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.