Fresh off the PCAOB’s published naughty list, BDO USA and partners Kevin Olvera and Michael Musick got sent to the punishment corner for violations of PCAOB rules and audit standards in connection with the audit of AAC Holdings, Inc. (“AAC”) for 2017. Specifically, audit partner Olvera failed to properly evaluate three significant estimates that AAC used to value substantially all of its client-related revenue and accounts receivable and Musick, who was not the engagement partner but somehow got dragged into this mess anyway, failed to exercise due professional care when performing an engagement quality review of the audit, accepting the engagement team’s judgments related to the evaluation of the significant estimates instead of identifying the deficiencies in the audit work.
PCAOB:
These failures occurred despite BDO, Olvera, and Musick encountering several red flags that called into question the reasonableness of the estimates. For example, BDO, Olvera, and Musick were aware that PCAOB inspectors had found deficiencies in the procedures performed to test one of the same estimates during BDO’s audit of AAC for 2015, yet the procedures performed during BDO’s 2017 audit of AAC failed to adequately address those deficiencies.
The involved parties did not admit or deny the PCAOB’s findings but graciously consented to the PCAOB’s order. Said order censured the firm (side note: why does the PCAOB insist on capitalizing “Firm” in news releases) and imposed a $2,000,000 civil money penalty. That’s a biggun, almost 20% as much as ALL PCAOB monetary penalties combined in 2022.
Olvera scored himself a $35,000 civil penalty and will be limited on the kind of audit work he can do for the next year while Musick received a penalty of $25,000. Both are required to complete 20 hours of CPE in addition to the hours required to maintain any professional licenses.
“PCAOB standards call for auditors to evaluate and respond appropriately to the significant risks they encounter during an audit,” said Robert E. Rice, Director of the PCAOB’s Division of Enforcement and Investigations. “The Respondents here repeatedly failed to meet these and other obligations, to the detriment of the investing public.”
Full PCAOB order here (PDF)
PCAOB Sanctions BDO USA, P.C. and Two of Its Partners for Violations of PCAOB Rules and Audit Standards [PCAOB].
Why do we let corporations pick their auditors? Why do we have only four big firms instead of a dozen, a score or more? Why doesn’t government do the audits, as the IRS does tax audits? Why is law enforcement handcuffed by inadequate budgets and rules that hinder investigations? Why are auditors allowed to quietly resign instead of being required to blow the whistle? Auditing needs a shakeup, fundamental restructuring and the accounting firms need a serious debate about their failings, practical and moral. [
Technically from reading the order Olvera was also not the partner. He was only the focus consultant reviewer for the areas.
Since 2002, when the PCAOB opened up shop, it levied $4.5 million in CMPs against the US arms of the Big Four (BF). $2 million is 44.4% of this. Is BDO such a big threat to the capital markets as to merit what appears, by PCAOB standards to be a massive fine?
The company in question, AAC holdings was small. It had about $318 million in sales, $428 million in assets, $136 million in equity and a $190 million market cap. No giant. At least the PCAOB acted against the firm and the partners as opposed to ignoring say E&Y in the Lacetti case.
We’ll see if the PCAOB finds some bigger fish to fry amongst Fortune 100 companies audited by the BF>
Chumpchange.
An hour in the naughty corner would be a bigger punishment.
It’s probably only a little more than the audit fee, if even that.
BDOs 2017 and 2016 audit fees for AAC were $457 and $764 (000), a total of $1,221. So the fine was 164% of the related fees.