Page 647 - Encyclopedia of Business and Finance

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Public Relations

what requires revision, and what requires new auditing SEE ALSO Accounting
standards.
As noted earlier, the Auditing Standards Board of the
Bernard H. Newman
AICPA continues to function to provide guidance for
audits of those entities that are not required to report to
the SEC under the specifications of the Securities
Exchange Act of 1934 in accordance with auditing guid- PUBLIC RELATIONS
ance from the PCAOB. Inasmuch as auditing is a generic
process, many critics have raised questions about the wis- Public relations (PR) is a profession that includes the
dom—and complexity—of two sets of standards, as many functions of communication, community relations, crisis
public accounting firms serve both types of clients. management, customer relations, employee relations, gov-
The new requirement for an audit of internal controls ernment affairs, industry relations, investor relations,
led to much criticism. Section 404 of the act and rules media relations, mediation, publicity, speechwriting, and
adopted by the SEC require companies that file annual visitor relations. The first World Assembly of Public Rela-
reports with the SEC to report on management’s respon- tions Associations, held in Mexico City in August 1978,
sibilities to establish and maintain adequate internal con- defined the practice of public relations as “the art and
trol over the company’s financial reporting process, as well social science of analyzing trends, predicting their conse-
as management’s assessment of the effectiveness of inter- quences, counseling organizational leaders, and imple-
nal controls. Section 404 requires the accounting firm menting planned programs of action, which will serve
that audits the company’s financial statements to perform both the organization and the public interest.”
an audit on management’s assessment and on the effec- With the advancement of the profession, in 1988 the
tiveness of the company’s controls. Public Relations Society of America (PRSA) adopted a
Questions have been raised about the value of such an short definition, “Public relations helps an organization
audit related to internal control and the burden imposed and its publics adapt mutually to each other.” In 1994 the
by additional costs. Furthermore, there are critics who British Institute of Public Relations offered its definition:
believe that the scandals related to accounting during the “Public relations practice is the discipline that looks after
early years of the new century would likely not have been reputation with the aim of earning understanding and
averted by an audit of internal control. Enron, in its 2001 support, and influencing opinion and behavior.”
annual report, included an audit report from its audit Although these definitions vary to some extent, they all
firm, Arthur Andersen, about its internal controls. imply that the fundamental functions of PR are commu-
(Arthur Andersen had served as the company’s internal nicating and improving the behavior of an organization
auditors; thus, they were auditing their own work, which and the perceptions of that behavior by its clientele.
is a violation of the independence required of public
accountants at the time.)
PUBLIC RELATIONS, ADVERTISING,
This requirement for an audit of internal controls and
the submission of an auditor’s report became effective with AND PROPAGANDA
annual reports for fiscal years ending after December 15, People sometimes confuse public relations with advertis-
2004. The cascade of questions about the need for the ing and propaganda. Actually, they are different.
requirement, the nature of the requirement, and the guid- Advertising. The purpose of advertising is to stimulate
ance provided led the SEC to convene a Roundtable on consumers’ desires for a product or service and to moti-
Implementation of Sarbanes-Oxley Internal Control Provi- vate them to buy that product or service. Designing adver-
sions for April 13, 2005. Over 200 letters of comment were tisements, preparing verbal and graphical messages, and
submitted to the SEC related to this new requirement. The buying time and space from the mass media for their
Roundtable was open to the public. Follow-up of the exposure are the tasks of advertising. When necessary, PR
Roundtable included the provision of additional guidance. professionals will use advertising as one approach to build-
Challenges to the value of such an audit continue. ing goodwill and creating proper public attitudes toward
their organizations. Tobacco companies’ goodwill ads and
WEBSITES OF INTEREST television commercials are one example of such a use.
Propaganda. The purpose of propaganda is to gener-
For extensive information on activities and plans of ate conditioned reflexes among people in order to replace
the PCAOB: http://www.pcaob.org their reasoned actions with the conditioned reflex. Propa-
The AICPA also provides information about devel- ganda is used to brainwash people with a doctrine and
opments at the PCAOB: http://www.aicpa.org then mislead them, and obviously the term carries a

624 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION