PCAA stands for Public Company Accounting Oversight Board. It is a nonprofit corporation that was established by Congress in 2002 under the Sarbanes-Oxley Act to oversee audits of public companies in order to protect investors and the public interest.
What are the responsibilities of PCAA?
PCAA has several key responsibilities:
- Registering public accounting firms that audit public companies
- Establishing auditing, quality control, ethics, independence, and other standards for registered public accounting firms
- Conducting inspections of registered public accounting firms
- Conducting investigations and disciplinary proceedings of registered public accounting firms
- Enforcing compliance with laws, regulations, and professional standards relating to audits of public companies
In summary, PCAA oversees the audits of public companies to ensure they are accurate, independent, and compliant with regulations. This helps protect investors by improving audit quality.
Firm Registration
All public accounting firms that wish to perform audits of public companies must register with PCAA. Registration provides oversight and subjects firms to inspections, investigations, and enforcement actions.
Standards Setting
PCAA establishes auditing, attestation, quality control, ethics, and independence standards that registered firms must follow when conducting public company audits. This helps improve audit quality.
Inspections
Registered accounting firms that regularly audit more than 100 public companies undergo an annual inspection by PCAA. The inspections assess the firm’s compliance with standards and regulations related to auditing public companies.
Investigations
PCAA conducts investigations of registered firms and their associated persons for potential violations of laws, regulations, or professional standards. These help identify and discipline any improper conduct.
Enforcement
If violations are identified through inspections or investigations, PCAA can impose disciplinary sanctions on firms. This includes fines, restatements, license suspensions, bars from auditing public companies, or referrals to the SEC or Justice Department for potential violations of the securities laws.
What companies are subject to PCAA oversight?
All public companies that file financial statements and disclosures with the SEC are subject to PCAA oversight. This includes:
- Companies that have publicly issued securities like stocks, bonds, or options
- Publicly traded companies listed on exchanges like the NYSE or Nasdaq
- Registered investment companies like mutual funds, ETFs, and hedge funds
- Private foreign issuers that file with the SEC
In total, over 7,000 public companies have financial statements that fall under PCAA’s oversight based on SEC filings. Any registered public accounting firm that audits these public companies has to follow PCAA’s standards.
How is PCAA funded?
PCAA is funded by:
- Accounting support fees – Fees paid annually by public companies based on their relative market capitalization
- Accounting support fees – Fees paid annually by registered public accounting firms based on their relative audit fee revenue from public clients
- Fines collected from enforcement proceedings
This ensures that PCAA has stable, independent funding to fulfill its oversight responsibilities. Companies and firms that fall under PCAA’s jurisdiction provide the funding rather than taxpayers or the government.
Accounting Support Fees from Public Companies
Public companies pay an annual accounting support fee to PCAA based on their market capitalization. The total fees collected are allocated proportionately based on each company’s market cap relative to the total market cap of all public companies. The accounting support fee for an individual company typically ranges from a couple hundred dollars to a few hundred thousand dollars.
Accounting Support Fees from Registered Firms
Registered public accounting firms also pay an annual fee based on their revenue from public company audit clients. The total fees match the amount collected from public companies. It is allocated to firms based on their share of total public company audit revenue.
Fines
Fines collected by PCAA from enforcement actions provide additional funding. However, this makes up a relatively small portion of total funding.
What are the penalties for violations of PCAA rules?
PCAA has the authority to impose significant penalties on public accounting firms and their associated auditors if they violate PCAA rules and standards, including:
- Civil fines up to $100,000 per violation, with each day counting as a separate violation
- Additional fines up to $750,000 or twice the gross pecuniary gain for intentional or reckless conduct
- Censures and reprimands for negligent conduct
- Mandated education or training programs
- Suspensions or bars from auditing public companies
- Required independent monitoring of firm policies and procedures
- Referrals to state licensing boards to revoke individual CPA licenses
- Referrals to the SEC and Justice Department for criminal proceedings and securities law violations
These penalties provide serious incentives for accounting firms and CPAs to comply with all PCAA rules and standards when auditing public companies.
What are some key auditing standards issued by PCAA?
