PCAOB releases flood of fines and sanctions

November 15, 2023 4:51 PM

Courtesy of PCAOB

The Public Company Accounting Oversight Board released a number of settled disciplinary orders today for a range of violations, and imposed penalties totaling approximately $4 million across nine different firms.

The orders represent only the latest in a recent stream of disciplinary actions by the audit overseer, which has stepped up enforcement activity since Erica Williams became chair in January 2022. (See "PCAOB turns up the heat on auditors.")

Details of the individual sweeps are included below; none of the firms involved either admitted or denied the findings in their orders.

Quality control failures at Somerset

Somerset CPAs PC was sanctioned for failing to maintain an adequate quality control system and fined $100,000.

The board also sanctioned partners Douglas Fahrnow and Rebecca Quintana for specific issues related to their work as engagement partners, and partner Edward McGuire for issues related to his work as an engagement quality reviewer.

For instance, the board said that Farhnow failed to sufficiently evaluate whether amounts recorded by an audit client as revenue based on terminated contracts complied with GAAP, and failed to sufficiently test the company's accounts receivable.

Quintana, meanwhile, failed to sufficiently test goodwill impairment on two different audits, and McGuire failed to exercise due care and professional skepticism on one of Fahrnow's audits, and actually prepared substantive audit workpapers for one of the engagement teams whose work he was reviewing.

"A firm's system of quality control provides the foundation for properly performed audits," said PCAOB chair Erica Williams, in a statement. "Firms will be held accountable for quality control deficiencies — especially when there are repeated failures by firm personnel across multiple audits."

Farhnow faces a penalty of $60,000 and Quintana $40,000; neither may be associated with a registered public accounting firm for at least two years; McGuire's penalty is $30,000, and he cannot be an associated person of a registered firm for at least one year.

Though it was an independent firm at the time of the audits mentioned in the order, Somerset was acquired by CBIZ and Mayer Hoffman McCann in February 2023.

Six firms sanctioned in sweep

As a result of a sweep — where the PCAOB gathers information about potential violations from a number of firms at the same time — the board sanctioned six different auditing firms over audit committee communications violations, imposing a total of $255,000 in fines.

All the firms failed to make specific required communications with audit committees regarding the planned participation of other firms and individuals in the audit, as required by AS 1301.10, "Communications with Audit Committees."

All the firms were censured, and were subject to the following fines:

Cherry Bekaert LLP — $35,000;
Deloitte Audit (Luxembourg) — $50,000;
KPMG (Argentina) — $40,000;
KPMG Auditores Independentes Ltda. (Brazil) — $40,000;
RH CPA — $45,000; and,
UHY LLP — $45,000.

UHY also failed to obtain audit committee pre-approval in connection with providing non-audit services to an issuer audit client, in violation of PCAOB Rule 3520, "Auditor Independence," and PCAOB Rule 3524, "Audit Committee Pre-Approval of Certain Tax Services," while RH CPA also failed to file an accurate Form AP in violation of PCAOB Rule 3211, "Auditor Reporting of Certain Audit Participants."

"The PCAOB is seeing too many instances where auditors fail to comply with rules and standards in communicating with audit committees," said chair Williams in a statement. "Audit committees play a critical role in helping protect investors, and the PCAOB will continue to enforce communications requirements designed to ensure they have the information needed to oversee the auditor's work and ensure independence."

These latest orders came from a sweep that led to sanctions and fines against five other firms in July.

PwC Greece hit for $3M

PricewaterhouseCoopers Auditing Co. SA, the Greek affiliate of the Big Four firm, was censured and fined $3 million for rules and standards violations connected with its 2016 audit of Aegean Marine Petroleum Network Inc.

The board also censured a partner at the firm, Nicos George Komodromos, fined him $80,000, and barred him for two years from being associated with a registered auditing firm.

Despite Komodromos and the firm knowing that an executive at Aegean had a history as a convicted fuel smuggler, and that there was a significant risk of material misstatement due to fraud, the PCAOB said that they failed to respond with due professional care and appropriate professional skepticism to inconsistent evidence related to four of the company's customers.
"Komodromos and the engagement team disregarded and did not resolve inconsistencies from certain contradictory audit evidence about the unusual transactions with the four customers, despite the heightened risks of fraud at Aegean and the engagement team's initial concerns about the transactions," the PCAOB reported. "This contradictory evidence should have been viewed as red flags that raised substantial doubt about management's assertions in Aegean's financial statements related to the four customers' transactions and balances."

The board noted as an example the fact that the PwC Greece engagement team had trouble finding street addresses for the four customers, and later discovered that one of the addresses simply didn't exist, and two of them were for residential apartment buildings — and yet did not respond to the evidence, or even document the attempted site visits.

Besides its penalty, PwC Greece needs to make sure that staff and associated persons involved in PCAOB audits complete extra training regarding board standards, and it also needs to have its audits reviewed in an advance by a third party for the next two years.

"We are pleased to resolve this matter from six years ago," PwC Greece said in a statement emailed to Accounting Today. "We cooperated fully with the PCAOB during their investigation, and we accept and are already enacting the remedial measures described in the PCAOB's order. Our No. 1 priority is the quality of our work, and we continue to invest significantly to enhance our audit quality."

"While PwC Greece's work ultimately helped uncover the fraud at Aegean Marine Petroleum Network Inc.," the statement continued, "we fully accept that we should have asked more questions and conducted the audit for the financial year 2016 differently. The audit opinion that we issued for the financial year 2016 did not meet the standard that we set for ourselves and that our stakeholders expect. In the years since the Aegean audit, we have taken a number of substantial steps to enhance our audit quality, including significant additional investment in the technology to develop the audit of the future. In addition, we have put in place additional training and oversight to learn from this matter."

KPMG AZSA in Japan

The Japanese affiliate of Big Four firm KPMG, KPMG AZSA LLC, was sanctioned for violating quality control standards and fined $500,000.

From 2019 through 2021, the board reported, KPMG Japan's policies and procedures didn't provide reasonable assurance that firm personnel were conducting sufficient testing of journal entries.

In addition, the firm failed to adequately monitor its quality control systems.

"Firms' systems of quality control are critical to ensuring that their personnel comply with PCAOB auditing standards," said Robert Rice, director of the PCAOB's Division of Enforcement and Investigations, in a statement. "When those systems are inadequate, audit quality suffers, and firms can expect to be subject to disciplinary action."

Besides the fine, KPMG Japan has to review and evaluate its policies and procedures around journal entry testing and submit a report on them to the DEI.