CReCER Meeting Managua 2012 Bruce Overton, Assistant Director Office of International Affairs

2 Disclaimer The views I express today are mine and do not necessarily reflect the views of the Board, individual Board members, or other members of the Board’s staff.

3 Public Company Accounting Oversight Board Regulator of auditors of companies to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports  Auditors of companies publicly traded in the United States  Auditors of nonpublic broker-dealers Created under the Sarbanes-Oxley Act of 2002 to be independent from the accounting profession  Reflects view by U.S. Congress that peer review was not effective  Board members  Funding

Key Structural Decisions in Establishing the PCAOB Independent funding mechanism Independent board members Experienced, expert, seasoned staff Independent enforcement and discipline Independent standard setting Publish individual inspection reports 4

Funding The largest source of funding for the PCAOB comes from the companies whose financial statements must be audited by PCAOB-registered firms Additional funding comes from brokers and dealers A small amount of funding comes from registration fees The U.S. Securities and Exchange Commission (SEC) approves PCAOB’s annual budget 5

6 SEC Oversight Analogy to SEC oversight of self regulatory organizations Appointment of Board members Approval of rules and standards Appeal of Board sanctions Appeal of Board inspection reports Appeal of denial of registration Approval of budget and accounting support fees Oversight of Board processes

PCAOB’S Principal Statutory Functions Registration Standard-Setting Inspections Investigations & Enforcement 7

8 Registration Registration is voluntary, but only firms that are registered with the PCAOB may conduct audits, or play a substantial role in audits, of:  Public companies that trade in U.S. markets  Public or nonpublic broker-dealers Registration subjects firms to PCAOB oversight Currently, approximately 2,400 audit firms (U.S. and non-U.S.) are registered with the PCAOB Of those, approximately 900 are non-U.S. firms from 88 jurisdictions

9 Current PCAOB Statistics  2,375 firms registered with the PCAOB, of which  913 non-U.S. firms are registered with the PCAOB from 88 jurisdictions  Almost 40% of all firms registered with the PCAOB are located outside the U.S.  Approximately 25% of all registered non-U.S. firms have at least one issuer client and must be inspected at least every 3 years

10 Standard-Setting Previously controlled by the profession through AICPA’s Auditing Standards Board (ASB) Now exclusive authority of PCAOB (subject to SEC approval)  GAAS reference changed to “PCAOB standards”  Includes auditing, quality control, ethics, independence, and attestation standards  Excludes accounting standards  Adoption of AS 5 and other major standards

11 Inspections The Sarbanes-Oxley Act directs the Board to conduct a continuing program of inspections Inspections assess the compliance of the firm and its associated persons with the Act, the Rules of the Board and the SEC and U.S. professional standards Information obtained in inspections is confidential and protected from discovery in legal proceedings pursuant to Section 105(b)(5) of the Act

12 Inspection Reports Inspection reports contain both public and nonpublic portions  Inspection reports do not identify an issuer by name  The public portion of an inspection report summarizes significant engagement deficiencies, if any, and is posted on the PCAOB’s web site  The nonpublic portion of a report may describe additional detail or discuss other issues, including any quality control criticisms or potential defects identified in the inspection

13 Enforcement and Investigations Separate process from Inspections  Separate division  Different staff Board may investigate possible violations by registered public accounting firms or associated persons Prompted by inspections, referrals from other regulatory agencies, public announcements or filings and tips Anonymous tip hotline (telephone and ) Sanctions can be appealed to the SEC and then to the federal courts; if appealed to SEC, sanctions do not take effect and are not made public by the Board unless SEC orders that sanctions take effect

14 Enforcement and Investigations Range of possible sanctions  Suspend or permanently revoke a firm’s registration  Suspend or permanently bar an individual from association with a registered public accounting firm  Temporarily or permanently limit the activities, functions or operations of a firm or associated person  Civil monetary penalty  Impose a censure, require additional professional education or training, or impose any other sanction provided in the rules of the Board

15 Global Developments in Independent Auditor Oversight  EU Directive on Statutory Audit  European countries obligated under Directive:*  France - High Council for Statutory Auditors  Finland – Auditing Board of the Central Chamber of Commerce  Germany - Auditor Oversight Commission  The Netherlands - Authority for the Financial Markets  Norway - Financial Supervisory Authority  Spain – Accounting & Auditing Institute  Sweden - Supervisory Board of Public Accountants  UK – Federal Reporting Council * This list is not exhaustive

16 Global Developments in Independent Auditor Oversight  Other countries:  Australian Securities and Investments Commission  Canadian Public Accountability Board  Japan Certified Public Accountants and Auditing Oversight Board  Korea Financial Supervisory Service  Malaysian Accounting Oversight Board  Singapore Accounting and Corporate Regulatory Authority  South Africa Independent Regulatory Board for Auditors  Switzerland Federal Audit Oversight Authority

17 Global Developments in Independent Auditor Oversight  International Forum of Independent Audit Regulators  Organization of independent auditor oversight entities  Established in September 2006  Membership criteria:  Independent of auditing profession (governing body and funding)  Acts in the public interest and, in particular, conducts or oversees inspections program  Purpose is to bring auditor oversight entities together to share information and exchange ideas  Currently 44 member countries