Botta

BACKGROUND

Public companies pay PwC to audit their financial statements and their internal controls over financial reporting. The firm’s audits serve a well-recognized “public watchdog function,” United States v. Arthur Young & Co., 465 U.S. 805, 818 (1984) (simplified), because participants in the capital markets rely on the results in deciding where to invest their money. To further this watchdog function, the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) have issued detailed auditor independence rules. See, e.g., SEC Regulation S-X, 17 C.F.R. § 210.2-01; PCAOB Rules § 3 Pt. 5, Ethics and Independence, https://pcaobus.org/about/rules-rulemaking/rules/section_3. The rules seek to reduce conflicts of interest, which may naturally arise given that auditors are paid for their work by the companies they audit. See generally Te-Kuang Chou, An Examination of the Mechanism and Legal

1 Internal controls are procedures that companies use to prevent and detect errors in their financial statements. If a company requires its accounting staff, each month, to cross-check corporate bank balances against records of…