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Public Company Accounting Oversight Board Standard Research Paper

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Updated: Jun 14th, 2020

Introduction

The adoption of auditing rules is essential for protecting the interests of many stakeholders, especially investors. They put trust in the integrity and efficiency of businesses. Moreover, they are strongly dependent on the work of the agencies that monitor the financial reporting practices of enterprises. In turn, this paper is aimed at discussing the standards adopted by the Public Company Accounting Oversight Board or PCAOB. In particular, one should examine the standard that is known as PCAOB No. 5. It is supposed to regulate the work of businesses whose stocks are available to the general public. In this document, the PCAOB (2015) identifies the steps that should be taken by an auditor. Additionally, this document includes the norms that businesses should follow while recording and reporting their financial performance. Much attention is paid to the internal controls that are required for identifying financial misstatements. Overall, the regulations identified by the PCAOB are helpful for finding possible malpractices such as fraud or embezzlement. In turn, the information collected by auditors enables stockholders make a more accurate assessment of the financial statements made by corporations. In turn, one should examine these issues in greater detail.

The summary of the provisions and their implications

It should be noted that this standard was adopted in response to the criticisms of the previous rules set by the PCAOB. In particular, one can mention PCAOB No. 2 that set strict requirements for the work of auditors. However, in many cases, it was rather difficult to adhere to these norms. In particular, much attention should be paid to the excessive cost of this process. In turn, PSAOB No. 5 was supposed to address these challenges and make auditing more cost-efficient. According to these regulations, one can select the areas in which the risk of reporting malpractices is very high (PCAOB, 2015). So, an auditor can proceed to the most relevant tasks as soon as possible.

While discussing the provisions of PCAOB No.5, one should first consider the use of the top-down approach. At first, the auditor has to scrutinize the major financial statements of the organization. Later, this professional should proceed to the entity-level controls (PCAOB, 2015). For instance, it is possible to mention the code of conduct established in this enterprise. Moreover, inspectors should examine the process of risk evaluation, and policies on whistle-blowing activities. The primary task is to determine if these entity-level controls are sufficient for preventing fraud. At the next stage, the auditor should concentrate on the most significant disclosures and accounts of the company. Moreover, it is critical to study the flow of transactions within the company and their documentation. Auditors need to determine if there are any loopholes for distorting the information about cash flows or even concealing these transactions.

This standard is helpful for assessing the efficiency of internal controls over financial reporting. One of the provisions is that the internal control of an organization cannot be called effective, if there is at least one material weakness (PCAOB, 2015). In this context, this term can be described as the deficiency of internal control. For instance, one should consider the absence of mechanisms that can help managers detect financial misstatements in a timely manner (PCAOB, 2015). This provision does not imply that a company can be punished for every possible mistake. Instead, the primary task is to ensure that the enterprise can identify such errors as quickly as possible. This capability is critical for protecting the interests of shareholders and investors.

Furthermore, this standard includes provisions about the steps that should be taken by the auditor if this professional identifies deficiencies that can result in fraud. In particular, this inspector should inform the management about potential risks (PCAOB, 2015). In some cases, it may be necessary to discuss this issue with the board of directors (PCAOB, 2015). Moreover, this person has the authority to disclose the information about material deficiencies if the management fails to address these problems. So, one can say that auditors can better promote the interests of shareholders and people who may intend to buy the stocks of a public company.

The role of auditing standards in preventing fraud

Overall, the presence of such rules is essential for avoiding fraud that can be committed by some employees or even senior executives. Corporate scandals that took place during the last decade have highlighted the need for more efficient controls. In turn, PCAOB 2 guides the work of those professionals who should address these challenges and shield investors from the risk of considerable losses. Additionally, the adoption of PCAOB No. 5 can considerably improve the work of auditing organizations. For instance, the assessment of audits performed by the leading accounting firms indicates that many of them failed to detect the flaws in the internal control of companies (Whitehouse, 2015). Thus, auditors should receive the training that can help them implement the guidelines included in PCAOB No. 5.

However, it is necessary to remember that the adoption of rigid standards may not be sufficient for detecting and deterring fraud. Much depends on the integrity of auditors and their willingness to find possible limitations in the practices of corporations. Sometimes, these people have to come into conflict with the senior executives of various businesses, especially if these managers do not try to eliminate malpractices in the financial reporting. Sometimes, such conflicts can have disastrous effects on the career of such auditors.

This argument is particularly relevant to such a company as Arthur Andersen. Before the Enron scandal, this organization was one of the leading auditing firms in the world (Hill, 2015). Nevertheless, it failed to identify blatant flaws in the reporting practices of Enron Corporation. As a result, many investors lost their savings (Hill, 2015). Therefore, much attention should be paid to the professional skills of auditors and their willingness to reach the highest ethical standards. It is one of the issues that should be taken into consideration by legislators, regulating agencies, and stockholders.

Conclusion

Overall, PCAOB No. 5 can motivate companies to introduce safeguards that are necessary for identifying possible errors. In this case, one should focus on the controls existing at different levels of the organizational hierarchy. Additionally, this method can make the work of auditors more cost-efficient because these professionals can select the risks that they should monitor. Nevertheless, the existing of rigid standards is not sufficient for minimizing the likelihood of fraud. It is also vital to consider the skills of auditors and their compliance with ethical principles. These attributes are the essential prerequisites for increasing the transparency of financial reporting in many public companies.

Reference List

Hill, A. (2015). Arthur Andersen rises from the Enron ashes — twice. The Financial Times. Web.

PCAOB. (2015). . Web.

Whitehouse, T. (2015). PCAOB Inspection Reports at 5: What Can We Learn. Compliance Week. Web.

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