Archives: PCAOB Enforcement

The PCAOB adopted two attestation standards relating to auditors’ examinations and reviews of broker-dealer compliance and examination reports and adopted an auditing standard for the audits of supplemental information that broker-dealers file with the SEC.

The preparation by broker-dealers of compliance or exception reports are new requirements that were added by the SEC when it adopted amendments to Securities Exchange Act of 1934 Rule 17a-5 on July 30, 2013.  The PCAOB’s standards are subject to approval by the SEC.  If approved, the effective dates with the Rule 17a-5 effective dates for fiscal years ending on or after June 1, 2014.  The PCAOB has seen significant compliance problems under the existing standards through its interim inspection program.  The PCAOB plans to adopt conforming rules to reflect the changes relating to broker-dealer audits.

Broker-dealer auditors should be prepared for these changes.

The PCAOB issued a policy statement regarding its enforcement investigations, in that it will consider extraordinary cooperation, including voluntary and timely self-reporting, remedial or corrective action, and providing substantial assistance during the investigative process.  This type of cooperation may result in reduced charges and/or sanctions.  The settlement documents may also indicate the cooperation, or there may be no disciplinary action at all.

The PCAOB believes this policy will encourage firms and associated persons to self-report, correct and remediate.  Although the PCAOB, generally, requires cooperation, the form of cooperation must be greater, and may include discovery of potential violations earlier and conclude investigations sooner.  However, the PCAOB is the final arbiter of the meaning of cooperation, and it will also consider the conduct of supervisors, management, and associated persons.  In particular, it will look at supervision and training before acknowledging cooperation.

In sum, the PCAOB is following other agencies on the subject of cooperation.

Two Senators introduced a bill that would make disciplinary proceedings of the Public Company Accounting Oversight Board open to the public. 

According to the lawmakers, the Sarbanes-Oxley Act of 2002 made the PCAOB proceedings confidential through charging, hearings, initial decision, and appeal.  Unfortunately, the secretive nature of the process enables firms that engage in misconduct to drag out the proceedings for years while the investing public is kept in the dark.  The new bill would make the PCAOB proceedings available to the public, similar to proceedings before other regulators such as the Securities and Exchange Commission. 

Openness is a good thing, hopefully, this legislation might see the light of day.

In early December, the PCAOB issued a release indicating that accounting and auditing professionals need to be skeptical regarding their work.

The PCAOB is suggesting that professionals in the accounting and auditing profession must be critical of their oversight responsibilities with their clientele.  Regulators expect them to continue to exercise that skepticism in their judgments as they work through audits and other accounting functions.  If such skepticism is missing, the PCAOB seems to infer that there could be consequences.

Accordingly, PCAOB is watching for this skepticism, auditors and accountants exercise it.

Accountants beware – prison lurks.

Recently, a certified public accountant and auditor was sentenced to 54 months in prison for his role in a nearly half-billion dollar investment scam that impacted over 3,500 investors.  In the sentencing, the court indicated accountants and auditors are gatekeepers of our financial system, and must protect that system and those who are relying upon it for their well-being.  The court then went on to imposing a sentence of nearly 5 years in prison.

Accountants and CPAs need to be aware of these issues, and must be assertive with their clients to ensure their own security and the well-being of the investing public.

The SEC is extremely concerned about foreign auditors.

In particular, the SEC is worried that those who work in certain European countries and in China are not subject to auditor requirements or the PCAOB.  Essentially, the SEC is concerned over the lack of US oversight over these foreign auditors.  Further, the SEC is concerned about if their audit reports provide accurate information for investors.

Although the SEC has not indicated enforcement action, it is considering if it should instruct the  PCAOB to engage in further regulation of these entities and their issuers.  See http://WWW.SEC.GOV/NEWS/SPEECH/120312LAA.HTM

We have repeatedly stated that auditors are significant players in today’s securities industry.  No other than the SEC has made this point on numerous occasions.  Recently, the SEC brought this fact home with the filing of administrative proceedings against two auditors.  See http://www.sec.gov/litigation/admin/2013/34-68605.pdf.

The SEC claimed these individuals failed to follow professional standards in reviewing valuations derived from management.  These auditors failed to properly review suspect real estate loans.  The SEC said these auditors, basically, “rubber-stamped” the material it received from management.  As such, the SEC charged these auditors with several violations of PCAOB standards.

There is no doubt that auditors must improve their reviews regarding valuations or face the SEC’s wrath.

We have not talked about the Sarbanes-Oxley Act in sometime, so let’s jump right in!! 

Interestingly, over the last 10 years since Sarbanes-Oxley became effective, audit costs for public and private companies have increased significantly.  We recently came across a survey published by Financial Executives International, indicating, that these fees increased somewhat over the last 10 years.  Additionally, the vast majority of those polled by the survey did not support the PCAOB’s mandatory audit rotation plan, stating that it would increase costs significantly. 

In reporting troubling results, the survey stated that only 37% of private companies had risk management processes in place.  That means a significant majority of private companies could be at risk.  One wonders if this leads to trouble in the future.

Finally, there was some positive aspects of the survey.  The report found that those companies with centralized operations on both the public and private level saved money in audit fees as opposed to those who had decentralized operations. 

The SEC’s Chief Accountant announced that a number of companies may be unaware they fall under the disclosure requirement for Emerging Growth Company status under the JOBS Act. 

As a result of this status, the JOBS Act requires these companies to disclose such a status in their public filings with the SEC.  This disclosure and the resulting status has impacted both the accounting and auditing sides of the business, requiring these companies to act accordingly.  The SEC has also issued Frequently Asked Questions guidance to address these requirements and status under the JOBS Act.  Further, the PCAOB will also be limited in requiring mandatory audit rotation for these Emerging Growth Companies.

In short, the JOBS Act is still a work in progress, and it will be interesting to see its long-term applications on the public filings of these Emerging Growth Companies.

The SEC Enforcement Division’s chief accountant has gone on record as saying that, in every SEC accounting case, the SEC Staff reviews auditor conduct. 

The chief accountant stated that the SEC Staff looks at improper revenue recognition; understated expenses; financial crisis related accounting issues regarding loans and securities; as well as cross-boarder issues.  These reviews are done in conjunction with the PCAOB, and said auditor reviews are ongoing.  

This is not new news or should not come as a shock to anyone.  The SEC is always looking at the potential for bringing an auditor into an action when there is an investigation of any form of financial fraud.  As a result, auditors should respond carefully to any SEC inquiry.