In the wake of several accounting scandals in the 1990s, national governments across the world sought to raise popular confidence in the integrity of financial statements through measures to make auditors more independent of the companies that they were auditing (see "auditing" topic) and also to subject them to more independent scrutiny.
In the EU and the US, this process led to the creation of public oversight bodies (POBs), which were intended to represent the public interest in the maintenance of credible and accurate systems of financial reporting by taking on an oversight role for the auditing profession.
In the EU, the Statutory Audit Directive obliges member states to set up effective systems of public oversight for auditing. These have to be governed by non-practitioners with relevant expertise, though the Directive permits practitioners to sit on the governing boards of POBs, providing that they make up only a minority of the board's membership. The POBs are ultimately responsible for registering and approving auditors, systems for investigating and disciplining auditors and for continuing professional education and quality assurance.
The US had adopted a slightly different approach, giving its oversight body, the Public Company Accounting Oversight Board (PCAOB), much more of a direct role for setting auditing standards and regulating auditors of SEC registered firms than is the case in the EU.
Recent developments/current issues
As the POBs are required to be independent of the existing professional bodies of auditors, the creation of the POBs marked a significant step away from the previous system, which was largely based on self regulation by the professional bodies. In particular, the POB’s ultimate responsibility for investigation and discipline removed some powers from the professional bodies. However, in most cases the professional bodies are still responsible for investigating misconduct and imposing professional discipline, with the POB taking a supervisory role to ensure that the professional body investigates complaints and imposes disciplinary penalties properly. Similarly, the POBs generally oversee the educational curricula and qualification systems set by the professional bodies rather than setting them themselves. As a result, the effectiveness of the public oversight system still relies on the quality of the professional bodies and on the strength of the relationship between the professional bodies and the POB.
The Statutory Audit Directive can be found here (Paragraph 20 and Article 32 outline the obligations and duties of the public oversight system).
The UK has adopted a slightly different approach which is illustrated in the latest annual report of the Professional Oversight Board (part of the Financial Reporting Council). It can be found here:
Source: Audit & Oversight Community of Practice Workshop, 25 - 26 May 2010, Chisinau
"Education Implications of the Statutory Audit Directive (SAD)"
the World Bank Centre for Financial Reporting Reform
"Highlights of the Statutory Audit Directive (SAD)"
Jon Hooper on the key components of the SAD and their equivalence to IFIAR criteria
(Source: Audit & Oversight Community of Practice Workshop, 25 - 26 May 2010, Chisinau)
"Challenges in implementing the Statutory Audit Directive (SAD)"
Excerpt featuring John Carchrae, Meta Duhovnik and Jon Hooper
on oversight by dedicated institution or as part of another body.