Understanding the role and requirements of the Public Company Accounting Oversight Board (PCAOB) is critical as a business prepares for its initial public offering (IPO). Being audited by a PCAOB-registered accounting firm is a prerequisite to going public.
Selecting the right PCAOB-registered firm to perform these audits helps public companies maintain integrity in their financial reporting and win the trust of current and potential investors. In other words, it enormously impacts the success of an IPO and a public company’s continued success.
This article explores the PCAOB, its history and responsibilities, and how to find the right PCAOB-registered audit partner.
What is the PCAOB?
The Public Company Accounting Oversight Board (PCAOB) is a nonprofit organization that oversees the audit process for publicly traded companies in the United States. It consists of a five-member board, appointed in five-year terms by the SEC, and approximately 800 staff members.
The organization was established in 2002 with the passage of the Sarbanes-Oxley Act (SOX) in response to several high-profile accounting scandals, including Enron, Worldcom and Tyco International. Today, the PCAOB’s independent oversight helps to protect investors against similar scandals.
The PCAOB has four primary responsibilities:
- Registering public accounting firms that audit public companies
- Establishing auditing, quality control, ethics and independence standards for public accounting firms
- Regularly inspecting registered public accounting firms’ quality control, ethics and independence standards
- Investigating and disciplining registered firms for violations of laws and professional standards
The PCAOB’s activities—such as establishing rules and standards and making budgetary decisions—are subject to SEC oversight and approval. It is primarily funded by issuer/public company dues.
What Does the PCAOB Do?
The PCAOB is responsible for registering public accounting firms, establishing auditing standards, and inspecting registered public firms for compliance with the established standards.
But what does that entail? Let’s go through each one.
Registering Public Accounting Firms
Any public accounting firm that audits public companies or SEC-registered brokers must first be registered with the PCAOB. This process enables the PCAOB to set and enforce auditing, quality control and independence standards.
This makes registration a cornerstone of the PCAOB’s oversight authority. Without it, the organization cannot fulfill its other responsibilities.
To register with the PCAOB, an accounting firm must submit a detailed application containing information about the firm, its audit clients, and current quality control efforts.
Registration provides the PCAOB with direct oversight over auditing standards, helping to protect investors and the public interest. But take care: while many firms are registered with the PCAOB, not all have a proven track record conducting PCAOB audits.
Establishing Auditing Standards
The PCAOB establishes the auditing, quality control, ethics, and independence standards accounting firms must follow when auditing publicly-traded companies, or companies aiming to become publicly traded.
This allows it to:
- Ensure that all public company audits adhere to consistent procedures, practices and quality standards
- Promote auditor independence, objectivity and ethical behavior
- Address emerging issues and evolving best practices in the accounting and auditing industry
To establish new standards—or amend existing ones—the PCAOB solicits feedback via a public commenting period and then submits its proposal to the SEC for review and approval.
The SEC collects additional feedback through their public commenting period and then evaluates, approves or denies the new standards. Once approved, the new standards become mandatory and must be followed for all PCAOB audits.
This review process ensures that all accounting standards are appropriate, effective, and in the public interest.
Inspecting Registered Public Accounting Firms
In addition to setting standards, the PCAOB enforces them by regularly inspecting registered public accounting firms’ audit and their quality control systems.
Typically, these inspections are conducted:
- Annually, if a firm audits more than 100 public companies
- Every three years, if a firm audits 100 or fewer public companies
During these inspections, the PCAOB reviews selected audits, interviews firm personnel, and quality control policies and procedures. Once the inspection is complete, the audited public accounting firm receives a report summarizing any deficiencies the PCAOB uncovered. Portions of this report are available for public review on the PCAOB’s website.
Public accounting firms must remediate any quality control deficiencies found in their PCAOB inspection. The PCAOB oversees this process. If they do not comply or do not satisfactorily resolve the deficiencies, the firm may be subject to disciplinary action.
Potential disciplinary action for a failed PCAOB inspection includes:
- Consequences to individual partners, ranging from monetary fines to disbarment, depending on the severity of the issue, their role and seniority
- Consequences to the firm, such as required new procedures or quality control measures, or even loss of PCAOB-registered status, depending on the frequency and severity of the violations
In addition to disciplinary action, the firm risks losing clients due to increased costs and reputational damage.
This inspection and enforcement power, along with the potentially heavy consequences, helps ensure that auditors uphold high quality, independence and professional standards, improving the reliability of audits and financial reporting.
How To Find a PCAOB-Registered Audit Firm
To make an initial public offering (IPO), companies must submit audited financial statements. Per the Sarbanes-Oxley Act of 2002, the auditor must first be registered with the PCAOB to audit a public company’s financial statements.
The PCAOB maintains a searchable database of registered audit firms on its website. To find one, search by name, location, or audit activity. Each firm’s activities are summarized: view Grassi’s here.
Next, assess a firm’s capabilities and compliance by reviewing its public-facing inspection reports. These reports detail the firm’s overall quality, specific deficiencies (if any), and how those deficiencies were addressed. These reports are relatively technical but give readers an idea of the level of PCAOB audit work a firm has performed.
To choose a firm closely aligned with your company’s needs:
- Evaluate the firm’s expertise by focusing on candidates with experience auditing other companies in your industry. This can help ensure the audit team has the industry knowledge and technical skills you need.
- Consider the firm’s resources, including size, geographic reach, technology, and quality control systems. Larger firms may have more robust quality control and access to specialized expertise.
- Assess independence and objectivity by ensuring no conflicts of interest, such as pre-existing relationships with your company.
By working with an audit firm with the experience and capability you need, you can ensure reliable financial reporting and inspire confidence in investors once you go public. Grassi: PCAOB-Registered Audit Firm
Obtaining an audit from a PCAOB-registered audit firm is a pre-requisite to going public.
Through its oversight powers, the PCAOB ensures that public company audits are consistent, high-quality and reliable. Its transparent inspection and reporting process also helps businesses research potential audit partners.
If you’re new to the PCAOB audit process, the requirements may seem overwhelming. But, working with an experienced firm with a successful track record in your industry can make this process easier.
Grassi takes a proactive approach to PCAOB audits, ensuring consistent and clear communication to clarify the process and avoid unpleasant surprises. Our experienced professionals take ownership over the timeline and ensure your internal team is able to meet its goals in a timely manner.
As a well-established firm, Grassi has the expertise and depth of resources to overcome any audit challenge, as demonstrated by their track record of facilitating successful IPOs:
- Azitra: $7.5 million IPO
- Forza x1: $17.3 million IPO plus an $8 million follow-on offering
- Twin Vee PowerCats: $18 million IPO plus a $6.9 million follow-on offering
- Alset: $3.8 million follow-on offering
To find out how Grassi’s SEC and Capital Markets team can help you navigate the complex PCAOB audit process, request a consultation with one of Grassi’s advisors today.
