SYNOPSIS: This commentary assesses the status of audit regulation under the Public Company Accounting Oversight Board (PCAOB) and explores what the future might hold. The commentary discusses how...

SYNOPSIS: This commentary assesses the status of audit regulation under the Public Company Accounting Oversight Board (PCAOB) and explores what the future might hold. The commentary discusses how discretionary choices in implementing the PCAOB’s legislative mandates under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the 2012 Jumpstart Our Business Startups Act have shaped the Board and the PCAOB’s inspection, standardsetting, and enforcement activities over its first decade. The commentary suggests that the importance of discretionary choices gives rise to a necessity to develop, articulate, and adhere to core principles of audit regulation. The commentary uses the PCAOB’s articulated principles to explore what appear to be some of the key determinants of the future of audit regulation under the PCAOB. Keywords: PCAOB; audit regulation; audit quality; SOX; cost benefit analysis. INTRODUCTION I t has been more than ten years since the Sarbanes-Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB) to regulate public company auditing. Because a decade provides sufficient time for the contours of this new audit regulatory landscape to emerge, this commentary uses this milestone as motivation to assess the status of public company audit regulation, consider what is working and what is not, and explore what the future might hold. Assessing the regulatory structure is important because SOX took the giant step of transferring public company audit regulation from the private sector to the federal governZoe-Vonna Palmrose is a Professor at the University of Washington. This commentary has benefited from discussions with a number of people, especially Bill Kinney. In addition, I very much appreciate the comments and suggestions on various drafts by Bill Kinney, Joe Carcello, and the participants in the LSU Regional Accounting Conference. Submitted: March 2013 Accepted: August 2013 Published Online: December 2013 Corresponding author: Zoe-Vonna Palmrose Email: XXXXXXXXXX 775 ment.1 This transfer occurred under a ‘‘fire-alarm’’ approach to regulation (Kinney 2005), whereby major instances of fraudulent financial reporting propelled congressional action without first trying alternate private sector regulatory structures (e.g., see Panel on Audit Effectiveness 2000), including one proposed by the Securities and Exchange Commission (SEC) (SEC 2002) just prior to the enactment of SOX. Even so, this commentary does not represent a call to return to self-regulation. Congress did not choose to sunset the PCAOB, and the organization has withstood a constitutional challenge. The commentary generally does not quibble with the provisions of SOX. However, there is great scope for discretion in implementing SOX and the commentary provides perspective on the efficacy of this implementation. As such, the discussion extends prior assessments of the PCAOB and the regulation of public company auditing post-SOX (e.g., K