Inadequate penalties incentivize malpractice in auditing

In the world of high-stakes auditing, where billions of dollars and the trust of countless stakeholders hang in the balance, one might expect rigorous oversight and severe consequences for those who fail to uphold the profession's highest standards. However, the reality is far from this ideal.

In recent episodes of The Accounting Podcast, my co-host David Leary and I delved into the disturbing cases of Gries and Associates and BF Borgers CPA PC. These relatively unknown firms audited multibillion-dollar companies, one of which turned out to be a fraud. The other is Donald Trump's social media company, which has gained attention for other reasons. These two firms have had multiple deficiencies identified across different inspections. These cases highlight the alarming lack of oversight and accountability in auditing, which allows substandard practices to persist and undermines public trust in the profession.

The auditing profession's current system of regulation and limited consequences for malpractice has created an environment where firms like Gries and Associates and BF Borgers can engage in substandard audits without facing meaningful repercussions, undermining the integrity of the entire profession. These are not isolated incidents but symptoms of a deeper problem that demands our attention and action.

Gries and Associates: A glaring example of inadequate oversight

The case of Gries and Associates auditing Tingo, a fraudulent, multibillion-dollar company, raises serious questions about the credibility and capability of small firms handling large-scale audits. When David and I first came across this story, we were stunned by the audacity of the situation.

Consider the following:

• A multibillion-dollar company, Tingo, entrusted its audit to Gries and Associates, a firm with only one CPA listed on its website. On a form filed by the firm, they listed five accountants, of which two were CPAs.
• Tingo turned out to be a fraud. Gries failed to detect and report any irregularities over two years of audits for 2021 and 2022.
• The auditing profession's regulatory bodies did not intervene or question the capacity of Gries and Associates to handle such a significant audit.
• After issuing a disciplinary order, the Public Company Accounting Oversight Board revoked the registration of Gries & Associates, but the firm may reapply after one year. 
• The PCAOB also issued a joint fine of $65,000 on the firm and the founder, Blaze Gries.
• But that's not much money in the world of accounting firms. According to an SEC filing, it appears that Gries' audit fees for the 2021 audit were $120,000 and $195,000 for the 2022 audit.

These points underscore the glaring inadequacies in the current oversight mechanisms within the auditing profession. If a single CPA firm can take on a multibillion-dollar audit without triggering any alarms, it begs the question: Who is watching the watchmen? And if the penalties are so small in value and short in duration, does it deter other bad actors?

Disciplinary actions against BF Borgers: A slap on the wrist

In addition to the Gries and Associates case, the PCAOB inspection reports and disciplinary actions against BF Borgers, the auditor of Trump's social media company, reveal a pattern of substandard audits and insufficient consequences for apparent malpractice. As we dug deeper into the case, the evidence of the firm's negligence became increasingly apparent.

Chris Vanover, president at CPA Club, provided an in-depth analysis of BF Borgers' deficiencies, the PCAOB's findings, and disciplinary actions. The findings were nothing short of astonishing. Vanover points out that, "The PCAOB inspected nine issuer audits (all different companies) in 2019 and found that eight had Part 1A deficiencies. In other words, they didn't have sufficient audit evidence to render the opinion they did at the time they did." And the deficiencies got worse in subsequent inspections. The PCAOB found deficiencies in 10 out of 10 audits for 2021. They found deficiencies in 11 out of 11 audits for 2022, the most recent inspection year.

Let that sink in for a moment. Twenty-nine out of 30 audits inspected by the PCAOB had significant deficiencies, indicating a systematic failure to adhere to professional standards. One would expect such a poor track record to result in severe consequences, right? Wrong.

Despite the high rate of deficiencies, a ban from accepting new clients in Canada, and getting kicked out of the AICPA Peer Review Program, until recently BF Borgers only faced a $5,000 fine from the State of Colorado (see below). This slap on the wrist is hardly commensurate with the gravity of the firm's misconduct and its potential impact on the financial markets and investors.

This sends a dangerous message to other auditors: You can cut corners, fail to obtain sufficient evidence, and issue opinions based on incomplete information, and the worst you'll face is a minor fine. When firms can get away with substandard practices without facing meaningful consequences, it erodes public trust in the integrity of financial reporting and the role of auditors as gatekeepers.

SEC charges BF Borgers: A step in the right direction

Just as this article was set to be published, the Securities and Exchange Commission announced charges against BF Borgers and its owner, Benjamin F. Borgers, for "deliberate and systemic failures" to comply with auditing standards in over 1,500 SEC filings from January 2021 through June 2023. The SEC's order paints a damning picture of misconduct: fabricating audit documentation, falsely claiming audits complied with standards, and wholesale failure to obtain required engagement quality reviews or properly supervise audit work.

BF Borgers agreed to pay a $12 million penalty to settle the charges, while Benjamin Borgers will pay $2 million. Both also consented to permanent suspensions from appearing or practicing before the SEC as accountants.

These penalties are much more substantial than the wrist-slap fines and temporary practice restrictions previously imposed on BF Borgers by other regulators. The SEC's action is a positive step towards accountability. However, it still falls short of what's needed to deter auditor misconduct and restore trust in the profession.

While $2 million is a significant sum, how does it compare to the fees Borgers personally collected from the tainted engagements over multiple years? It's certainly possible that Borgers will still come out ahead financially. The lack of criminal penalties and the fact that Borgers can settle without admitting wrongdoing sends a troubling mixed message. In other industries, white-collar criminals whose schemes impact thousands of people and entities often face incarceration, not just fines and professional sanctions.

The need for meaningful consequences and stronger oversight

The consequences for substandard audits are inadequate. Firms can prioritize profits over quality without facing meaningful repercussions. We need a fundamental shift in accountability to restore trust in auditors and ensure they fulfill their role as gatekeepers of financial integrity. 

This must include:

• More stringent penalties for malpractice, including substantial fines, suspensions, and the permanent revocation of licenses for repeated or egregious violations.
• Increased frequency and scope of PCAOB inspections to promptly identify and address substandard practices.
• Greater transparency in the disciplinary process, with public disclosure of findings and penalties to deter others from engaging in similar misconduct.
• A re-evaluation of the primarily self-regulatory model, with consideration given to external oversight and accountability measures.

There are also specific actions the PCAOB could take now to bring transparency to buyers and audit committees. Chris Vanover made the following recommendations in CPA Club's comment letter to the PCAOB regarding the proposed Rule 2400, which aims to promote transparency, maintain accurate registration information, and improve its regulatory processes:

• A registered public accounting firm must prominently include on its website and/or its equivalents a direct link to the PCAOB's summary page for its firm.
• A registered public accounting firm must prominently disclose on its website and/or its equivalents and in any issuer proposals a historical summary table of the results of its three most recent PCAOB inspection reports, where applicable, including the number of Part I.A. deficiencies, the percentage of Part I.A. deficiencies in comparison to the number of audits selected for review, the number of Part I.B. deficiencies, and the number of Part I.C. deficiencies.
• A registered public accounting firm must include an additional required communication to audit committees under AS 1301 and, within any issuer proposal, a disclosure as to whether the firm has been notified or believes itself to be in violation of this proposed new PCAOB Rule 2400.

By implementing these changes, we can create a regulatory environment that prioritizes audit quality, holds auditors accountable for their actions, and restores public trust in the profession.
For more on the Gries and Associates and BF Borgers cases and their implications for the auditing profession, listen to Episodes 378 and 379 of The Accounting Podcast. Share your thoughts, experiences, and ideas for reform. Together, we can work towards a future where the auditing profession is synonymous with integrity, accountability, and unwavering commitment to the public good.