Prior auditing standards and authorities

The American Institute of Certified Public Accountants has issued guidance to accountants and auditors since 1917, when, at the behest of the U.S. Federal Trade Commission and auspices of the Federal Reserve Board, it issued a series of pamphlets to the accounting community in regard to preparing financial statements and auditing (then referred to as "verification" and later "examination").^[4] Verification of Financial Statements, the first pamphlet dedicated exclusively to providing guidance for audits, was issued in 1929.^[5] With its opening paragraph, the guidance provided one of the most fundamental principles in auditing, stating that "the responsibility for the extent of the (audit) work required must be assumed by the auditor."^[6] In 1936 the AICPA revised its prior pronouncements and issued Examination of Financial Statements by Independent Public Accountants, which contained more detailed guidance on performing audit procedures for audits of small and mid-sized companies, while still emphasizing the need to perform the audit based on the nature of the client, its size, and its internal control structure, among other attributes.^[7]

On January 30, 1939, the Committee on Auditing Procedure was formed by the AICPA to evaluate, discuss, and issue guidance exclusively on auditing-related matters.^[8] This Committee is considered the antecessor of the Auditing Standards Board, and was the first to issue Statements on auditing standards and principles to the public accounting community.^[8] In 1941 it issued a pamphlet titled Statements on Auditing Procedure, which discussed the auditor’s responsibility in applying judgment in audits. It was followed by a series of numbered pronouncements called Statements on Auditing Procedures, or SAP (the antecessors of Statements on Auditing Standards), issued between 1939 up to the early 1970s for a total of 54 SAP pronouncements.^[8] During that time, the Securities Exchange Commission required public accountants to include a representation in their independent audit reports that the audit was performed in compliance with generally accepted auditing standards, and the Committee issued a booklet titled Generally Accepted Auditing Standards—Their Significance and Scope to adopt the SEC’s requirement.^[8] In 1963, the Committee issued Statement on Auditing Procedure No. 33 to consolidate and replace various pronouncements issued between 1949 and 1963, including pamphlets and statements.^[8]

In 1972, the AICPA implemented significant changes to its standard-setting practices by consolidating all auditing pronouncements up to that date under Statements on Auditing Standards (SAS), and gave the Committee the title of senior technical committee on auditing matters while changing its name to Auditing Standards Executive Committee. From 1972 through 1978 the Executive Committee issued SAS as the authoritative guidelines and rules for auditing, issuing a total of 23 SAS.^[9]

Creation of the ASB

In October 1978, following extensive studies by the AICPA and its sub-committees, its governing council established the Auditing Standards Board as the maximum authoritative body in establishing GAAS, thereby consolidating and replacing all previous senior technical committees.^[3] It required all AICPA members and public accountants to adhere to the ASB’s pronouncements in relation to audit, attestation, and quality control. The ASB would now define auditor responsibilities and provide guidance to allow them to accomplish work and emit a report, among others.^[3]

Sarbanes–Oxley and the PCAOB

The Sarbanes–Oxley Act of 2002, as amended by the Dodd–Frank Act, changed the hierarchy of generally accepted auditing principles and standards. The legislation established that the new Public Company Accounting Oversight Board (PCAOB) and the Securities Exchange Commission (SEC) now had final authority over auditing regulation and public-auditor professional-practices standards for audits of public companies, also referred to as "issuers".^[10] Public accountants and firms who audit public companies were required to register with the PCAOB and follow all standards, principles, rules, and interpretations issued by the PCAOB in regard to public company audits and audit reports, as well as attestation and quality control. The PCAOB adopted the ASB's auditing and attest standards as its temporary auditing rules in 2003.^[10]

The AICPA subsequently changed the designation of the leading GAAS-setting authority in February 2004. It designated the PCAOB as the authoritative body for GAAS related to public companies, while the ASB was designated for non-public companies.^[10]