U.S. GAAP

Question: FASB creates U.S. GAAP, the official standards for the preparation of financial statements. What group

sets the examination and reporting rules to be followed by independent auditors? Their work is not in accordance

with accounting principles. Instead, they are seeking to determine whether U.S. GAAP was applied properly.

These auditing firms clearly provide a vital service by adding credibility to reported financial information. How

do independent auditors know what actions should be taken in assessing the data reported by a company such as

Xerox or Bank of America?

Answer: When an audit is performed on the financial statements of any organization that issues securities to the

U.S. public, the examination and subsequent reporting is regulated by the Public Company Accounting Oversight

Board (PCAOB). The PCAOB was brought into existence by the U.S. Congress through the Sarbanes-Oxley

Act of 2002, a measure passed in response to a number of massive accounting scandals, including Enron and

WorldCom. Members of Congress apparently felt that the auditing profession had failed to provide adequate

protection for the decision makers who were relying on published financial information. Consequently, the federal

government became more involved. The PCAOB was established under the oversight and enforcement authority

of the SEC. It holds wide-ranging powers that include the creation of official guidelines for the performance of a

proper audit. Its mission is stated as follows: “The PCAOB is a private-sector, nonprofit corporation, created by

the Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies in order to protect the interests of

investors and further the public interest in the preparation of informative, fair, and independent audit reports.