The PCAOB and the Social Responsibility of the
By Douglas R. Carmichael, Chief Auditor
It is a distinct pleasure to speak to this group that uniquely blends a passionate interest in auditing standards, practice, and education. I have the honor of being the first Chief Auditor of the Public Company Accounting Oversight Board – the primary advisor to the Board on policy and technical issues related to the auditing of public companies, including auditing standards, and the head of the PCAOB’s professional standard-setting division. However, the views I express today are my own and do not necessarily reflect the views of the Board members or other staff members. I am sure that this audience has a general understanding of the PCAOB’s origin, composition, and areas of responsibility, including registering public accounting firms, inspecting the practices of those firms, setting professional standards of auditing, ethics, quality control and independence, and enforcing those standards and applicable securities laws. I do not plan on explaining those things in any detail in my prepared remarks, but I would be pleased to address any questions you have in those areas later. In trying to decide what to talk about today I reviewed the PCAOB’s charge as stated in the Sarbanes-Oxley Act of 2002. The Act requires the PCAOB – … to oversee the audit of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative accurate and independent audit reports for companies the securities of which are sold to, and held by and for, public investors. To carry out this mission, the Act instructs the PCAOB to perform any activities the Board – … determines are necessary or appropriate to promote high professional standards among, and improve the quality of audit services offered by, registered public accounting firms and associated persons, or otherwise to carry out this Act in order to protect investors, or to further the public interest. In short, the mission of the PCAOB is to restore the confidence of investors, and society generally, in the independent auditors of public companies. There is no doubt that repeated revelations of accounting scandals and audit failures have seriously damaged public confidence. The focus on public confidence caused me to recall the work of a widely respected teacher of auditing who observed that if the confidence that society places in the effectiveness of the audit and the opinion of the auditor is lost, then the social usefulness of the audit is destroyed. I am speaking, of course, of Professor Theodore Limperg of the University of Amsterdam and his basic theory of the auditor’s function that has come to be known as the Theory of Inspired Confidence. In a series of essays published over 70 years ago, Professor Limperg set forth a dynamic theory that connects society’s need for reliable financial information to the ability of auditing methods to meet that need. He explained how changes in the needs of society and changes in auditing methods interact to bring about changes in the auditor’s function. Limperg based his theory on the science of business economics and viewed the development of the audit function from an economic perspective. From this perspective the development of a separate function of auditing was a natural product of differentiation in production. As with any other aspect of the production process, when the process could be carried out more efficiently by an autonomous branch than in combination with other processes a separate function developed. He observed, however, that with respect to the practice of public accounting the differentiation was caused by more than efficiency in the production process. The independent auditor acts as a confidential agent of the community, or an agent of confidence for society. For the function of...
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