PCAA has established detailed auditing standards in many important areas that registered firms must follow, including:
Audit Documentation
Firms must adequately document work performed, conclusions reached, and evidence obtained that supports audit opinions. Documentation provides support for the audit report and evidence of audit quality.
Engagement Quality Review
Audit engagements have mandatory quality reviews by an experienced auditor not directly involved with the engagement to provide additional scrutiny and perspective.
Audit Committee Communications
Key matters must be timely communicated to a company’s audit committee, which enables oversight over the external auditor.
Partner Rotation
Lead and reviewing audit partners must periodically rotate off audit engagements to maintain auditor independence.
Second Partner Review
A second partner review is required for the audits of high risk engagements to provide an additional layer of quality control.
Reviewing Interim Financial Information
Reviews of quarterly financial statements are required to identify significant risks or issues prior to year-end.
Using the Work of Specialists
Requirements exist for properly overseeing third party specialists involved in audits like valuation experts, actuaries, and geologists.
And many other technical standards across all key areas of audits of public companies.
What are the limitations of PCAA oversight?
While PCAA provides important oversight of public company auditing, some limitations exist:
- Resource constraints – Performing high quality inspections of all major firms annually requires significant resources.
- Detection risk – Violations may go undetected between inspections.
- Enforcement lag – Disciplinary actions often take years to resolve.
- Foreign firms – Oversight is limited over foreign registered firms.
- Costs – Funding fees and compliance costs affect industries.
- Over-reliance – The SEC and investors may overly rely on PCAA, underweighting their own due diligence.
Regular PCAOB inspections occur only once a year, and some firms go many years between inspections of smaller foreign affiliates. Violations during the interim may result in undetected audit deficiencies.
Does PCAA oversee all CPA firms?
No, PCAA only has authority over registered public accounting firms that audit SEC-registered public companies. Other CPA firms that perform private company or nonprofit audits, compilation, reviews, tax, and advisory work do not fall under PCAA’s oversight.
For non-public companies, the state boards of accountancy oversee licensing and regulation of CPAs and their firms based on state accountancy laws and regulations.
However, many larger CPA firms that audit both public and private companies will choose to follow certain PCAA standards across all practice areas, even where not strictly required.
Can PCAA enforce bans on providing non-audit services?
Under the Sarbanes-Oxley Act, PCAA does not have direct authority to regulate the scope of non-audit services provided by registered firms. However, SEC and PCAOB rules restrict certain non-audit services that could impair auditor independence.
Services banned under SEC and PCAA independence rules include:
- Bookkeeping
- Financial information systems design and implementation
- Appraisal or valuation services
- Actuarial services
- Internal audit outsourcing
- Management functions
- Human resources
- Broker-dealer, investment advisor, or investment banking
- Legal services
- Expert services unrelated to the audit
So while PCAA does not directly regulate non-audit services, important restrictions exist under independence rules that PCAA can enforce violations of.
Can foreign public accounting firms audit SEC registrants?
Yes, foreign public accounting firms can register with the PCAOB to audit SEC-registered companies. However, this subjects them to oversight such as:
- Inspections by PCAA of relevant foreign affiliates.
- Compliance with PCAA and SEC independence rules.
- Production of documents and testimony in PCAA investigations and disciplinary proceedings.
- Potential economic sanctions for failing to cooperate with PCAA.
Hundreds of foreign firms in over 80 countries are registered with PCAA and regularly audit SEC registrants. However, PCAA faces challenges in inspecting foreign registered firms in certain jurisdictions.
Conclusion
The PCAOB provides valuable oversight of audits for over 7,000 SEC registered public companies. This protects investors by improving audit quality through inspections, enforcement, and requiring adherence to strict auditing standards.
While limitations exist, PCAA oversight is an important component, along with the SEC, state boards, and other regulators, in governing public company financial reporting and auditing to benefit the public markets.
| Year | Registered Public Accounting Firms | Public Companies Audited |
|---|---|---|
| 2022 | 1,841 | 7,210 |
| 2021 | 1,997 | 6,927 |
| 2020 | 1,924 | 6,219 |
| 2019 | 1,922 | 5,843 |
This table shows the number of registered public accounting firms and SEC-registered public companies subject to PCAOB oversight from 2019 to 2022. The number of registered firms declined, while public companies audited increased each year.