Reflections on the Establishment of the PCAOB and Its Audit Standard-Setting Role

Abstract

SYNOPSIS This is an essay on the causes of the establishment of the PCAOB as the U.S. regulator of auditors of the financial statements of public companies, and the key developments in its role as a professional standard setter. From its inception in the U.S., the accounting profession was largely self-regulated. There was a degree of governmental regulation by state licensing laws, and the SEC's regulation of the offering and trading of securities of public companies. The federal securities laws gave the SEC direct authority over accounting standards, and indirect authority over auditing requirements through its ability to specify the form of audit reports. The SEC, however, looked primarily to the accounting profession to set its own standards. Some viewed the ability to set professional standards as an essential hallmark of professionalism. In 2002, that comfortable arrangement changed dramatically, and the regulation of auditors of public companies became the purview of the PCAOB.