'Oversight' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Oversight is a critical regulatory concept. Thanks to the Congressional act the Sarbanes-Oxley Act of 2002, independent oversight became a major new requirement for occupations pertaining to accounting at public companies. This act and trend in government regulating led to the creation of the PCAOB. PCAOB stands for the Public Company Accounting Oversight Board.
This organization proves to be a not for profit entity which oversees the auditors at publicly traded corporations. The aim of the board lies in safeguarding both stakeholders and investors in public firms. They do this by making certain that the company financial statements and auditor statements follow a rigorous set of guidelines.
The PCAOB also has borne the responsibility since 2010 of overseeing broker-dealer audits. This means that any compliance reports which auditors file according to the requirements of the federal securities laws must foster protection of investors. It is up to the United States SEC Securities and Exchange Commission to approve all standards and rules of this particular regulatory entity. This organization has brought about the historical first time oversight (via both independent and external means) of American public company auditors. Before this Sarbanes-Oxley Act passed in 2002, the profession and industry was self-regulated from within its own ranks.
There are four main functions of the Public Company Accounting Oversight Board. These include overseeing auditors in the specific capacities of standard setting, inspection, registration, and enforcement. They do this to ensure that there will be accurate, highly informative, and completely independent audit reports prepared for the good of the investing and buying public.
Today’s Public Company Accounting Oversight Board counts five members on its continuously standing board. The Chairman is the head of this governing and steering body. They receive appointments for five year terms of service which are staggered for continuity in and stability of the board composition. It is the SEC Securities and Exchange Commission who appoints the board members. They do this after consulting with the Secretary of the U.S. Treasury and the Board of Governors for the Federal Reserve System’s Chairperson. Besides approving the composition of the board members for the PCAOB, the SEC has other important functions. They must also sign off on the board’s budget as well as their standards and rules.
The PCAOB activities are paid for through means provided in the Dodd-Frank Wall Street Reform and Consumer Protection Act. This provided a means of funding for all of their functions. The money mostly is derived from annually assessed accounting support fees. Public companies are required to pay these fees. The amounts are set by the size of their average monthly market capitalization relative to other publicly traded firms. Broker dealers are also now assessed fees (since 2010) that go to the PCAOB’s support. These are determined by the firms’ average quarterly tentative net capital on a relative basis to the other broker-dealers in the industry.
The vision for this Public Company Accounting Oversight Board is to establish itself in the tradition of a model organization for regulation. They do this by employing cost-effective means and tools which are innovative. They seek to better the quality of audits overall and to lessen the dangers of auditing failures for the United States’ public markets. They are also working towards improving public trust surrounding the auditing profession in particular and the process of financial reporting in general.
This Public Company Accounting Oversight Board arose because of a constantly increasing series of restatements from the accounting filings of American public firms during the 1990s. There were especially a number of embarrassing and highly damaging accounting scandals that decade which led to horrific and record-making bankruptcies of huge public firms. Among these were the two major scandal examples of Enron and WorldCom. Arthur Andersen was the big five accounting firm that was incriminated in helping to make these scandals possible. They became complicit in signing off on the financial statements and filings of the two companies in question.
Before the PCAOB became founded, it was up to the AICPA American Institute of Certified Public Accountants to self-regulate the industry. The board became dissolved officially on March 31st of 2002. SEC Chairman Harvey Pitt appointed William H. Webster as official first chair of the PCAOB.