PCAOB Reporting Requirements

PCAOB Reporting Requirements

Introduction

One unique proposal floated in the congressional hearings by two accounting professors, Joshua Ronen and G.A. Swanson, would have created audit insurance that would be paid for by the public companies to insurance companies. The insurance companies would then be authorized to commission audits of those companies in order to reduce their exposure. This proposal assumed that management would not be even more emboldened to hide the ball from the auditors and that the insurance companies would not then refuse coverage for fraud. Congress opted instead for another layer of regulation that was closely modeled after the proposal by Harvey Pitt for a new accounting oversight body (Ward, 2003).

PCAOB

The centerpiece of the Sarbanes-Oxley legislation was the creation of a new public regulatory organization to set accounting standards for the industry. Called the Public Company Accounting Oversight Board (PCAOB), it quickly became known as “Peekaboo.” Sarbanes-Oxley directed that PCAOB be formed as a federal corporation governed by the not-for-profit laws of the District of Columbia. PCAOB was to be funded by issuers of securities, adding further to the cost of doing business in America and inflating the costs of goods to consumers since these fees would be passed onto them through increased prices. Fines collected by PCAOB for infractions were to be used to fund scholarships for accounting students, since no one in their right mind would otherwise want to become an auditor with all of this regulatory scrutiny. Accounting firms that audit public companies were required to register with PCAOB. Registration laid the groundwork for other intrusive and expensive regulation, such as establishing books and records requirements, setting auditing standards and inspections, creating ethics rules, and sanctioning auditors. Foreign accounting firms were subjected to these requirements when they certified statements for public firms (Ribstein, 2002).

The Financial Accounting Standards Board (FASB) retained control over the setting of generally accepted accounting principles (GAAP), but the SEC was ordered by Sarbanes-Oxley to conduct a study of “principles-based accounting” such as that used by the International Accounting Standards Board (IASB). FASB was already considering the adoption of principle-based accounting standards, rather than the rule-based GAAP. The SEC issued a concept release in 2000 that sought comment on the development of a set of broad standards for determining whether an international accounting method met the SEC's goals of full disclosure.

The European Commission was requiring companies listed on stock exchanges in the European Union to replace their national financial rules with international accounting standards by 2005. As a result of that requirement, and because many foreign companies began delisting in the United States as the result of Sarbanes-Oxley requirements, the SEC announced in April 2005 that it planned to move forward on allowing foreign companies to use international accounting standards in filing financial reports in the United States. In the meantime, almost 100 countries, including all of Europe, had adopted IASB standards rather than U.S. GAAP standards. In addition, European corporations report only semiannually. An effort to have corporations report quarterly was ...