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Public Company Accounting Is Serious Business

Edward A Marod


  • Accounting firms must register with the PCAOB to qualify to issue an audit report for a public company, other issuer, or a broker-dealer, or to play certain roles in those audits.
  • The PCAOB sanctioned two firms for noncompliance with the quality-control rules and the filing requirements under PCAOB Rule 3211.
  • Accounting firms should think carefully about entering the auditing market for public companies.
Public Company Accounting Is Serious Business
Kobus Louw via Getty Images

We all know that failure to comply with the auditing standards can result in the issuance of materially misstated financial statements that can form the basis of litigation against accounting firms and their clients. However, even in the absence of material misstatements in the financial statements, an audit firm’s failure to comply with the Public Company Accounting Oversight Board (PCAOB) and American Institute of Certified Public Accountants (AICPA) quality-control standards has its own potential negative ramifications, including fines, revocation of registration, and orders prohibiting practitioners from being employed by registered firms. Fines can be costly. Revocation of registration can eliminate the firm’s public-company practice. Orders prohibiting a practitioner from being employed by a registered firm can destroy a career. Two recent orders of the PCAOB illustrate these risks.

Accounting firms must register with the PCAOB to qualify to issue an audit report for a public company, other issuer, or a broker-dealer, or to play certain roles in those audits. Once registered, the firms are required to comply with the PCAOB auditing and related professional-practice standards, which include quality-control standards. The quality-control standards require the firms to have a system of quality control for their accounting and auditing practice that “encompasses the firm’s organizational structure and the policies adopted and procedures established to provide the firm with reasonable assurance of complying with professional standards.” PCAOB QC § 20.04. The policies and procedures should encompass all elements of quality control, including independence, integrity, objectivity, personnel management, client acceptance and continuance of client engagements, performance of those engagements, and monitoring. Id. § 20.08. And the firm should prepare appropriate documentation to demonstrate compliance with its policies and procedures for this system. Id. § 20.25. Registered firms are also required to file specific forms with the PCAOB within a short time after filing any report with the Securities and Exchange Commission. Failing to do so, failing to do so accurately, and failing promptly to correct any such form filed inaccurately all expose the firm and the involved professionals to sanctions.

The recent PCAOB orders—In re Spielman Koenigsberg & Parker, LLP, PCAOB Release No. 105-2022-024, and In re Jonathan B. Taylor, CPA, PCAOB Release No. 105-2022-025—were against a New York accounting firm and one of its partners. The accounting firm registered with the PCAOB in 2006. The audits in question were performed for two related clients that were issuers as that term is defined in the Sarbanes-Oxley Act of 2002 as amended. The two issuers were the only issuer clients the firm had ever audited. The firm audited the financial statements of these two related clients for the years ended December 31, 2015, through 2020. In October 2022, the PCAOB censured the firm, revoked the firm’s registration, imposed a $150,000 civil penalty, and required it to undertake remedial measures concerning quality control and training directed toward satisfying requirements applicable to audits and review of issuers before filing, and also to provide evidence of such measures with any future registration application. In addition, the individual certified public accountant (CPA) who had served as the engagement partner for the relevant audits and who had served as the firm’s partner in charge of technical and quality review was censured, barred from being associated with any registered public accounting firm, and hit with a civil penalty of $150,000. The civil penalty is the largest civil penalty against an individual imposed by the PCAOB.

The PCAOB based these sanctions entirely on noncompliance with the quality-control rules and the filing requirements under PCAOB Rule 3211. The sanctions were justified because of the following:

  1. The firm and the individual CPA had not complied with the PCAOB quality-control requirements.
  2. During a routine investigation by the PCAOB, the individual, among other transgressions, had
    1. “made a months long effort involving other [firm] professionals to alter and backdate audit work papers,”
    2. “made false statement to the inspectors about whether those work papers had been improperly altered,”
    3. “misled investigators regarding whether engagement quality reviews (‘EQRs’) were performed,” and
    4. stated that document productions were complete “while withholding thousands of responsive documents.”

These orders tell us that accounting firms should think twice about entering the auditing market for public companies because the cost in professional time of creating, monitoring, and enforcing a PCAOB-compliant code of conduct is substantial and may not be justifiable absent a substantial number of such audit clients, especially in view of:

  • the fact that the PCAOB is getting serious about enforcing its code of conduct; and
  • the fact that audits of public companies, other issuers, broker-dealers, and others within the jurisdiction of the PCAOB are not finished until all of the required paperwork, including Form APs and EQRs, is done correctly and on time.

There was no hint in either of these orders that the financial information in the audit reports in question was misstated at all. Instead, the PCAOB found that the interests of investors and the public interest in the preparation of informative, accurate, and independent audit reports was violated by

  1. the accountants’ failure to provide collateral information relating to the specific identity of the audit firms that did all or part of the work,
  2. the failure to establish and enforce an appropriate quality-control system, and
  3. the failure to be honest and forthright when investigated.