PCAOB Has Handed Out a Slew of Punishments to Audit Firms Recently

July 28: Plante Moran, BPM, S.R. Snodgrass, Mancera S.C., MSPC CPAs

These five firms were fined and sanctioned by the PCAOB for violating auditing rules and standards related to communications with audit committees. The firms were sanctioned as part of a sweep, which enables the PCAOB to collect information on potential violations from a number of firms at the same time.

“Audit committees play a critical role in helping protect investors, and the PCAOB will hold firms accountable for their part in making sure audit committees are appropriately informed,” PCAOB Chair Erica Williams said in a press release. “Firms must be vigilant in preserving their independence, and part of that means making sure that services performed for issuer audit clients are pre-approved by their audit committees. At the same time, required disclosures are critical to ensure audit committees have the information they need to effectively oversee the auditor’s work.” 

Three of the five firms—BPM (the 35th largest firm in the U.S.), Plante Moran (the 15th largest firm in the U.S.), and S.R. Snodgrass—failed to obtain audit committee pre-approval in connection with providing audit and/or non-audit services to issuer audit clients, in violation of PCAOB Rule 3520, Auditor Independence, and for two of the three firms (BPM and Plante Moran) PCAOB Rule 3524, Audit Committee Pre-Approval of Certain Tax Services. 

The penalties were:

• BPM: $50,000 fine and censure
• Plante Moran: $40,000 fine and censure
• S.R. Snodgrass: $35,000 fine and censure

The other two firms—Mansera S.C. and MSPC CPAs—failed to make and/or document certain communications with audit committees related to the planned participation of other firms and auditors in the audit, as required by AS 1301, Communications with Audit Committees.

Their penalties were:

• Mansera: $40,000 fine and censure
• MSPC: $30,000 fine and censure

Each firm agreed to undertake remedial measures to establish, improve, or comply with revised policies and procedures concerning compliance with PCAOB rules and standards related to these violations. 

Aug. 8: KG Somani & Co.

India-based accounting firm KG Somani & Co. (KGS) was fined $125,000 and engagement partner Anuj Somani was fined $50,000 for violating auditing and quality control standards.

Specifically, the PCAOB found the following: 

• Somani violated PCAOB audit standards during a 2020 issuer audit because he failed to perform all necessary audit procedures prior to the release of KGS’s audit report, failed to adequately document the audit work, and failed to properly supervise the engagement team.
• KGS violated PCAOB quality control standards because, during the time it was conducting the 2020 issuer audit, the firm failed to have policies and procedures relating to performing audits under PCAOB standards or monitoring of its quality control system. 

“When auditors fall short in performance, documentation, supervision, and quality control, they are putting investors at risk, and the PCAOB will take action,” Williams said in a press release. 

The disciplinary order censures KGS and Somani, and it requires KGS to engage an independent consultant to review and make recommendations for the improvement of the firm’s quality control policies and procedures. Somani was also suspended from associating with a registered public accounting firm for one year, and the order restricts his activities for an additional year following the end of his suspension.

Aug. 9: Blue & Co.

Top 60 accounting firm Blue & Co. was fined $75,000 for auditor independence violations during six audits of three company employee benefit plans.

“Auditor independence is essential to an audit firm’s credibility with investors, and the PCAOB will strictly enforce independence rules to keep investors protected,” Williams said in a press release.

The PCAOB found that Blue violated PCAOB auditor independence rules and auditing standards during its 2018 and 2019 audits of three employee benefit plans. Specifically, the firm allowed one of its partners to serve as the engagement partner for those audits immediately after the same individual had served as the engagement quality reviewer or engagement partner during Blue’s 2013-2017 audits of the same three employee benefit plans. Under auditor independence rules, “lead” and “concurring” partners are required to rotate off an engagement after a total of five years in either role and, upon rotation, must be off the engagement for five years.

The PCAOB also found that Blue violated PCAOB quality control standards—lapses that contributed to the partner rotation violations. During the time it was conducting the 2018 and 2019 employee benefit plan audits, the firm failed to implement and monitor adequate policies and procedures to reasonably ensure that its professionals would comply with applicable auditor independence requirements. 

The disciplinary order censures Blue and requires the firm to review and certify its auditor independence policies and procedures.

Aug. 9: Ciro E. Adams, CPA, LLC

Wilmington, DE-based Ciro E. Adams, CPA, LLC and its sole partner, Ciro E. Adams, CPA, were jointly fined $40,000 for rule-breaking.

