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PCAOB - Auditing the Auditors

PCAOB is the acronym for the Public Company Accounting Oversight Board, the new organization that will oversee the auditing of publicly traded companies. The main office for this newly formed board is in Washington D.C. Presently the office consists of a small staff of several dozen including four board members. But this startup agency will soon grow to three hundred strong and will work to guard against the accounting scandals that have occurred recently.

William McDonough, former president of the Federal Reserve Bank of New York, is the board chairman. One of the first tasks assigned to the board will be to investigate formulas used by accounting firms to pay audit partners. If the board finds that the formulas provide more incentives to the audit partners for selling services than for conducting quality audits, the board will begin to demand changes. The board will wield tremendous power since, beginning late October 2003, firms that want to audit public companies must be registered with the PCAOB. To register, accounting firms must disclose any civil or criminal proceedings against them.

The board plans to evaluate the audit practices of the largest accounting firms annually by board-hired inspectors. Smaller firms will be evaluated every three years. If the board determines that an accounting firm is using deficient audit practices, the firm will be fined or barred from public auditing. The PCAOB will also replace the AICPA in writing standards of conduct for auditors by creating an advisory panel, one third of which will be investors. The PCAOB's chief auditor, Douglas Carmichael, says he is on board to represent the investors.

  1. Why was the Public Company Accounting Oversight Board formed?

  2. Will the PCAOB have the authority to determine standards of conduct for auditors?

  3. What power does the PCAOB have over accounting firms that audit public companies?

  4. What must accounting firms disclose to register with the PCAOB?

  5. How often will the PCAOB investigate the audit practices of accounting firms?

  6. What is one of the first objectives of the PCAOB?

- Leslee Higgins

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