The Public Company Accounting Oversight Board (AOB) is a five-member board created when the Sarbanes-Oxley Act was signed into law on July 30, 2002. The AOB was established to protect the interests of the investors and the integrity of financial markets. It was set up in response to the recent scandals at Enron, WorldCom, and Andersen as a means for Congress to assure investors, employees, and pensioners that the hardships and losses they had suffered would not be repeated.
The AOB performs the following duties: registers public accounting firms; establishes auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers; conducts inspections of accounting firms; conducts investigations and disciplinary proceedings, imposing appropriate sanctions; enforces compliance with the Sarbanes-Oxley Act and other professional standards; and sets the budget and manages the operations of the Board and its staff. The AOB is thus given the power to discipline accountants and issue subpoenas. It also has authority to amend, modify, repeal, and reject any standards suggested by the professional groups of accountants and any advisory groups. Some of these relevant groups are: the FASB (Financial Accounting Standards Board), the IASB (International Accounting Standards Board), the FASAB (Federal Accounting Standards Advisory Board), the GASB (Governmental Accounting Standards Board), and the AICPA (American Institute of Certified Public Accountants). The AOB must report its standard-setting activity to the Securities and Exchange Commission annually. It requires registered public accounting firms to prepare and maintain files for a period of at least seven years, to audit work papers and other information related to an audit report in sufficient detail to support the conclusions reached in the report.
Members of the board are appointed by the Securities and Exchange Commission (SEC) in consultation with the Federal Reserve Chairman and the Secretary of the Treasury. The Sarbanes-Oxley Act states that board members must be “prominent individuals of integrity and reputation who have demonstrated commitment to the interests of investors and the public, and an understanding of the responsibilities and nature of financial disclosure . . . and the obligations of accountants with respect to the preparation and issuance of audit reports with respect to such disclosures.” By law, two members of the board must be or must have been Certified Public Accountants and the three remaining members must not be and cannot have been certified public accountants. Members of the board are appointed for a five-year term during which time they will serve on a full-time basis.
Soon after the Accounting Oversight Board came into existence, controversy arose over the process of selecting board members. The SEC named William Webster, former director of both the FBI and the CIA, as chairman of the board in a divided vote (a 3-2 approval). Criticism mounted after the New York Times reported that Webster had warned SEC Chairman Harvey Pitt, but not to entire Commission, before the vote on his nomination that he had recently headed the auditing committee of a company facing fraud accusations from investors. Additionally, SEC Commissioner Harvey J. Goldschmid argued that Pitt had initially promised the chairmanship to John Biggs, head of the giant teachers pension fund TIAA-CREF, who had called for tight oversight of the accounting industry. Goldschmid further argued that Pitt had changed his mind under pressure from the industry and Republican lawmakers. There was general consensus among SEC members to open an investigation into the process used to select William Webster and other board members. Webster subsequently resigned his position as chairman.
The other current board members include Daniel Galzer, former general counsel at the SEC; Kayla Gillat, former attorney at Calpers, a large California pension fund; Willis Gradison, former member of Congress and former Undersecretary of the Treasury Department; and Charles Niemeier, a senior enforcement official at the SEC.
The Accounting Oversight Board is funded by assessed contributions from publicly traded corporations. The Board collects a registration fee and an annual fee from every public accounting firm in amounts that are sufficient to recover the costs of processing and reviewing applications and annual reports.