According to the disciplinary order, Adams served as the engagement partner on four audits during which he and the firm relied too heavily on information generated by, and representations from, audit clients, which violated various PCAOB rules and auditing standards.

Specifically, the PCAOB found that, among other things, the firm and Adams failed to exercise due professional care and skepticism, as well as failed to obtain sufficient appropriate audit evidence with respect to: 

• Testing revenue during the audits of Professional Diversity Network Inc. (PDN) for 2019 through 2021; 
• Testing a significant acquisition during the 2021 PDN audit; and 
• Testing notes receivable and potential related party transactions during the 2020 audit of Alpha Investment Inc.

“This order underscores the diligence with which auditors must test assets and transactions significant to issuers’ financial statements,” Robert Rice, director of the PCAOB’s Division of Enforcement and Investigations, said in a press release. “These respondents relied too heavily—and sometimes exclusively—on management representations and company-prepared materials.”

The disciplinary order censures both Adams and his firm, revokes the firm’s registration, and bars Adams from being an associated person of a registered public accounting firm. The firm may reapply for registration, and Adams may petition to terminate his bar, after two years from the date of the order. Finally, the order requires Adams to complete supplemental continuing professional education prior to submitting any petition to terminate his bar.

Aug. 10: RAM Associates & Co.

Hamilton, NJ-based RAM Associates & Co. and its sole owner and engagement partner Parameswara Ramachandran were jointly fined $150,000 for violating PCAOB rules and standards in connection with multiple audits of two issuer clients, as well as not following quality control standards. 

According to the disciplinary order, RAM Associates and Ramachandran:

• Failed to obtain sufficient appropriate audit evidence in auditing the valuation of an issuer’s goodwill and using the work of a specialist in two audits;
• Failed to timely assemble for retention a complete and final set of audit documentation for two audits;
• Failed to communicate all required matters to an issuer’s audit committee for two audits; and
• Failed to obtain an issuer’s audit committee pre-approval for tax services.

In addition, RAM Associates failed to ensure two audits had engagement quality reviews performed and documented in accordance with PCAOB standards, and the firm did not timely file five Form APs.

The PCAOB also found that the firm’s system of quality control failed to provide reasonable assurance that it would comply with PCAOB standards regarding engagement quality reviews, timely assemble complete and final sets of audit documentation, and sufficiently monitor the effectiveness of the design and implementation of its system of quality control.

“This order highlights the importance of following PCAOB standards when evaluating critical accounting estimates such as goodwill, and the steps auditors must take when using the work of a specialist,” Rice said in a press release.

In addition to the fine, the disciplinary order censures RAM Associates and Ramachandran, revokes the firm’s registration, and bars Ramachandran from being an associated person of a registered public accounting firm. The firm may reapply for registration, and Ramachandran may petition to terminate his bar, after two years from the date of the order.

RAM Associates is also required to undertake certain remedial measures, should it submit a future registration application. These measures include establishing quality control policies and procedures to give the firm reasonable assurance that issuer audits and reviews are conducted in accordance with applicable professional standards.

Aug. 11: BDO Taiwan, Jendrach Accounting and Professional Services, Moore MSLL Lima Lucchesi Auditores e Contadores Ltda.

These three firms received sanctions for failing to report required information to the PCAOB. Specifically, two of the firms—BDO Taiwan and Jendrach Accounting and Professional Services—failed to timely disclose their role in an audit of an issuer or broker-dealer on the PCAOB’s Form 2, Annual Report. Moore MSLL Lima Lucchesi Auditores e Contadores Ltda. was punished for failing to timely report a legal name change on Form 3, Special Report.

Board staff identified the violations as a result of a sweep designed to uncover potential failures to comply with PCAOB reporting requirements.

The sanctions given to the three firms included:

• BDO Taiwan: $35,000 fine and censure
• Jendrach Accounting and Professional Services: $25,000 fine and censure
• Moore MSLL Lima Lucchesi Auditores e Contadores Ltda.: $25,000 fine and censure

“Complete and accurate reporting on required annual reports, and timely reporting of firm legal name changes enable investors to rely on information provided by firms and ensures the board’s ability to oversee registered firms,” Rice said in a press release. “Sweeps enable us to pursue these types of potential violations and will continue to be an important tool in our enforcement arsenal.”