The role of the Public Company Accounting Oversight Board (PCAOB) in independence of auditors of public companies
The creation and the work of the Public Company Accounting Oversight Board (PCAOB) have resulted in the improved independence of auditors of public companies. PCAOB has put in place strict measures that govern how audit firms conduct business. Before its formation, auditing firms had failed to uphold business ethics leading to numerous cases of liabilities to investors, banks, and other parties interested in financial reports.
Financial statements are important for business, investors, banks, government, and other interested parties. Business managers need to know the business position for decision-making. Therefore, accountants must prepare up-to-date financial reports at any given time for decision-making. The greatest interest of the managers is to evaluate the value of revenue and expenses to determine the financial strengths of the business.
The business position helps managers to make decisions on credit, investment, taxation, and union bargaining where applicable. Therefore, accountants must act in accordance with professional ethics to deliver the desired results for the decision-making processes. After the preparation of financial statements by the accountants, auditors come in to verify the reports’ authenticity. Hence, the accountants must adhere to the generally accepted accounting principles that enhance the authenticity of financial reports and statements (Loeb, 2007).
Accounting and auditing professional ethics demand that a professional must act independently. This aspect helps to produce work that meets the qualities of financial accounting. These qualities include relevance, materiality, reliability, understandability, and comparability. Relevance implies that accounting information must be in a position to influence decisions by the business stakeholders. The materiality concept implies that any mistake can influence economic decisions, as they are perceived to be true. The reliability concept implies that accounting statements should be free from errors or biases.
As mentioned earlier, the objective of PCAOB is to enhance the authenticity of auditing reports. Auditors are required to scrutinize the authenticity of financial statements and give opinions about the business position before the financial statements are released to the stakeholders. Before the inception of PCAOB, auditors would collude with business owners, potential investors, and third parties with the intention of meeting some individual interests. However, the situation has changed with the implementation of strict policies and measures that auditors must adhere to executing their business (Bennet, Bradbury, & Pragnell, 2006).
Besides, auditors are required to look into the financial statements and scrutinize their authenticity independently. They ask for information concerning previously audited financial statements and evaluate the business growth trend. The trend acts as a guideline for providing opinions about the business position. Moreover, auditors authenticate the taxable income on behalf of the government while at the same time considering the business welfare.
PCAOB also demands that a business organization must change businesses with auditing firms once in at least five years. This aspect helps to enhance the independence of the auditing firm from individual interests while conducting their business. Additionally, a business is not supposed to contract an auditing firm in which it hired a CEO, CFO, or CAO. This assertion implies that a contract is made where there are minimum chances of personal interests influencing the auditors’ decisions. Therefore, the formation of PCAOB has helped to promote the independence of auditors in their contracts with business by reducing the chances of influences from people with stakes.
The purpose of auditing of financial statements and PCAOB members
Auditing is not done primarily for the protection of public investors. As noted earlier, the preparation of financial statements is done to give information about the financial position of a business. Public investors form a part of stakeholders that are interested in the business financial statements. Public investors need the protection of their money. Therefore, auditors must provide authentic information about business financial positions and give a professional opinion about business’s ability as a going concern (Jackling, Cooper, Leung, & Dellaportas, 2007).
Investment communities such as investment banks and mutual fund institutions have professionals that when contracted can give relevant information about businesses’ ability as going concerns. However, the purpose of auditing is not to provide information about the future of the business but rather the current financial position. Therefore, the investment community can be contracted for providing business consultancy as opposed to interfering with the business management (Oler, Oler, & Skousen, 2010).
Besides, investors are more interested in the growth trend, which is determined by past performance. Accountants arrive at the current financial position after taking into account the carried forward balances from the previous financial year. The profit amounts tell the growth trend relative to the previous years. The investor may then need to understand the business objectives in the future and the nature of the external environment with the help of investment professions. Therefore, PCAOB members should be accounting professionals who understand the ethics of the accounting profession and leave investors in the hands of investment professionals.
Regulatory compliance requirements and business situations
Every legal business must comply with regulatory requirements to acquire an operation license. Through various authorities, the government provides the regulations that must be complied with in various business sectors. In the contemporary world, various professional bodies provide regulatory services to various professional businesses. The greatest purpose for the regulation of professional business is to put in place ethical guidelines that protect clients from unscrupulous individuals. Besides, the nature of businesses is highly dynamic in the modern world and thus regular training must be done to professionals to ensure high-quality service delivery in the industry (Williams & Elson, 2010).
For instance, auditing is a professional business that has a great impact on the economy and welfare of business stakeholders. To ensure high-quality service delivery in the industry, auditing firms are regulated by accounting professional bodies that demand professions to have passed accounting professional papers before they are authorized to practice. Additionally, regulatory bodies ensure that auditors do not violate professional ethics in their work. They are highly monitored to ensure that they do not alter financial statements with the intention of meeting some personal interests. Hence, in any business situation, ethical guidelines must be observed. Moreover, business operations are highly monitored by regulatory authorities to ensure that businesses do not carry out unauthorized operations.
References
Bennet, B., Bradbury, M., & Pragnell, H. (2006). Rules, Principles, and Judgments in Accounting Standards. Abacus 42(2), 189–203.
Jackling, B., Cooper, B., Leung, P., & Dellaportas, S. (2007). Professional Accounting Bodies’ Perceptions of Ethical Issues, Causes of Ethical Failure and Ethics Education. Managerial Auditing Journal 22(9), 928–944.
Loeb, S. (2007). Issues Relating to Teaching Accounting Ethics. In C. Jeffrey (Ed.), Research on Professional Responsibility and Ethics in Accounting (pp. 1-30). Bingley, UK: Emerald Group Publishing Limited.
Oler, D., Oler, M., & Skousen, C. (2010). Characterizing Accounting Research. Accounting Horizons 24(4), 635–670.
Williams, J., & Elson, R. (2010). Improving Ethical Education in the Accounting Program: A Conceptual Course. Academy of Educational Leadership Journal 14(4), 107-116.