Infringement of PCAOB Regulations and Guidelines through Inappropriate Utilization of Unregistered Auditors’ Services
- Posted by kalyani
- On May 17, 2024
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The US Public Company Accounting Oversight Board (PCAOB) oversees the auditor’s compliance with the Sarbanes-Oxley Act, the provisions of the Securities Act relating to audit, standards, and rules of the PCAOB and SEC, with the motive of highest investor protection. Recently, the PCAOB announced a settled disciplinary order to a Canadian accounting firm for the improper use of unregistered auditors’ services. The firm has been subjected to a penalty of $175,000 and an order to review its policies and procedures, report on the same, and produce a management certification of implementation of remedial action.
Entities Engaged
| The Audit Firm | A limited liability partnership located in British Columbia, Canada, an accounting firm that provides services as Chartered Professional Accountants of British Columbia and registered with the PCAOB pursuant to Section 102 of the Act and PCAOB rules. |
| Issuer A | A corporation incorporated under the laws of the Cayman Islands, having its principal office in Hong Kong. Its public filings disclose that it is a merchant bank and has a royalty interest in the group company’s iron ore mine in Canada. The audit firm issued audit reports that were included in Forms -20F filed with the United States Securities and Exchange Commission (SEC) for the fiscal years ended December 31, 2020, and December 31, 2021. |
| Issuer B | A corporation incorporated under the laws of British Columbia, Canada, having its principal office in Vancouver, Canada. The public filings disclose that it is a build-to-suit tower owner, operator, and developer of multitenant communication structures. The audit firm issued audit reports that were included in Forms -20F filed with the SEC for the fiscal years ended December 31, 2020, and December 31, 2021. |
| Unregistered Audit Firm C | An LLP headquartered in Buenos Aires, Argentina, is a public accounting firm and an associated person of registered public accounting firm as per definitions of the PCAOB rules but not registered with the Board. |
| Unregistered Audit Firm D | An LLP headquartered in Qormi, Malta, is a public accounting firm and an associated person of a registered public accounting firm as per definitions of the PCAOB rules but not registered with the Board. |
The Services Utilized
The PCAOB registered audit firm used the services of the unregistered firms in a substantial role capacity for four issuer audits and repeatedly violated PCAOB rules and standards in connection with those audits.
| Auditor | Auditee | Percentage of assets and revenue audited (FYE 2020 and 2021) |
| Unregistered Audit Firm C | Issuer B subsidiaries | 88% and 97% of Issuer B subsidiaries assets
80% and 90% of its revenues |
| Unregistered Audit Firm D | Issuer A subsidiaries | 21% and 23% of assets
17% and 24% of its revenues |
Both the unregistered firms audited significant assets and revenues of the issuers’ subsidiaries, which were important to the issuers’ financial statement as a whole, and the audit firm relied on the services of unregistered audit firms for issuing audit reports.
The unregistered firm’s total audit hours ranged from 40% to 73%, and total audit fees ranged from 27% to 32%, each above the threshold limit of 20% and hence amounting to substantial role participation by the unregistered firms.
The Violation
PCAOB Auditing Standard 1205: Part of the Audit Performed by Other Independent Auditors establishes requirements that apply when an auditor of an issuer’s financial statements uses the work and reports by other independent external auditors who have audited the financial statements of the subsidiaries, divisions, branches, components, or investments included in the financial statements. One of the requirement states that the principal auditor must make reference to using the work of another auditor.
PCAOB Rule 2100, Registration Requirements for Public Accounting Firms, requires that a public accounting firm that plays an essential role in the preparation and issuing of the audit report with respect to any issuer, broker, or dealer must be registered with the Board.
The audit firm violated the above rules and standards by not stating that the work of other auditors has been used, and although external auditors conducted a substantial portion of the audit, the audit firm made no efforts to ensure that they were registered with the Board. Additionally, the unregistered audit firms did not follow the PCAOB standards, but the audit report claimed adherence to PCAOB standards.
KNAV’s Opinion
The audit firm’s breach does not indicate a lack of oversight; rather, it points to a deficiency in the robustness of the audit system, quality control procedures and practices. When an auditor issues a report, they are offering assurance to a company’s investors. Consequently, when this assurance relies on the efforts of other auditors, it becomes the responsibility of the principal auditor to confirm the credentials of these auditors. To make use of the work carried out by an external auditor, the principal auditor must exercise due professional care, perform a comprehensive evaluation, and, if they have doubts about the reputation of the audit firm, limit their involvement to non-substantial aspects. The principal auditor must acknowledge that fundamental deficiencies cannot be rectified by implementing supplementary audit procedures, such as relying on the work of an unregistered auditor in a significant capacity and rationalizing it through additional audit measures.
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