Turning up the temperature on auditors

March 4, 2024 10:00 AM

Courtesy of PCAOB

In 2022 — its first full year under a new chair and with an almost completely new set of board members — the Public Company Accounting Oversight Board increased its enforcement activity significantly and levied record-setting penalties of $11 million.

And then in 2023, it broke those records again.

By mid-November it had issued almost $12 million, with more still come.

"Last year through our enforcement program we imposed the highest penalties in PCAOB history against those who put investors at risk," said Chair Erica Williams during a meeting in mid-November to approve the 2024 budget. "This week we surpassed that record with $11.9 million in penalties against wrongdoers — and the year is not over. Our 2023 penalties are already more than double the total penalties in each of the five years before our record-breaking year in 2022."

And 2024 looks set to be another strong year for enforcement, with the board planning to review more audit engagements, to expand its inspection procedures, and to get its inspection reports out faster.

To get a sense of its inspection and penalty priorities, see the collection below of enforcement actions from the past year or so; for more on how the regulatory environment for accountants, auditors and tax professionals is getting stricter, see our feature story.

December 2022

Alex Kraus/Bloomberg

The board levied sanctions and fines totaling $7.7 million Tuesday against three of KPMG's member firms in the U.K., India and Colombia over violations including failure to cooperate with an inspection, cheating on training exams, signing off on blank work papers, and improper use of an unregistered firm between 2016 to 2021. Along with the fines, the sanctions include barring or suspending four auditors from participating in public company audits and requiring three KPMG member firms to review and improve as necessary their quality control policies and procedures.

The board also censured and levied $165,000 in fines against six auditing firms for failing to disclose information about whether the firms or their employees had been involved in any criminal or disciplinary proceedings on Form 3, which discloses whether a firm or its personnel have been the subject of certain criminal or disciplinary proceedings. The firms included three U.S. firms, Grant Thornton, MaloneBailey and KCCW Accountancy Corp., along with three firms abroad, including a Grant Thornton firm in Brazil.

March 2023

The board levied a $100,000 fine and censured Friedman LLP, a former Top 100 Firm that's now part of Marcum LLP, for failing to reasonably supervise unregistered Chinese firms in audits of a dozen different public companies. The board also found that Friedman violated its standards relating to due professional care, audit planning and quality control in connection with the audits.

April 2023

The board fined Singapore-based RT LLP $50,000 and revoked its registration over a number of issues, including violating quality control and documentation standards in a 2017 audit, and failing to assemble for a retention a final set of audit documents. The firm also failed to timely file Form AP, "Auditor Reporting of Certain Audit Participants," for two audits involving the same client.

June 2023

Joshua Roberts/Bloomberg

The Securities and Exchange Commission charged Top 25 Firm Marcum LLP with systemic quality control failures and violations of audit standards, mainly in connection with its audits of SPAC clients, and imposed a $10 million penalty, while the board simultaneously levied a $3 million penalty against the Top 100 Firm for violating its rules and quality control standards — its largest ever penalty against a firm that isn't part of a global network like the Big Four. The board also required Marcum in a settled disciplinary order to make functional changes to its supervisory structure related to the firm's quality control system.

Separately, the board sanctioned Barzily & Co. CPAs over violations of various board rules and standards, particularly around quality control, censuring the Israel-based firm, fining it $50,000, and requiring it to hire an independent consultant to make recommendations on improving its QC system.

July 2023

The board sanctioned CohnReznick LLP, a Top 25 Firm based in New York, and fined it $20,000 for failing to disclose disciplinary proceedings from the Securities and Exchange Commission within five months as required.

The board also disciplined five auditing firms for violating its rules and standards when communicating with audit committees, part of an overall sweep (where the PCAOB gathers information about potential violations from a number of firms at the same time) that yielded almost $200,000 in fines.

August 2023

Courtesy of PCAOB

The board sanctioned Indiana-based Top 100 Firm Blue & Co. and fined it $75,000 for auditor independence violations, for allowing a partner who had served as the engagement quality reviewer or engagement partner on three employee benefits plans from 2013 to 2017 to then serve as engagement partner on the same audits in 2018 and 2019.

