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:
- The firm and the individual CPA had not complied with the PCAOB quality-control requirements.
- During a routine investigation by the PCAOB, the individual, among other transgressions, had
- “made a months long effort involving other [firm] professionals to alter and backdate audit work papers,”
- “made false statement to the inspectors about whether those work papers had been improperly altered,”
- “misled investigators regarding whether engagement quality reviews (‘EQRs’) were performed,” and
- 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
- the accountants’ failure to provide collateral information relating to the specific identity of the audit firms that did all or part of the work,
- the failure to establish and enforce an appropriate quality-control system, and
- the failure to be honest and forthright when investigated.