Rules for Auditing Public Companies
The standard of professional conduct for the audit of all publicly traded companies comes from the Public Company Accounting Oversight Board (PCAOB). The Audit Standards Board (ASB) used to be the one-stop shop for all standards for nongovernmental audits. However, when the U.S. Congress passed the Sarbanes-Oxley Act of 2002 (SOX), the authority over audits of public companies shifted to the newly formed PCAOB. If your audit client is a public company, you follow PCAOB standards rather than ASB standards.
What’s the difference between the ASB and PCAOB standards? Not much — yet. In April 2003, the PCAOB adopted ASB standards on an interim, transitional basis. Frankly, it would have been an insurmountable task to immediately come up with a new set of standards.
Although some interim standards have been superseded, PCAOB and ASB standards are still quite similar. Any differences between the two are spelled out in guidebooks that contain GAAS, which are listed in the next section of this chapter. Another resource is the PCAOB Web site.
If you’ll be involved in auditing a public company, you need to keep the auditing standards cast of characters straight in your mind. Here’s a quick and dirty guide to the creation of SOX and the PCAOB:
The bankruptcies of Enron Corporation and WorldCom, Inc. (and the subsequent billions of dollars of investor losses) prompted the U.S Congress to pass the Sarbanes-Oxley Act of 2002 (SOX) in an effort to renew investor confidence in the regulation of publicly traded companies.
SOX in turn created a new watchdog of the public accounting and auditing profession: the PCAOB. The PCAOB is a private, nonprofit corporation charged with bringing a halt to the financial shenanigans on the part of corporate chief financial officers (CFOs) and chief executive officers (CEOs).
As part of this effort, PCAOB requires CFOs and CEOs to attest to the correctness of their companies’ financial statements. The teeth in this attestation is that the CEOs and CFOs are now subject to criminal penalties for incorrect financial statement representation.
Who oversees the PCAOB watchdog? The Securities and Exchange Commission (SEC) is charged with this task. The SEC’s mission is to make sure publicly traded companies tell the truth about their businesses and treat investors in a fair fashion by putting the needs of the investors before those of the company. The PCAOB Board of Directors consists of five members appointed by the SEC.
SOX requires that all accounting firms preparing or issuing audit reports on U.S. public companies register with the PCAOB.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
