PCAOB Lands Multiple Knock-out Blows on Audit Firms: Quality Control Violations Cannot be Trivialized!
- Posted by kalyani
- On March 4, 2024
- 0 Comments
The US Public Company Accounting Oversight Board (PCAOB), true to its purpose of protecting investor interests, has charged several hundreds of thousands of dollars in penalties in a single week to multiple auditors, adopting an aggressive approach to oversight.
In January 2022, Erica Williams was appointed as the Chair of the PCAOB, and ever since, she has issued regular warnings to auditors that the Board will take a more aggressive approach to enforcement which has taken various forms, including ‘sweeps.’ Sweeps gather information on the same kind of potential violation from multiple firms.
The disciplinary orders issued during the week pointed out various shortcomings in:
- Performance
- Documentation
- Supervision, and
- Quality Control
These shortcomings led to non-compliance with the PCAOB audit and quality standards devised to protect investor rights.
The investigations of multiple firms and the findings of some of them are summarised below:
| Violation | Auditing Standard/ QCs/Act/Rules Violated |
| An Indiana-based Top 100 Firm was sanctioned for auditor independence violations. An engagement partner on three employee benefit plans from 2013 to 2017, continued to serve as an engagement partner on the same audits in 2018 and 2019.
|
Section 10A (j) of the Exchange Act.
Rule 2-01 of Commission Regulation S-X.
PCAOB Rule 3100, Compliance with Auditing and Related Professional Practice Standards.
PCAOB Rule 3400T, Interim Quality Control Standards.
PCAOB Rule 3520, Auditor Independence.
AS 1005, Independence.
|
| A sole partner of a CPA LLC was sanctioned for placing excessive reliance on information and representations presented by audit clients in four audits. | PCAOB Rule 3100, Compliance with Auditing and Related Professional Practice Standards.
AS 1015.01 and .07, Due Professional Care in the Performance of Work.
AS 1105.04, Audit Evidence.
AS 2301.39, The Auditor’s Responses to the Risks of Material Misstatement.
AS 1105.17, Note (“Inquiry of company personnel, by itself, does not provide sufficient audit evidence to reduce audit risk to an appropriately low level for a relevant assertion . . .”).
AS 2810.30, Evaluating Audit Results
|
| A New Jersey-based sole owner firm and its engagement partner were sanctioned for violations in multiple audits conducted for two issuer clients. The firm failed to obtain sufficient audit evidence to audit the valuation of a client’s goodwill and the work of a specialist in two audits. | PCAOB Rule 3100, Compliance with Auditing and Related Professional Practice Standards.
PCAOB Rule 3200, Auditing Standards.
AS 3101.02, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.
AS 1015.01, .07, Due Professional Care in the Performance of Work.
AS 2301.07, The Auditor’s Responses to the Risks of Material Misstatement.
AS 1105.04, Audit Evidence.
AS 2501.04-, Auditing Accounting Estimates.
ASC 350, Intangibles – Goodwill and Other.
|
| An India-based chartered accounting firm and partner were sanctioned for various violations. In a 2020 issuer audit, the firm failed to have the necessary quality control policies and procedures in place; there was a failure to perform all the required audit procedures before releasing the audit report. | PCAOB Rule 3100 – Compliance with Auditing and Related Professional Practice Standards.
PCAOB Rule 3200, Auditing Standards
PCAOB Rule 3400T, Interim Quality Control Standards.
AS 1215.15, Audit Documentation (defining “documentation completion date” as a date not more than 45 days after an auditor releases an audit report).
AS 1201.03, Supervision of the Audit Engagement
AS 1015.01, Due Professional Care in Performance of Work
QC §§ 20.01-.03, System of Quality Control for a CPA Firm’s Accounting and Auditing Practice.
QC § 30.03, Monitoring a CPA Firm’s Accounting and Auditing Practice |
A UK-based firm and its senior auditor who lacked basic training in PCAOB standards have been charged by SEC for giving a clean bill of health to a music streaming company. They ignored red flags and did not exercise professional scepticism about company agreements and confirmation letters that turned out to be fabricated. The result is heavy penalties and withdrawal of PCAOB registration of the firm. The CEO and the senior auditors of the firm have been suspended from appearing before SEC as accountants.
KNAV’s remark and suggestions:
The above violations have raised an alarm globally, across accounting and audit firms. In our opinion and experience the following practices can help:
- Practice one single mantra, ‘Quality over Quantity.’
- Hold professional ethics at the pedestal and conduct every audit meticulously.
- Train audit staff and keep them up to speed.
- Knowledge Share – Spark discussions in an informal manner among various audit teams around standards and their application.
- Be a part of professional bodies and communities to know best practices.
- Give due regard to long-term reputation than short-term gains.
- Shoulder the responsibility of gatekeepers and highlight lapses.
- Be the independent body that regulators can trust.
Foreign accounting firms also need to be wary of the implications of auditing US domestic issuers. State licensing regulations limit and prohibit non-State licensed foreign accounting firms from auditing US companies. A PCAOB registration does not grant a state accounting license to conduct audits. Those actions and possible litigations on foreign accounting firms will follow the PCAOB enforcement orders.
The buzz around the violations and penalties will not fizzle out soon, and the implications will hamper the profession. However, a little planning, adequate documentation, and a willingness to comply will win the trust back.
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