The stock market for long-term investment no longer, rather, in 1928, the stock market had become a place where everyday people truly believed that they could become rich. Stocks had become the talk of every town. Discussions could be heard at every corner about stocks. Newspapers reported average people making millions off of the stock market. With so many people buying, the prices increased. Over a series of several days in October 1929 the market dropped a few times, but banks and companies were still loaning money and investing in the market leading people to believe everything was okay. Investors were now unable to invest confidently and banks had no regulations on their financial statements.

The accounting profession was pressured to establish more uniform accounting standards after this stock market crash of 1929. Some people felt that misleading or, incomplete if you will, financial statement information made the stock prices inflate contributing to the stock market crash and the depression that followed.

The Securities Act of 1933 and the Securities Exchange Act of 1934 were designed to restore that confidence in the investor. The 1933 act sets accounting and disclosure requirements for initial stocks and bonds, while the 1934 act applies to secondary transactions and mandates reporting requirements for companies whose securities are publicly traded. The 1934 act also created the Securities and Exchange Commission (SEC).

The 1934 act gave the SEC both the power and responsibility for setting accounting and reporting standards for companies whose securities are publicly traded by Congress. (highered.mcgraw-hill.com) However, the SEC, has delegated the primary responsibility for setting accounting standards to the private sector. The standards for publicly traded companies are now being written by the PCAOB. The SEC delegated the responsibility, but not the

authority, to set standards. That power still belongs to the SEC, and they can be denied if the SEC does not agree with them. After the SEC approves the standard they are placed into effect, making them valid so to speak. They are then a legal auditing standard that must be followed by all publicly traded companies.

For the private sector, it began with the Committee on Accounting Procedure (CAP), which was a committee of the American Institute of Accountants (AIA); later renamed the American Institute of Certified Public Accountants (AICPA) in 1957. The AICPA is the national organization of professional public accountants. In 1959 the Accounting Principles Board (APB) replaced the CAP. Members of the APB also belonged to the AICPA. Now that we have a brief history of the ‘who’ and ‘how’ of the audit standard setting process, let’s dig a little deeper into three different companies that impact the process of standard setting: the SEC, the PCAOB, and the AIPCA. We’ll start with the first site visit in Washington D.C., the Securities and Exchange Commission, or The Investors Advocate. As stated before, the SEC was created in 1929 following the stock market crash. Before then there were hardly any federal regulations within the securities markets. The SEC was put together to keep companies is line when it came to reporting their financial statements. Placing the financial standing of the company on the investors hand helps the investor to make a more informed decision when investing in a company.

The Commission is comprised of five Commissioners appointed by the president in a staggered five year term, set up so that no more than one chair at a time should be open. The

Commissioners are also not to exceed three from either political party, so that the newest laws placed in effect are not politically driven to either republican or democratic views. The role of the Commission is to: interpret and enforce federal securities laws; issue new rules and amend existing ones; oversee the inspection of securities firms, brokers, investment advisers, and ratings agencies; oversee private regulatory organizations in the securities, accounting, and auditing fields; and coordinate U.S. securities regulation with federal, state, and foreign authorities. The Commission convenes regularly at meetings that are open to the public and the news media unless the discussion pertains to confidential subjects, such as whether to begin an enforcement investigation. (www.sec.gov)

The process of making and setting rules is a series of steps. They first set a proposal of a new rule, and gain public input on the proposal. It is then released as a concept to determine what the Commission is trying to accomplish, including the pros and cons of the new rule in question. The public’s feedback is usually taken into consideration at this point to see which approach, if any, is appropriate. The Commission then publishes a detailed formal rule proposal for public comment. Unlike a concept release, a rule proposal advances specific objectives and methods for achieving them. Typically they provide between 30 and 60 days for review and comment. Just as with a concept release, the public comment is considered for formulation of the rule. Finally, the Commissioners consider what they have learned from the public exposure of the proposed rule, and seek to agree on the specifics of a final rule. If a final measure is then adopted by the Commission, it becomes part of the official rules that govern the securities industry.

My favorite part is what I’ll go over next: The Division of Enforcement. The SEC is a rule enforcement agency, so they have an entire division that strictly deals with the enforcement of rules set forth. The Division of Enforcement assists the Commission in executing its law enforcement function by recommending the commencement of investigations of securities law violations, by recommending that the Commission bring civil actions in federal court or as administrative proceedings before an administrative law judge, and by prosecuting these cases on behalf of the Commission. Division works closely with law enforcement agencies in the U.S. and around the world to bring criminal cases when appropriate, though most are civil. The agents do not carry guns as most cases are nonviolent violations that are usually fixed without the assistance of a courtroom.

