Sarbanes-Oxley Act of 2002

Click to download a One-Page Summary (PDF 19k) of the United States Public Company Accounting Reform and Investor Protection Act of 2002 — also called the Sarbanes-Oxley Act of 2002 (named after its Congressional cosponsors, Senator Sarbanes and Congressman Oxley).

Or you can Download the Full Text of the Sarbanes-Oxley Act of 2002 (PDF 230k).

PCAOB Rulemaking

The PCAOB's rulemaking process results in the adoption of rules that are then submitted to the Securities and Exchange Commission for approval. PCAOB rules do not take effect unless approved by the Commission. Click here for a detailed description of the PCAOB rulemaking process, as set out in the Bylaws and Rules of the Public Company Accounting Oversight Board (link to PCAOB website).

Click here for a List of the Various Rules that have been proposed and finalised by the PCAOB, with links to the underlying documents and letters of comment. (This is a link to the PCAOB website.)

Registration of Foreign Public Accounting Firms

Proposed Rules

In March 2003, the PCAOB voted unanimously (4-0) to issue Proposed Registration Rules (PDF 294k) that would require both US and foreign auditing firms to register with the Board if they perform audits of companies registered with the SEC. Comments are due by 31 March 2003. The rules are consistent with Section 102 of the Sarbanes-Oxley Act, which requires that all auditors of public companies must register with the PCAOB, identify public audit clients, identify all accountants associated with those clients, list fees earned for audit and non-audit services, explain their audit quality control procedures, and identify all criminal, civil, administrative, and disciplinary proceedings against the firm or any of its associated persons in connection with an audit. The Act also requires the PCAOB to inspect all CPA firms that audit public companies to assess compliance with the law, SEC regulations, rules established by the PCAOB, and professional standards. Following consideration of the comments on its proposed rules, the PCAOB will adopt final rules that also must be approved by the Securities and Exchange Commission.

Public Roundtable

The PCAOB convened a roundtable meeting on 31 March 2003 at which interested persons presented their views on the effect and operation of PCAOB registration and oversight of foreign public accounting firms. Among the questions discussed at the roundtable were these:

• Should foreign firms be given an extended deadline for their initial registration?
• Are there any portions of PCAOB's draft registration form that are inapplicable, or that should be modified or supplemented, for non-US applicants?
• Do any of the PCAOB's registration requirements conflict with national laws?
• In the case of non-US firms that must register because they play a 'substantial role' in the audit of a US issuer, how should 'substantial role' be defined?
• Should registered foreign public accounting firms be subject to PCAOB inspection, or could the PCAOB, in some cases, rely on home-country regulation in lieu of inspection?
  

Final Rules

On 6 May 2003, the PCAOB adopted Final Auditor Registration Rules (PDF 393k). All US public accounting firms must be registered with the Board if they wish to prepare or issue audit reports on US public companies, or to play a substantial role in the preparation or issuance of such reports, after 22 October 2003. Non-US public accounting firms that wish to prepare or issue audit reports on US public companies, or to play a substantial role in the preparation or issuance of such reports, must be registered by 19 April 2004. Registration will be via an on-line form on the PCAOB's Website. The form is currently being developed, with availability expected late June or early July 2003. Applicants must pay a registration fee. Registered firms will be required to file annual reports with the PCAOB and perhaps other periodic reports.

On-Line Registration System Activated

In July 2003, the PCAOB activated its On-Line Registration System for firms that audit US listed companies.

Briefing Paper on the PCAOB's Plans for Overseeing Non-US Auditing Firms

On 29 October 2003, the PCAOB published a briefing paper that describes the PCAOB's approach to oversight of non-US accounting firms. The approach envisions cooperation with appropriate non-US auditor oversight authorities. The plans described in the briefing paper include:

• A framework to permit varying degrees of reliance on a firm's home country system of inspections, based on a sliding scale: the more independent and robust a home country system, the higher the reliance on that system.
• A modification to the PCAOB's registration form to permit, where applicable, the inclusion of certain information about a non-US firm's home country oversight system, to facilitate coordination between the PCAOB and non-US oversight systems.
• A 90-day extension of the Board's deadline for non-U.S. firm registration, which will give non-US firms a reasonable amount of time to understand and prepare for registration.
  

PCAOB Registration of Non-US Accounting Firms

On 11 March 2004 the PCAOB published Frequently Asked Questions Regarding Issues Relating to Non-US Accounting Firms (PDF 37k).

The PCAOB also the initial registration deadline for non-US auditing firms from 19 April 2004 to 19 July 2004. The Board also approved an auditing standard for audits of internal control over financial reporting. The PCAOB will submit both decisions to the Securities and Exchange Commission for approval.

