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ARTICLE

A New PCAOB Board Sets New Enforcement Priorities

Robert Haymes Cox

Summary

  • After four years of lower enforcement activity, PCAOB enforcement experienced a significant uptick in 2022 in terms of both the number of settled orders made public and the amount of civil monetary penalties assessed.
  • In 2022, the PCAOB assessed civil monetary penalties in 100 percent of its settled orders, for a record total of $11 million.
  • Noncooperation with inspections continues to be an enforcement priority.
  • Quality control is a renewed enforcement priority.
A New PCAOB Board Sets New Enforcement Priorities
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In November 2021, the U.S. Securities and Exchange Commission (SEC) appointed four new members, including Chair Erica Y. Williams, to the five-member Public Company Accounting Oversight Board (PCAOB or Board). (Duane DesParte, who was appointed to the Board in 2018, was the only Board member to survive the SEC’s 2021 housecleaning.) Similar to the SEC, the Board has taken a more vigorous approach to enforcement of Board rules and PCAOB auditing standards. Throughout 2022, the new Board took significant steps to overhaul the enforcement program and to establish new priorities leading to levying record civil monetary penalties totaling $11 million. The Board has signaled through its increased enforcement activity and significantly higher monetary penalties that there is a new sheriff in town.

2022 Brought Tougher Enforcement

After four years of lower enforcement activity, PCAOB enforcement experienced a significant uptick in 2022 in terms of both the number of settled orders made public and the amount of civil monetary penalties assessed. In 2022, the PCAOB made public 41 settled orders and one adjudicated disciplinary order. PCAOB also announced five orders terminating a bar of an accountant, which are not included in the 41 settled disciplinary orders. See In re Hyung Seung Lee, PCAOB Rel. No. 105-2022-008 (May 24, 2022); In re Gale Moore, PCAOB Rel. No. 105-2022-018 (Sept. 27, 2022); In re Alexandria Yi, PCAOB Rel. No. 105-2022-023 (Oct. 4, 2022); In re Marco Aurélio Paulino Neves, PCAOB Rel. No. 105-2022-016 (Aug. 29, 2022); In re Susan Lunn Powell, PCAOB Rel. No. 105-2022-030 (Nov. 30, 2022).

In contrast, 2018 through 2021 were years marked by a significant drop in the number of settled orders from a high of 54 settled orders made public in 2017. The PCAOB made public 20 settled orders in 2018, 30 settled orders in 2019, 17 settled orders in 2020, and 21 settled orders in 2021.

Year Number of Orders
Audit Failure Deficient Quality Control
Non-Cooperation Form Filing
Termination of Bar
2020 12 6 1 5 4
2021 17 7 2 3 1
2022 27 14 8 15 5

 

In public speeches, Williams and enforcement staff have signaled their intent to strengthen enforcement going forward. Where the bar used to be a single act of reckless conduct or multiple acts of negligent conduct, Williams has noted that “a single, serious wrongful act, whether reckless or negligent,” can be “serious enough to put investors at risk.” Press Release, PCAOB Chair Williams Delivers Remarks at CII Fall Conference (Sept. 22, 2022) (transcript of Williams’s remarks) (“For any violation of PCAOB standards that is serious enough to put investors at risk, the excuse that ‘it only happened once’ simply won’t cut it. We will not hesitate to bring cases that hinge on only a single, serious wrongful act, whether reckless or negligent.”).

SEC Commissioner Hester M. Peirce has raised concerns that such an approach to enforcement “could devolve quickly into bringing enforcement actions for minor infractions.” Statement, Hester M. Peirce, Comm’r, Pub. Co. Acct. Oversight, Bd., PCAOB’s Ballooning Budget (Dec. 23, 2022). Both the SEC and PCAOB have recently conducted several “sweep” investigations in an effort to identify patterns that result in violations. “Sweeps” enable the PCAOB to get “additional information from a number of firms at the same time on areas where [the PCAOB] suspect[s] that violations may be occurring.” Press Release, supra. Sweep investigations are likely at the top of Peirce’s concerns.

Some key takeaways from the 2022 settled orders include the following:

  • Both firms and individuals settling enforcement matters with the PCAOB paid on average over 300 percent more in civil monetary penalties than in 2021.
  • There was a continued focus on violations of Board processes (e.g., noncooperation with inspections due to improper alteration and/or backdating of audit work papers).
  • There was a continued focus on cross-border audits and non-U.S. firms.
  • There was a renewed focus on quality-control violations (e.g., KPMG exam cheating case).

More of the same is expected going forward.

High Civil Monetary Penalties

In the past, the PCAOB has been criticized for assessing civil monetary penalties that were considered modest. In September 2019, the Project on Government Oversight (POGO) published an analysis criticizing PCAOB enforcement and civil monetary penalties. POGO noted that only $6.5 million in civil monetary penalties had been assessed against Big Four accounting firms from 2003 to 2019 and that auditors at Big Four firms were fined only $40,000 during that same period. Ellen Graper, PCAOB on Pace for Record Year of Financial Penalties, Acct. Today (Aug. 19, 2022). Furthermore, in 2020, civil monetary penalties totaled only $1.5 million; and in 2021, only $1.1 million.