The Division obtains evidence of possible violations of the securities laws from many sources, including market surveillance activities, investor tips and complaints, other Divisions and Offices of the SEC, the self-regulatory organizations and other securities industry sources, and media reports.

All SEC investigations are conducted privately. Facts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods. With a formal order of investigation, the Division's staff may compel witnesses by subpoena to testify and produce books, records, and other relevant documents. Following an investigation, SEC staff present their findings to the Commission for its review. The Commission can authorize the staff to file a case in federal court or bring an administrative action. In many cases, the Commission and the party charged decide to settle a matter without trial.

I found this to be most interesting to me because it’s more than just sitting behind a desk working on a computer. It’s going out into the field and collecting evidence and bringing justice to those that abuse the system. (Maybe I was a detective in a past life)

The next site visit was to the PCAOB. The Sarbanes Oxley Act of 2002 gave the PCAOB the authority for standard setting. The board has adopted 17 auditing standards and two new attestation standards for engagements related to Broker-Dealers on October 10, 2013. Current projects of the PCAOB include: Reorganization of Auditing Standards; Related Parties; Auditor’s Reporting Model; Audit Transparency: Identification of Engagement Partner and Other Firms; Other Accounting Firms and Specialists; Other Standard-Setting Projects.

We also learned about registration and who is required to register. Any accounting firm, U.S. or non-U.S., that prepares or issues an audit report for an issuer or for an SEC-registered broker or dealer, or plays a substantial role in those audits is required to register. When registered, the company is subject to an inspection. What is an inspection exactly you might ask? An inspection is a review of audit work and related quality control systems of registered accounting firms. These can be done on-site at the company or service being inspected, or they can be done at the PCAOB be means of sending necessary paperwork and conducting phone interviews.

Lastly at this site, we went over the subject that again stole my interest: The Division of Enforcement and Investigations. Dress is it any way you like; breaking the rules is not and should never be allowed under any circumstance. This division is comprised of accountants and lawyers from New York and Washington D.C. They identify matters for investigation, conduct those investigations, recommend a solution that best fits the crime, and conduct litigated

disciplinary proceedings before a board hearing officer. They investigate potential violations with the Sarbanes Oxley Act, rules set by the Board, laws related to auditing, PCAOB standards set, and non-cooperation of inspections. Again, the guys without guns (unless you work for the FBI) going in and punishing rule breakers just seems more interesting to me than being the one at the desk making the rules. I heard it said that the DEI is as sexy as accounting gets, but it’s also the most non-repetitive and hands on, making it the most interesting to me.

We then of course left the beautiful city of Washington D.C. and set our sights on New York City. Upon arrival at the American Institute of Certified Public Accountants, or AICPA, we learned about their role in the auditing process for companies of the private sector. These are companies that are not publicly traded.

Auditing Standards Board, the senior technical committee designated by the American Institute of Certified Public Accountants or AICPA, to issue auditing, quality control statements, standards and guidelines to certified public accountants, or CPAs, for non-public company audits. Created October 1978, it’s composed of nineteen members representing various industries and/or sectors. These include: public accountants and private, educational, and governmental entities. It also issues pronouncements in the form of statements, interpretations, and guidelines, which all CPAs must follow to when performing audits.

Their process is similar in that ASB proposed pronouncements are discussed within the ASB membership, the AICPA and with the general public. They meet to discuss auditing issues and prepare draft proposals, and occasionally hold public hearings. The meetings are considered informal to encourage open deliberation between members and matters which affect public

interest. The meetings are established by the Chair, with the public notices and meeting highlights listed on the AICPA website.

Proposed pronouncements are discussed in the meetings, and the ASBs board members must vote before to issuing a draft proposal, or the final version to the public with two-thirds of members in favor. The voting results are included in the meeting highlights published, and any ASB member who diverts from issuing a pronouncement can request their reasons for diversion to be included in the draft proposal or final pronouncement.

References:

www.aicpa.org

www.sec.gov

www.pcaobus.org

PCAOB Powerpoint from email

www.kpmg.com

Also: Notes taken during various presentations.