Auditing Standards in the United States

Introduction

• Two different sets of auditing standards exist in the U.S.

Historical Context

• 1938: Major fraud scandal involving McKesson & Robbins.
  • SEC blamed auditor Price Waterhouse (now PWC) for inadequate audit.
• AICPA response:
  • Established auditing standards to guide auditors in performing high-quality audits.
  • Standards issued from 1939-1972 known as Statements on Auditing Procedures.
  • Referred to as Statements on Auditing Standards (SAS) thereafter.

The Sarbanes-Oxley Act of 2002

• Triggered by a wave of corporate frauds:
  • Notable cases: Enron, WorldCom, HealthSouth, Tyco.
• Congress intervened by passing the Sarbanes-Oxley Act.
  • Created the PCAOB (Public Company Accounting Oversight Board) to regulate audits of publicly traded companies.

PCAOB's Role and Standards

• PCAOB given authority to set auditing standards for publicly traded companies.
• 2003: PCAOB adopted AICPA standards on an interim basis as their own.
  • Original AICPA standards (as of 2003) still largely in effect.
  • PCAOB has since developed new standards while retaining many original AICPA standards.

Current Standards Structure

• Post-2003 framework:
  • AICPA: Sets standards for audits of private companies (e.g., small businesses).
  • PCAOB: Sets standards for audits of publicly traded companies.

Concerns Regarding Divergence

• Complaints about the two-tiered structure leading to potential divergence in standards.
  • Question of quality and rigor:
    • Will audits for private companies be perceived as less rigorous than those for public companies?

Summary

• Before 2003: One set of auditing standards (AICPA).
• After 2003:
  • AICPA standards for private companies.
  • PCAOB standards for public companies.