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The accounting profession has a unique responsibility in the United States. Regulators, investors, and the general public rely on certified public accountants to assure the integrity and credibility of corporate financial statements. At the same time, the accounting profession has considerable autonomy in regulating itself. To maintain self-regulation, the American Institute of Certified Public Accountants has developed a multilevel system of self-regulation based on exacting quality control standards. The Public Oversight Board plays a critical role within this system. The role of the Public Oversight Board is closely related to the Securities and Exchange Commission Practice Section.

THE SECURITIES AND EXCHANGE COMMISSION PRACTICE SECTION

On September 17, 1977, the American Institute of Certified Public Accountants (AICPA) established the Securities and Exchange Commission Practice Section as a voluntary organization of certified public accountant firms striving for professional excellence in the auditing services they provide to Securities and Exchange Commission registrants. The objectives of the section are (1) to improve the quality of practice by certified public accountant firms, and (2) to establish and maintain mandatory peer reviews for member firms. An executive committee manages the activities of the section. The Public Oversight Board oversees all activities of the section and reports on these activities.

There are three key elements of the self-regulatory program for certified public accountant firms: (1) peer review for the firm's quality control system once every three years, (2) inquiries to determine whether alleged audit failures indicate breakdowns in a firm's quality control system, and (3) oversight of the process by the Public Oversight Board.

The self-regulatory process answers to legislators, regulators, and the general public. Over-sight of the process, by the Public Oversight Board and the Security and Exchange Commission, makes the section's self-regulatory system both more effective and more credible.

THE PUBLIC OVERSIGHT BOARD

In 1977, the AICPA created the Public Oversight Board. The board is an independent, private-sector body that monitors and reports on the accounting profession's self-regulatory programs for independent auditors of entities registered with the Securities and Exchange Commission. The board recommends improvements to strengthen the system.

The board's independence is evidenced by its power to select the successors of its members, hire and compensate its staff, set the compensation of its members, and choose its chair. The board consists of five members, primarily nonaccountants, who represent a broad spectrum of business, professional, regulatory, and legislative experience. The board, which meets about eight times a year, had its first meeting in March 1978.

Mission and Functions of the Public Over-sight Board The primary mission of the Public Oversight Board is to represent the public interest when the Securities and Exchange Commission Practice Section sets, revises, or enforces standards, membership requirements, or rules of procedure. In addition, the board represents the public interest regarding the results of individual peer reviews or the possible quality control implications of litigation alleging audit failure.

The board's main functions are to (1) monitor and evaluate the regulatory and sanction activities of the peer review and executive committees to assure their effectiveness, (2) determine that the peer review committee is ascertaining that firms are taking appropriate action as a result of peer reviews, (3) conduct continuing oversight of all other activities of the section, (4) make recommendations to the executive committee for improvements in the operation of the section, (5) publish an annual report and such other reports as may be deemed necessary with respect to its activities, and (6) attend all meetings of the executive committee.

The Peer Review Program The objectives of the peer review are to determine (1) whether a reviewed firm's system of quality control for its accounting and auditing practice is appropriately comprehensive and suitably designed for the firm, (2) whether its quality control policies and procedures are adequately documented and communicated to professional personnel, and (3) whether such policies and procedures are being complied with so as to provide the firm with reasonable assurance of conforming with professional standards and the membership requirements of the Section.

The board's staff oversees each peer review by evaluating the review teams' qualifications and experience, and by reading the peer review report, letter of comment, and reviewed firm's response letter.

The Quality Control Inquiry Committee In November 1979, the Securities and Exchange Commission Practice Section established the Quality Control Inquiry Committee to consider the implications of allegations of audit failure on a firm's quality control system. Member firms of the section must report to the committee all litigation or regulatory proceeding involving audits of public companies or regulated financial institutions within thirty days of receiving a complaint. The Public Oversight Board oversees the Quality Control Inquiry Committee by reviewing both the plaintiff's allegations and the committee's analysis of them. The board routinely makes recommendations for improvement in the peer review and Quality Control Inquiry Committee programs.

ACTIVITIES OF THE PUBLIC OVERSIGHT BOARD

Since the Public Oversight Board was a brand new layer in the self-regulatory structure, the first year activities were devoted principally to (1) organizing, defining its role, and recruiting its staff; (2) advising on policy matters during the development of the section's peer review program; (3) monitoring initial peer review; (4) studying the question of the scope of services provided by certified public accountant firms and preparing and publishing a report containing recommendations on the subject; and (5) considering the question of what action should be taken by the section in the event of an alleged or possible audit failure involving one of its member firms.

The board or one or more of its members or staff met on numerous occasions with the members of the Securities and Exchange Commission Practice Section. The board also held public hearings, conferences, and educational sessions on the self-regulatory programs, and received written comments from firms and individuals interested in the scope of service. From the initial efforts, the role of the board became clear.

The board's oversight and monitoring program now consists of (1) post-review of working papers prepared by reviewers, including panels;(2) observation of reviews in process, with emphasis on attendance at exit conferences; and (3) other selected procedures. The board publishes an annual report and other reports as may be deemed necessary with respect to its activities. In addition, the board and its members give speeches, write articles, testify before congressional committees, and conduct special studies on matters bearing directly on the integrity of the audit process. From time to time, special initiatives are undertaken.

In September 1994, the Public Oversight Board formed an Advisory Panel on Auditor Independence to determine whether the Securities and Exchange Practice Section, the accounting profession, or the Securities and Exchange Commission should take steps to better assure the independence of auditors and the integrity and objectivity of their judgments on the appropriate application of generally accepted accounting principles to financial statements. A report was issued, which is discussed later.

In 1998, the board appointed a panel on audit effectiveness, which includes investors, auditors, regulators, audit committee members, and corporate executives, to examine whether audit processes of large-firm members of the Securities and Exchange Commission Practice Section adequately serve and protect the interests of investors.

PUBLICATIONS OF THE PUBLIC OVERSIGHT BOARD

The board publishes an annual report as well as special reports. In 1991, the board published Evaluation of the Quality Control Inquiry Committee by Robert K. Mautz and Charles J. Evers. The booklet describes how the profession reconciled two conflicting forces: the protection of the public interest on the one hand and, on the other, the right of a firm to mount a vigorous defense against audit failure litigation.

In 1993, the board published In the Public Interest: Issues Confronting the Accounting Profession: Litigation, Self-Regulation, Standards, Public Confidence, and Professional Practice. The report was a result of the board's concerns with the impact of litigation and the influence of publicized allegations on the public perception of the accounting profession's performance.

In 1994, the board published Strengthening the Professionalism of the Independent Auditor. The board asked for a more accountable board of directors to strengthen the professionalism of the outside auditor. In 1995, the board published Directors, Management, and Auditors: Allies in Protecting Shareholder Interest. In that report the board urged directors to play an active role in the financial reporting process and urged the auditing profession to look at directors—the shareholders' representatives—as its client.

THE BOARD'S RELATIONSHIP TO THE SECURITIES AND EXCHANGE COMMISSION

The staff of the chief accountant of the Securities and Exchange Commission regularly reviews the Public Oversight Board's files to determine whether the peer review and the Quality Control Inquiry Committee programs are being properly conducted and properly overseen by the board. The commission staff's conclusions are reflected in the commission's annual reports. These reports have stated that the Securities and Exchange Commission Practice Section's programs have increased the reliability of audits.

In addition, the board itself meets from time to time with the Securities and Exchange Commission's staff and commissioner.