As of 4 April 2008, 1,850 public accounting firms have registered with the Board to be allowed to audit the financial statements of US public companies. Of those, approximately 850 (over 45%) are non-US audit firms from more than 86 jurisdictions. Click for List of Registered Firms (updated periodically by PCAOB).

Auditing and Ethics Standards

In April 2003, by unanimous vote, the PCAOB decided not to delegate responsibility for setting auditing standards to the accounting profession but, rather, to set the standards itself. Heretofore, the American Institute of CPAs has promulgated auditing standards in the United States. The Financial Accounting Standards Board will continue to set accounting standards. The PCAOB's auditing standards will include matters of quality control, professional ethics, and independence of auditors from companies whose financial statements they audit. Though the PCAOB has authority to regulate all auditors – American or foreign – of all public companies in the United States, the extent to which PCAOB auditing standards would apply to foreign auditors remains to be addressed. The PCAOB also voted to finance its operations by fees paid by publicly traded companies in proportion to their size. Auditing firms will also pay fees to fund the PCAOB's auditor registration system.

• Click here for a link to the Rulemaking Page on the PCAOB's Website

November 2005: PCAOB Report on Audits of Internal Controls

In November 2005, the PCAOB published a report summarising issues identified in implementing Auditing Standard No. 2 An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements (AS2). The PCAOB's monitoring revealed that some audits "were not as effective or efficient as Auditing Standard No. 2 intends and as the Board expects they can be in the future, given the benefits of experience, adequate time and resources." The report cites specific examples of inefficiency and ineffectiveness. It also explains and clarifies certain aspects of AS2 and amplifies certain guidance it has previously issued. Click for:

• PCAOB Press Release (PDF 58k)
• PCAOB Report (PDF 277k)

July 2007: New PCAOB Standard on Audits of Internal Controls

On 25 July 2007, the US Securities and Exchange Commission approved Auditing Standard No. 5 An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements. AS 5 was adopted by the Public Company Accounting Oversight Board in May 2007. AS 5 replaces the PCAOB's previous internal control auditing standard, Auditing Standard No. 2. With SEC approval in place, audit firms registered with the PCAOB are required to use the new standard for all audits of internal control no later than for fiscal years ending on or after 15 November 2007. The PCAOB has announced that it intends to undertake several initiatives to support the successful implementation of the new standard. Click for:

• PCAOB Auditing Standard No. 5 (PDF 179k)
• SEC Press Release on Approval of AS 5 (PDF 47k)
• PCAOB Press Release on SEC Approval (PDF 43k)
• PCAOB Press Release on Adoption of AS 5 (May 2007) (PDF 62k)
• Link to Page on PCAOB Website with More Info on AS 5

December 2007: PCAOB proposes greater reliance on foreign auditor inspections

The PCAOB has issued for comment a proposed policy statement that identifies the factors relevant to 'full reliance' by the Board on the inspections programs systems of its non-US counterparts that are sufficiently rigorous to meet the level of protection for investors that is required by the Sarbanes-Oxley Act of 2002. The proposed policy statement provides guidance on the Board's Rule 4012 Inspections of Foreign Registered Public Accounting Firms, which permits the Board to adjust its reliance on the inspections of auditor oversight entities located in the home countries of registered non-US audit firms, based upon the level of independence and rigor of those entities. Under the proposed policy statement the PCAOB would increase its level of reliance on non-US oversight systems where possible, including in some cases full reliance, if certain essential criteria are met. The Board is seeking public comment by 4 March 2008 on the criteria and the approach described in the policy statement.

• PCAOB's Proposed Policy Statement (PDF 83k).
• PCAOB News Release (PDF 22k).

January 2009: PCAOB staff guidance on internal control for SMEs

The US Public Company Accounting Oversight Board (PCAOB) has published a 62-page guidance publication Staff Views An Audit of Internal Control Over Financial Reporting That Is Integrated With An Audit of Financial Statements: Guidance For Auditors of Smaller Public Companies. The PCAOB's objective in issuing the Guidance is to help auditors apply the provisions of PCAOB Auditing Standard 5 An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements to audits of smaller, less complex public companies. Click for:

• Staff Guidance on Applying AS 5 to Smaller Public Companies (PDF 201k)
• PCAOB Auditing Standard 5

July 2010: PCAOB proposes new auditing standard on confirmation

At its meeting on 13 July, the Public Company Accounting Oversight Board approved for public comment a proposed audit standard Confirmation. If approved, this Standards will supersede the current PCAOB standard, AU sec. 330, The Confirmation Process. Click here to download the exposure draft (PDF 295k). Comments are due 13 September 2010.

