PCAOB fines Withum $2M for SPAC audit violations

The Public Company Accounting Oversight Board levied a $2 million fine against WithumSmith+Brown, a Top 25 Firm based in Princeton, New Jersey, for violating quality control rules during audits of special purpose acquisition companies.

The PCAOB posted a settled disciplinary order Wednesday saying that between January 2020 and December 2021, Withum accepted a substantial number of SPAC audit clients, and that led to a dramatic increase in its audit practice, but also placed a significant strain on the firm's quality control system. Smaller auditing firms got a boost from SPACs in recent years, according to a report released last year by Audit Analytics, as the Securities and Exchange Commission began cracking down on them as a way for companies to go public by merging with a shell company without undergoing the traditional route of an initial public offering. 

In 2021, for example, Withum's issuer audit practice increased nearly 500%, from approximately 80 audit reports to close to 450. However, the number of partners assigned to SPAC audits increased by only 50% (from 15 to 23). According to the PCAOB, Withum's quality control system failed to provide reasonable assurance that its personnel complied with applicable professional standards and regulatory requirements, including those related to appropriately staffing issuer audits.

"Growth must not come at the expense of quality," said PCAOB chair Erica Williams in a statement Wednesday. "The PCAOB will hold firms accountable for upholding quality control systems that protect investors." 

Accounting Today reached out to Withum for a response. "Audit quality is, and always has been, a cornerstone of our firm," Withum said in a statement. "Withum is committed to its public company practice and will continue to work collaboratively with the profession's regulators to deliver audits of the highest quality."

The PCAOB said Withum's system of quality control failed to provide reasonable assurance that the firm would undertake only those issuer engagements that it could reasonably expect to be completed with professional competence and appropriately consider the risks associated with providing professional services in the particular circumstances. Withum needed to ensure its partner workloads were manageable to allow enough time for engagement partners to do their responsibilities with professional competence and due care. The firm also failed to ensure its people were consulting with individuals within or outside the firm, when appropriate, when dealing with complex issues, according to the PCAOB. It also didn't perform sufficient procedures to test estimates, including sufficiently evaluating the reasonableness of certain significant assumptions underlying the estimate, nor make all the required communications to the audit committees at public companies. Withum needed to perform sufficient procedures to determine whether certain matters were critical audit matters, as well as perform sufficient procedures to test journal entries; and timely and accurately file the required Forms AP, Auditor Reporting of Certain Audit Participants.

The firm settled with the PCAOB, without admitting or denying the findings, and agreed to a disciplinary order imposing a $2 million penalty on the firm and requiring Withum to engage an independent consultant who will review and make recommendations concerning the firm's quality control policies and procedures. Withum is also required to train all its audit staff.

"Today's order should serve as a stark reminder that firms must have both the staff and necessary expertise to perform the audits they agree to perform," said Robert Rice, director of the PCAOB's Division of Enforcement and Investigations, in a statement. "If they do not, we will hold them accountable for those failures."

The PCAOB has been increasing its enforcement efforts in recent years under the board members like Williams who were appointed during the Biden administration. On Tuesday, the PCAOB also announced penalties and sanctions against a number of other prominent firms, including Baker Tilly US, Mazars USA and Grant Thornton's member firm in India.