The board also imposed sanctions for the first time ever against an accounting firm, Warren Averett, over auditor independence violations because it's a member of an alliance where another firm, BDO USA, did valuation work for the same client. The board imposed a $200,000 fine against the Birmingham, Alabama-based firm for both auditor independence and quality control violations and required the Top 50 Firm to review and certify its auditor independence policies.

And it sanctioned India-based K G Somani & Co. LLP for various violations, fining it $125,000 and requiring it to engage an independent consultant to help improve its quality control regime.

Mid-month, it sanctioned New Jersey-based RAM Associates & Co. LLC and sole owner and engagement partner Parameswara K. Ramachandran for violations in multiple audits conducted for two issuer clients. The $150,000 penalty covered failing to obtain sufficient appropriate evidence to audit the valuation of a client's goodwill and the work of a specialist in two audits and failing to file five Form APs on time, among other things.

As part of another sweep, three firms were fined a combined $85,000 for failing to comply with reporting requirements.

September 2023

The New York offices of Top 10 Firm BDO USA

Photo: Richard Falco

The board levied a $2 million penalty against BDO USA, the Chicago-based Top 10 Firm, for violating its auditing rules and standards, and sanctioned two of its audit partners as well.

The board also imposed a $900,000 fine on a Deloitte member firm in the South American country of Colombia for violating quality control standards.

October 2023

The board imposed a $175,000 fine on Smythe LLP, a Canadian firm based in Vancouver, for violating its rules and quality control standards on four audits. Smythe used the work of two public accounting firms not registered with the PCAOB — PKF Audisur and PwC Malta — for help with the audits. It also failed to evaluate the professional reputation of the unregistered firms with due professional care, even though it knew the unregistered firms handled over 20% of the total audit hours or incurred more than 20% of the total audit fees.

November 2023

An incredibly busy month for the board, with Somerset CPAs (now a part of CBIZ MHM) sanctioned for failing to maintain an adequate quality control system and fined $100,000, with two partners sanctioned for specific issues related to their work as engagement partners, and another partner sanctioned for issues related to his work as an engagement quality reviewer.

Separately, as a result of a sweep, the board sanctioned six different auditing firms over audit committee communications violations, imposing a total of $255,000 in fines.

PricewaterhouseCoopers Auditing Co. SA, the Greek affiliate of the Big Four firm, was censured and fined $3 million for rules and standards violations connected with its 2016 audit of Aegean Marine Petroleum Network Inc. A partner at the firm was also censured, fined $80,000, and barred for two years from being associated with a registered auditing firm.

The Japanese affiliate of Big Four firm KPMG, KPMG AZSA LLC, was sanctioned for violating quality control standards and fined $500,000.

The board levied $7.9 million penalties against three firms in China, including member firms of PricewaterhouseCoopers that it found were improperly sharing answers to exams after PCAOB inspectors gained full access to the firms.

January 2024

The board announced $590,000 in fines on Top 100 Firm Haynie & Co. and some of its partners as part of a settled disciplinary order, and also sanctioned Jack Shama and his eponymous CPA firm, permanently barring him from working for a registered firm. In the case of Salt Lake City-based Haynie, in addition to the fines, the board is also requiring the firm to engage an independent consultant and is imposing practice limitations and bars on some of the partners.

February 2024

Courtesy of WithumSmith+Brown

The board barred two partners and fined them a total of $165,000: Marcelo de los Santos Anaya and Martin Rodriguez Martinez of San Luis Potosi, Mexico-based Marcelo de los Santos y Cia SC, were cited for failing to follow PCAOB rules and standards in connection with the 2018 and 2019 audits of Mexican steelmaker Grupo Simec SAB de CV. De los Santos, who was engagement partner on the audits, was barred from associating with a registered firm for five years and fined $125,000. Rodríguez, meanwhile, was barred for two years and fined $40,000. He served as engagement quality review on the audits, but didn't identify or properly address the engagement team's "many significant deficiencies," according to the PCAOB.

Separately, it levied a $2 million fine against WithumSmith+Brown, a Top 25 Firm based in Princeton, New Jersey, for violating quality control rules during audits of special purpose acquisition companies. The settled disciplinary order said that between January 2020 and December 2021, Withum accepted a substantial number of SPAC audit clients, and that led to a dramatic increase in its audit practice, but also placed a significant strain on the firm's quality control system.