August 2010: PCAOB adopts new auditing standards on risk assessment

The Public Company Accounting Oversight Board (PCAOB) today adopted eight auditing standards related to an auditor's assessment of and response to audit risk. The eight standards are: Auditing Standard 8 (AS No. 8) - Audit Risk Auditing Standard 9 (AS No. 9) - Audit Planning Auditing Standard 10 (AS No. 10) - Supervision of the Audit Engagement Auditing Standard 11 (AS No. 11) - Consideration of Materiality in Planning and Performing an Audit Auditing Standard 12 (AS No. 12) - Identifying and Assessing Risks of Material Misstatement Auditing Standard 13 (AS No. 13) - The Auditor's Responses to the Risks of Material Misstatement Auditing Standard 14 (AS No. 14) - Evaluating Audit Results Auditing Standard 15 (AS No. 15) - Audit Evidence The standards, if approved by the Securities and Exchange Commission, will become effective for audits of fiscal periods beginning on or after Dec. 15, 2010. Click here for more details and to view this and other news releases on the PCAOB website.

29 September 2010: PCAOB report on inspection observations of auditing during the economic crisis

The US Public Company Accounting Oversight Board (PCAOB) has released a report on issues occurring during their inspection process for audits of financial institutions and other companies during the economic crisis. The key points discussed in the report are: PCAOB inspectors identified instances where auditors appeared not to have complied with PCAOB auditing standards in connection with audit areas that were significantly affected by the economic crisis, such as fair value measurements, impairment of goodwill, indefinite-lived intangible assets, and other long-lived assets, allowance for loan losses, off-balance-sheet structures, revenue recognition, inventory, and income taxes. Firms have made efforts to respond to the increased risks stemming from the economic crisis. The deficiencies identified by inspectors in their reviews of issuer audits suggest that firms should continue to focus on making improvements to their quality control systems. The PCAOB will focus on whether firms' actions to address quality control deficiencies described in Board inspection reports have, in fact, reduced or eliminated subsequent occurrences of the kinds of deficiencies described in this report. The observations described in this report will serve to inform future PCAOB actions in connection with certain inspection, enforcement, and standard-setting activities. The Board will consider whether additional guidance is needed related to existing standards. PCAOB inspectors will continue to focus on firms' audits and quality control systems, particularly as they relate to audit risks posed by the ongoing effects of the economic crisis and any future similar events. The report covers aspects of PCAOB inspections conducted during the 2007 through 2009 inspection cycles, which generally involved reviews of audits of issuers' fiscal years ending in 2006 through 2008. Click for: PCAOB Press Release (link to PCAOB site) PCAOB Report (PDF 104k)

7 October 2010: PCAOB issues release on consideration of registration applications

The US Public Company Accounting Oversight Board (PCAOB) has issued a press release on consideration of registration applications from public accounting firms in non-U.S. jurisdictions, where inspections of PCAOB-registered firms are hindered by asserted legal restrictions or objections of local authorities.

18 January 2011: PCAOB publishes new auditing standards on risk assessment

The Public Company Accounting Oversight Board (PCAOB) today published eight auditing standards related to an auditor's assessment of and response to audit risk. The eight standards are: Auditing Standard 8 (AS No. 8) - Audit Risk Auditing Standard 9 (AS No. 9) - Audit Planning Auditing Standard 10 (AS No. 10) - Supervision of the Audit Engagement Auditing Standard 11 (AS No. 11) - Consideration of Materiality in Planning and Performing an Audit Auditing Standard 12 (AS No. 12) - Identifying and Assessing Risks of Material Misstatement Auditing Standard 13 (AS No. 13) - The Auditor's Responses to the Risks of Material Misstatement Auditing Standard 14 (AS No. 14) - Evaluating Audit Results Auditing Standard 15 (AS No. 15) - Audit Evidence The standards are approved by the Securities and Exchange Commission and become effective for audits of fiscal periods beginning on or after Dec. 15, 2010. Click here to view the Auditing Standards on the PCAOB website.

17 August 2011: PCAOB explores mandatory audit firm rotation

The United States Public Company Accounting Oversight Board (PCAOB) has issued a concept release to solicit public comment on ways that auditor independence, objectivity and professional scepticism can be enhanced, including through mandatory rotation of audit firms. The proposals follow earlier proposals for audit reform in Europe (see our earlier story).

Mandatory audit firm rotation would limit the number of consecutive years for which a registered public accounting firm could serve as the auditor of a public company, with the PCAOB considering the implications of a 10 year limit. The concept release paper outlines the PCAOB's rationale for proposing mandatory rotation, and asks for constituent feedback on matters such as the appropriate maximum term, which types of entities the rotation proposal should apply to, and transitional and implementation considerations.

Comments on the proposals are due by 14 December 2011 and a public roundtable on auditor independence and mandatory audit firm rotation is expected to be held in March 2012. Please click for:

• PCAOB press release (link to PCAOB website)
• PCOAB concept release on auditor independence and audit firm rotation (link to PCAOB website)
• Our earlier story on audit reform proposals in Europe.