014). Section 106 regulates foreign public accounting firms providing an audit report to an issuer and requires them to comply with PCAOB requests (Philipp, CPA, & CGMA, 2014). Section 107 gives SEC oversight and enforcement authority over the PCAOB and its decisions (Philipp, CPA, & CGMA, 2014). This prevents PCAOB from gaining too much power over accounting regulation. Section 108 amends the Securities Act of 1933 to allow the SEC to have the authority to establish accounting standards, to adopt accounting standards established by a standard setting body that meets certain qualifications, such as the FASB. Section 109 calls for funding of the PCAOB and the designated accounting standard-setting body (FASB) to be funded from fees imposed upon public companies (Philipp, CPA, & CGMA,

Part 1 of Sarbanes Oxley created the Public Company Accounting Oversight Board, which oversaw the audit of public companies, established auditing report standards and rules, and investigated, inspected, and enforced compliance with these rules (Jennings, 2015). Auditing companies must

Carcello, Hollingsworth and Mastrolia tested whether PCAOB annual inspections result in higher quality financial reporting (Carcello, Mastrolia, & Hollingsworth, 2011). They compare abnormal accruals reported by audit clients before and after initial inspections by PCAOB (Carcello, Mastrolia, & Hollingsworth, 2011). If the inspections result in improved auditing, they expect to see less earnings management after the initial inspection (Carcello, Mastrolia, & Hollingsworth, 2011). For comparison purposes, they make the same observations before and after AICPA peer review inspections made prior to SOX (Carcello, Mastrolia, & Hollingsworth, 2011). They find a significant decrease in income-increasing abnormal accruals in the first and second years

As a result of SOX, top management must individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased the oversight role of boards of directors and the independence of the outside auditors who review the accuracy of corporate financial statements.[1]

On July 30, 2002, The Sarbanes-Oxley Act of 2002 (SOX) was signed into law by President Bush. "The Act mandated some reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud" (SEC.Gov. 2013 P. 1). The SOX Act also created the Public Company Accounting Oversight Board (PCAOB) in response to numerous failures of the profession to fulfill its trusted role; to oversee the activities of the auditing profession (SEC.Gov, 2013. The auditing of financial statements is required for the protection of public investors; however the question that arises is whether or not all PCAOB members should be taken from the investments communities that use audited financial statements. The remaining of this

The Sarbanes-Oxley Act (SOX) was enacted in July 30, 2002, by Congress to protect shareholders and the general public from fraudulent corporate practices and accounting errors and to maintain auditor independence.   In protecting the shareholders and the general public the SOX Act is intended to improve the transparency of the financial reporting.   Financial reports are to be certified by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) creating increased responsibility and independence with auditing by independent audit firms. In discussing the SOX Act, we will focus on how this act affects the CEOs; CFOs; outside independent audit firms; the advantages and a

The PCAOB is under the control of the SEC and is obligated to enforce quality control, auditing, and independence standards (Hoyle et al., 2013). Additionally, the SOX mandates the PCAOB to interact “with the Auditing Standards Board to promulgate audit and attestation standards” (Hoyle et al., 2013, p. 556). That is, the PCAOB has the authority to repeal, reject, modify, or amend any auditing standard (Hoyle et al.,

The Sarbanes Oxley Act allowed the federal government to have durable guidelines of corporate governance along with inspecting the ethics for public companies. SOX creates the boundaries in regards to accounting companies and what they can offer These are services like: consulting, allowing corporate auditing organizations more responsibilities and accountabilities, enforcing public companies to make improved public releases - such as core financial controls assessment and permitting improved criminal and civil sanctions (Kessel, 2011). Moreover, SOX created the Public Company

According to PCAOB (2015), “the Public Company Accounting Oversight Board (PCAOB) is a nonprofit corporation established by the Sarbanes-Oxley Act. The Board is composed of five members appointed by the Securities and Exchange Commission. It was modeled on private self-regulatory organizations in the securities industry—such as the New York Stock Exchange—that investigate and discipline their own members subject to Commission oversight. Unlike these organizations, the Board is a Government-created entity with expansive powers to govern an entire industry.”

After the accounting scandals that took place in 2001 and 2002, Congress passed the SOX which requires companies to be held more accountable for financial statement reporting. SOX was established as a corporate responsibility law, which applies to all companies who are registered with the SEC (Mundy & Owen, 2013, p. 183). Mundy and Owen explains that SOX’s intention is to enhance the quality of financial statement reporting among all companies, to help investors feel confident with their investments (p. 183). Additionally, Mundy and Owen note that SOX looks to increase the reliability and accuracy of financial statements by implementing regulations and requirements on internal controls over financial reporting (p.183).

Section 101 of the Sarbanes-Oxley Act establishes the Public Company Accounting Oversights Board (PCAOB). The Board consists of five financially-literate members that are appointed for five-year terms. Three of these members must not be a CPA currently nor have been one in the past. The other two members must be, previously or currently, a certified public accountant. The main focus of this Board is (1) to register along with discipline accounting firms that prepare audit reports on companies that are public; (2) conduct inspections and/or investigations of registered accounting firms that audit public companies; and (3) establish audit and accounting standards.

SOX require public companies establish audit committees to conduct audit, and composed of only independent directors, and have one member with financial expertise. The audit committee is responsible for selecting the auditor. Furthermore, the Security Exchange Commission requires SOX to adopted rules of professional responsibility for attorneys representing public companies. The policies require attorneys to report evidence of a material violation of securities law or breach of fiduciary duty to the Chief Legal Officer, Chief Executive Officer, or the Board of Directors. Additionally, SOX requires businesses to “evaluation internal control process and adjust organizational policies to be aligned with SOX”, (Parles, O’Sullivan, & Shannon, 2007).

These changes were outlined in the Sarbanes Oxley Act of 2002 (SOX). SOX completely revolutionized financial reporting, requiring senior management of firms to sign off on each financial statement that the company issues. It also stipulated that wrongful doing can result in not only termination but also imprisonment. SOX amplified the requirement for companies, requiring firms to maintain proper levels of internal controls when it comes to operating activities. SOX also established the creation of the Public Company Accounting Oversight Board (PCAOB) which implemented stricter auditing standards for public accounting firms. Not only were accounting firms required to consider internal controls, but they were also required report any significant deficiency directly to the board of directors. SOX stressed the importance of internal controls, and within internal controls it established the need for segregation of duties. Since this time, there have been many additions to accounting policies regards segregations of duties, and many functions of the business process dedicated to it.