In 2002, the U.S. audit profession – hailed by the Supreme Court as serving a critical public watchdog function within the securities market (1) – was assigned its own watchdog by an anxious Congress reacting to several, high profile, corporate fraud and accounting scandals.
The Public Company Accounting Oversight Board (PCAOB) was established under the Sarbanes-Oxley Act of 2002 (SOX) to provide external and independent oversight over the auditors of publically traded companies. Prior to SOX, the audit profession had been self-regulated.
Independent oversight was more than 30 years in the making as a series of spectacular bankruptcies and substantially distorted public company financial statements sparked questions about auditors’ performance and independence (2). These failures began with the 1965 collapse of Westec, a Houston-based oil and mining company, accelerated during the dot-com bubble of the late 1990s, and exploded in the early 2000s with the meltdowns of Enron, WorldCom, and the accounting firm Arthur Andersen. These financial scandals raised the risk of, and in the worst cases produced, massive job and investor losses, triggering a cycle of litigation, congressional investigations, and commissions offering recommendations for audit reform.
During this period, the audit profession faced a host of competing pressures, including a changing business landscape that emphasized short-term earnings over long-term growth and the rise of lucrative consulting services within traditional audit firms’ less remunerative audit practices. (3)
Responding to calls from Wall Street and Main Street to restore investor confidence, Congress passed the Sarbanes-Oxley Act, laying out the foundations for the PCAOB in a mere 65 pages. This gallery tells the story of how early Board members and staff used the statute to build the regulator from scratch, creating registration, inspection, enforcement and standard-setting programs without models or prototypes. As well, this gallery traces the challenges the PCAOB faced as it forged its path onto the domestic and international financial regulatory landscape.
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