However, in 2022, the Board assessed civil monetary penalties in 100 percent of its settled orders, for a record total of $11 million. Press Release, Pub. Co. Acct. Oversight Bd., PCAOB Chair Williams Remarks on 20th Anniversary of Sarbanes-Oxley Act and Establishment of the PCAOB (July 28, 2022) (transcript of Williams’s speech to the Council of Institutional Investors). Of the $11 million, $10.1 million was from firms and $900,000 from individuals. Small firms were hit the most, with an increase in average civil monetary penalties close to 200 percent from 2021 to 2022, compared to less than a 70 percent increase for large firms. (Large firms include those on the 2022 Annually Inspected Firms, a list published by the PCAOB and its foreign affiliate.)

Total penalties imposed against individuals more than quadrupled, and the PCAOB twice assessed record-high civil monetary penalties against an individual in 2022: a civil monetary penalty of $100,000 against an individual in April 2022 and a civil monetary penalty of $150,000 against an individual in October 2022. In re Scott Marcello, CPA, PCAOB Rel. No. 105-2022-004 (Apr. 5, 2022) ($100,000 penalty against a former vice-chair of KPMG LLP for failure to supervise); In re Jonathan B. Taylor, CPA, PCAOB Rel. No. 105-2022-025 (Oct. 18, 2022) ($150,000 penalty against a partner of a small firm for noncooperation involving altering and backdating audit work papers).

Higher civil monetary penalties raise heightened concerns for small firms and their associated persons. In five orders in 2022, the PCAOB considered the financial resources of the respondents in imposing a lower civil monetary penalty. In re KPMG Inc., Cornelis Van Niekerk, & Coenraad Basson, PCAOB Rel. No. 105-2022-015 (Aug. 29, 2022) (one individual); In re Hall & Co. Certified Pub. Accts. & Consultants, Inc. & Anthony J. Price, CPA, PCAOB Rel. No. 105-2022-029 (Nov. 3, 2022) (firm had ceased operations); In re José Daniel Meléndez Giménez, PCAOB Rel. No. 105-2022-035 (Dec. 6, 2022); In re Edgar Mauricio Ramírez Rueda, PCAOB Rel. No. 105-2022-036 (Dec. 6, 2022); In re Marco Alexander Rodríguez Ramírez, PCAOB Rel. No. 105-2022-037 (Dec. 6, 2022). However, the PCAOB provides little guidance as to when and how the Board takes into account the financial resources of a firm or individual in assessing the respondent’s ability to pay and determining whether the civil monetary penalty should be reduced.

Continued Focus on Violations of Board Processes

Noncooperation with inspections continues to be an enforcement priority. The largest civil monetary penalty of 2022 was a $4 million fine sanctioning KPMG’s Colombia affiliate for noncooperation with a PCAOB inspection. In re KPMG, S.A.S., PCAOB Rel. No. 105-2022-034 (Dec. 6, 2022). The firm was required to complete undertakings to improve its system of quality control, engage an independent consultant, and agree to admissions in the settled order.

The PCAOB has recently focused on firms’ use of an unregistered firm in a substantial role in an audit.

The PCAOB also conducted enforcement sweeps against firms who failed to timely file Form AP (seven orders) and Form 3 (six orders).

Continued Cross-Border Audit Enforcement

The PCAOB continues to focus on non-U.S. firms. Over half of the 41 settled orders in 2022 (22 orders) and the sole adjudicated disciplinary order involved foreign firms and individuals. Of the $11 million civil monetary penalties that the PCAOB imposed in 2022, $9.7 million was against foreign registered firms and their associated persons.

In December 2022, the PCAOB announced that it secured complete access to inspect and investigate registered public accounting firms in mainland China and Hong Kong. With this new access, the PCAOB’s Division of Enforcement and Investigations (DEI) likely will be pursuing more investigations of Chinese auditors going forward.

Renewed Focus on Deficient Quality Controls

Quality control is a renewed enforcement priority. PCAOB inspectors have been increasingly focused on accounting firms’ systems of quality control, and 2022 saw an increase in enforcement activity in this area. In 2022, 14 orders involved quality-control violations, including seven against foreign affiliates of Big Four accounting firms—compared to seven orders in 2021, of which two were against foreign affiliates of Big Four accounting firms. The Board’s orders require the firms to increase their quality-control systems, in addition to paying monetary penalties.

Conclusion

In 2022, the DEI focused on significant audit failures, quality control, audit integrity, and compliance; and both large and smaller firms and their associated persons faced substantially higher civil monetary penalties in settling enforcement investigations. These trends have been continuing throughout 2023 and are expected to continue in 2024.

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