The Sarbanes Oxley Act of 2002 (SOX) created the PCAOB, which is the Public Company Accounting Oversight Board. All public company auditors must be PCAOB licensed and qualified. Prior to the enactment of SOX, the profession was self regulated and any CPA could audit a public company. On its website, the PCAOB describes itself as “[T]he PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.”
Not All PCAOB Auditors are Created Equal
Licensing and membership with the PCAOB has stringent requirements. In fact, shortly after the enactment of SOX the number of accounting firms that provide public company services declined dramatically. Being held to a higher standard isn’t for everyone. However, as time has passed, even with PCAOB oversight, it has become clear that not all PCAOB qualified and licensed auditors are created equal. The recent rash of Chinese company accounting fraud cases has certainly brought the issue to light. Like all areas of the “public company world”, choosing a PCAOB auditor requires due diligence.
Review Their Client Filings
In choosing a PCAOB firm to act as an auditor for a public company, the public company should consider how many other SEC clients does the firm have and when the firm was last inspected by the PCAOB. All accounting firms with 100 or more public company clients are inspected annually; however, those with less than 100 public clients are only inspected every three years. As the bigger firms with more than 100 clients can be cost prohibitive to smaller public companies, it is very important that a smaller public company find out when the last inspection was, and what the result of that inspection was. The PCAOB prepares a written report following an inspection, portions of which are available to the public.
Pending Enforcement Proceedings
Another factor to consider is whether any of the accounting firms clients are currently subject to an SEC enforcement proceeding. Enforcement proceedings are a matter of public record on the SEC website. Investigations are not public information; however, a public company should ask a potential PCAOB service provider if they or any of their clients are currently subject to investigation by the SEC. In line with this area of due diligence, is whether the PCAOB firm has a Chinese company practice and how large that practice is.
Unfortunately, if they have a large Chinese company practice there is a good chance that they may become subject to an investigation in today’s environment.
In addition, to specific issues relating to a potential auditor’s PCAOB qualifications, a public company should consider general criteria for hiring any professional: what is the firm’s pricing; how busy (responsive) will they be to your needs; will you be assigned a single accountant for most communications or a team; will that accountant/team change each year (thereby having to teach someone new every year about your business); how do you get along with the individuals; and does your SEC attorney have a relationship with the firm.
The Author
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.
Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.
