In this video, I'm going to explain why we have two different sets of auditing standards in the United States. So in 1938, there was this massive fraud by this company McKesson & Robbins, and the SEC blamed their auditor, Price Waterhouse, which is today PWC, for not doing a good job conducting the audit. And so the AICPA responded by saying, well, listen, we're going to set out some auditing standards, and these will be the standards that auditors are supposed to follow if they're going to do...
a high quality audit. So it's like a guide for you. You're an auditor and you say, okay, how would I do a good job of auditing a company like this?
And you go and you follow the standards. So initially the only set of standards was the standards that were promulgated by the AICPA. And they were known as statements on auditing procedures from 1939 to 1972. And then after that, they've been known as statements on auditing standards or SAS for short.
However, We had another wave of fraud in 2002. So we had Enron, we had WorldCom, we had HealthSouth, we had Tyco, and so forth. Just a number of frauds. And so Congress got involved in the United States.
They passed a thing called the Sarbanes-Oxley Act. And one of the things it did was it created the PCAOB. And their job was to regulate the audits of publicly traded companies. So now they were given the task.
of creating auditing standards. They didn't have to, they could have just said, well, we're just going to follow the auditing standards of the AICPA, but they took it upon themselves. They said, okay, well, we have the ability to set auditing standards for audits of publicly traded companies. So audits of public companies, the standards are set by the PCAOB.
And then since 2003, the standards of the AICPA are now just applicable only to audits of private companies. Okay. So Prior to 2003, so prior to 2003, if you're auditing any kind of company, you'd follow the standards of the AICPA. However, since 2003, if you're a publicly traded company that you're auditing, you will follow the standards of the PCAOB. And they're just called auditing standards.
Now, the PCAOB, when they originally started in 2003, they didn't have any standards because they were just starting. So what they did was they said, well, look, we're going to adopt. All the standards of the AICPA, those are our standards.
And they just said, okay, it's just going to be on an interim basis, so just temporarily, those are our standards. So initially, all the standards of the AICPA as of 2003, those are the standards of the PCAOB. And the PCAOB kept many of those standards. Many of those standards are their standards today. However, the PCAOB has also issued new standards since that time.
Okay, so the PCAOB... now will create their own standards. That's not saying that they got rid of all the interim standards that they took over. That's not the case. They've kept many of those standards.
So the PCAOB standards are similar in many respects to the standards that were enforced by the AICPA as of 2003. Okay, so now some people have complained and said, I don't like this two-tiered structure. We got two different sets of auditing standards. because it could lead to divergence.
Where we say, okay, over time, even though in 2003, the standards were exactly the same because the PCAOB just took the AICPA standards, over time, the AICPA is issuing some standards, and then now the PCAOB is issuing its own standards. And as they get further apart, people say, okay, well, is it going to be that an audit of a private company is not of as high a quality or is not as rigorous? is an audit of a public company and so forth.
So people have raised concerns about this divergence issue. But again, I just want to emphasize, let me just summarize here. So prior to 2003 in the United States, there was one set of auditing standards. It was those issued by the AICPA. They have an auditing standards board, ASB, and then they issue these statements on auditing standards.
After 2003... Now we have where the AICPA is setting the standards for audits of private companies. So if you're doing a small bakery or grocery store that's not publicly traded, then you will follow the auditing standards of the AICPA when you're conducting your audit. However, if it's a publicly traded company, you will follow the standards of the PCAOB when you're conducting your audit.