Independence in Auditing and the Work of PCAOB

Independence of auditors

Against the backdrop of increased accounting and corporateimproprieties, for example, WorldCom, Enron, and Tyco scandals, theSOX (Sarbanes-Oxley) act was enacted in 2002 (Li, 2014). Theenactment of SOX act introduced numerous changes to the control ofcorporate governance and financial practices. The Public CompanyAccounting Oversight Board (PCAOB) was established by the SOX Act asa non-profit body with a constitutional directive to supervise theauditing processes of US public companies (Anderson, Gaynor,Hackenbrack, Lisic, &amp Wu, 2014). The development of PCAOBbeckoned the end of voluntary self-regulation of the corporate andauditing profession and the commencement of compulsory oversight. Theentity has managed to provide investors’ safety and the publicinterest by endorsing autonomous, precise and informative financialassessments. The fundamental role of PCAOB is to supervise auditorsand enhance corporate responsibility and auditor independence. In abid to further the public interest and enhance independence, allpublic firms are required to register with PCAOB and follow itsdirective.

It is imperative to note that the enactment of PCAOB has createdgreater independence and accountability of auditors of public firms.According to the standards of PCAOB, a member in public practiceshall be autonomous in the execution of services as mandated byprinciples propagated by bodies elected by the council (Anderson etal., 2014 Li, 2014). This means that members should be independentto perform their roles without being influenced by aspects that mightcompromise professional decision. Before the enactment of PCAOB,unethical behaviors were rampant in the auditing practice andauditors were greatly compromised. However, since its formation,PCAOB has managed to set ethical values, quality control measures,and quality independence and auditing principles (Li, 2014).Furthermore, public entities must register with PCAOB and follow itsdirectives especially independence thus, the entity has managed toadvance independence in the field. To ensure that the independence ofauditors is advanced, PCAOB can use its power to execute disciplinaryproceedings, investigations, and sometimes sanctions or fines.Furthermore, the entity has developed rules, which consider anauditor as not autonomous of the client if the audit company

  1. Provide services to the client for a conditional commission

  2. Receive a contingent commission from the client

  3. Provide tax advice on particular types of potentially abusive tax transactions or in providing assistance in planning for the transactions

  4. Provide tax services to entities or persons employed by the client.

These rules have inhibited accounting firms in performing a range oftax services to their audit firms and ensured that auditors provideall the necessary information (Anderson et al., 2014 Nagy, 2009).This means that PCAOB continues to advance the independence ofauditors by integrating the audit function to the auditing andcorporate governance structure. The entity has also required auditcommittee to hire, fire, compensate, and oversee the work andindependence of external auditors. These rules require auditors toprovide reports to the PCAOB in accordance with the Foreign CorruptPractices Act, an aspect that has strengthened the independence ofauditors.

Structure of PCAOB members

Auditing of financial statements is required principally to protectpublic investors thus, members should not be taken from thecommunity using audited financial statements. PCAOB supervisesauditing processes, which means that its associates and membersshould be independent of firms using the statements or the accountingprofession. SEC (Securities and Exchange Commission) in consultationwith the secretary of the Treasury and board of the Federal ReserveSystem appoints members of PCAOB (Nagy, 2009). Furthermore, thesemembers must be efficient and independent of the auditing professionto implement the objectives of PCAOB especially the independence ofthe auditing firms and auditors. Gunny and Zhang (2013) contend thatfor the entity to execute its mandate effectively members should bealigned to presented firms or clients as this would interfere withits oversight. The entity oversees the audits of public firms inorder to protect public interest and investors thus, to avoidconflict of interest and ensure that the entity executes its mandatewithout favor or compromise, its members should be independent of theauditing profession.

Regulatory compliance requirements that apply to various businesssituations

Regulatory compliance denotes a firm’s adherence to regulations,laws, specifications, and guidelines relevant to the firm’sbusiness. The regulatory compliance requirements describe theobjectives and goals that the firm aspires to accomplish in itsendeavor to adhere to the set regulations and rules. Numerousbusiness situations command varied regulatory compliancerequirements thus, it is imperative to understand theserequirements. Some of these requirements include

  1. The SOX act. This act was enacted to deal with financial and corporate scandals witnessed in major firms. The act regulates corporate activities and sets standards that ensure the independence of auditors. The act applies greatly to broker-dealer audits especially through the role of PCAOB. PCAOB has implemented standards for broker-dealer audits such as auditing principle for supplemental information. The act requires the PCAOB to conduct inspections after every 3 years for companies that frequently offer audit information to 100 or less users and yearly for companies that provide audit reports for 100 users (Bernstein, 2015). These regulations and guidelines hold penalties and fines for auditors who fail to provide the required information or violate the regulations.

  2. FISMA (Federal Information Security Management Act). This is a federal act that recognizes the significance of information security to national and economic interests. The act requires federal agencies to create, document and apply an agency-wide approach to providing information security (Gunny &amp Zhang, 2013). The act provides an extensive structure to safeguard government information, assets, and operations from information-based threats such as cyber crimes.

  3. HIPAA (Health Insurance Portability and Accountability Act). This act protects employees and their families in terms of health insurance coverage when they lose or change their jobs. The act has provisions that require the creation of ideals for digital health care transactions and identifiers for employers, providers and plans (Brucker &amp Petritsch, 2016). The act forbids group health plans from setting lifetime coverage restrictions or denying coverage to people with specific illnesses or pre-existing conditions.


Anderson, U. L., Gaynor, L. M., Hackenbrack, K. E., Lisic, L. L., &ampWu, Y. J. (2014). Comments by the Auditing Standards Committee of theAuditing Section of the American Accounting Association on PCAOBRelease No. 2013-009, Proposed Rule on Improving the Transparency ofAudit: Proposed Amendments to PCAOB Auditing Standards to ProvideDisclosure in the Auditor`s Report of Certain Participants in theAudit: Participating Committee Members.&nbspCurrent Issues inAuditing,&nbsp8(2), C1-C7.

Bernstein, M. H. (2015).&nbspRegulating business by independentcommission. Princeton University Press.

Brucker, A. D., &amp Petritsch, H. (2016).&nbspU.S. Patent No.20,160,012,242. Washington, DC: U.S. Patent and Trademark Office.

Gunny, K. A., &amp Zhang, T. C. (2013). PCAOB inspection reports andaudit quality.&nbspJournal of Accounting and PublicPolicy,&nbsp32(2), 136-160.

Li, X. (2014). The Sarbanes–Oxley act and cross-listed foreignprivate issuers.&nbspJournal of Accounting and Economics,&nbsp58(1),21-40.

Nagy, D. M. (2009). Is the PCAOB a Heavily Controlled Component ofthe SEC: An Essential Question in the ConstitutionalControversy.&nbspUniversity of Pittsburgh Law Review.,&nbsp71,361.