By CFO Brew Staff
less than 3 min read
Definition:
The PCAOB is a nonprofit corporation overseen by the SEC. It was established by the Sarbanes-Oxley Act of 2002 (SOX), a landmark piece of legislation written in response to the financial crisis of 2001. Its mission, as stated on its website, is to regulate audits “in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports.”
The PCAOB’s mandate is fourfold. It:
- registers broker-dealers and public accounting firms that perform audits;
- inspects audits performed by those firms on a regular basis;
- proposes and passes new auditing standards; and
- investigates and disciplines firms and auditors that commit violations.
More than 1,600 public accounting firms are registered with the PCAOB, including the “Big Four” accounting firms, which audit companies representing around 80% of market capitalization on US stock exchanges. Firms that perform audits for more than 100 issuers are inspected annually, while those that perform fewer than 100 audits a year are usually inspected triennially.
The PCAOB chooses which audits to inspect on either a random or a “risk-based” method. In the latter case, it selects audits it believes has a higher risk of deficiencies, or material weaknesses that could prevent auditors from identifying misstatements in a timely manner. During an inspection, PCAOB staff examine the work papers for an audit a firm has performed and interview relevant parties. They identify any deficiencies, discuss and review them with the firm, and determine whether they should be published in the firm’s inspection report.
The PCAOB also levies sanctions on rulebreakers. It has the ability to bar serious offenders from practicing or revoke their registration, and it can assess fines that can run into the tens of millions of dollars. In 2024, it levied a record $35.5 million in fines.
The PCAOB is governed by a five-member board, each of whom serves a staggered five-year term. The board is led by a chair.
In the past decade, SEC commissioners, who are appointed by the president, have made sweeping changes to PCAOB boards. In 2017, SEC Commissioner Jay Clayton removed PCAOB chair James Doty and the entire board following a scandal in which PCAOB staff leaked information to accounting firm KPMG about an upcoming inspection. In 2021, SEC Commissioner Gary Gensler dismissed Chair William Duhnke III and the whole PCAOB board. And in July 2025, PCAOB Chair Erica Williams resigned after Trump-appointed SEC Commissioner Paul Atkins asked her to do so.
