January 18, 2021

Grant Thornton’s Streak of Not Being Fined By the PCAOB Has Come to an End

It had been nearly three years since Grant Thornton ran afoul of PCAOB auditing rules and got caught—on Dec. 20, 2017, the Purple Rose of Chicago agreed to pay a $1.5 million penalty to the PCAOB for quality control violations and audit failures as a result of its shoddy auditing work for Bancorp. But GT’s streak of staying under the audit cops’ radar came to an end on Nov. 6, as Adrienne mentioned in Footnotes last Friday.

AG pulled this from Bloomberg Tax:

Grant Thornton LLP has agreed to pay $750,000 to settle U.S. audit regulator charges that it missed warning signs that Erickson Inc. was at risk of going out of business and didn’t adequately understand its lease liabilities that resulted in a multiyear restatement.

Not only will GT have to shell out $750,000 for botching Erickson’s audits but two of its partners at the time—Gary Homsley, who was the engagement partner, and Larry Dana Leslie, who conducted the engagement quality reviews—were also punished by the PCAOB.

According to the PCAOB order, Grant Thornton and Homsley “failed to exercise due professional care, including professional skepticism, and failed to obtain sufficient appropriate audit evidence in connection with certain Erickson lease-related liabilities.”

These lease-related liabilities concerned Erickson’s contractual obligations to maintain or return aircraft to conditions specified under the relevant aircraft lease agreements. The Firm and Homsley failed to evaluate sufficiently whether Erickson’s financial statements correctly reported its lease-related liabilities. The Firm and Homsley also failed, in the FY2015 Audit, to evaluate adequately Erickson’s ability to continue as a going concern. As a result of these failures, the Firm lacked an appropriate basis to issue an unqualified opinion in each Audit.

Also …

The Firm and Homsley violated the auditing standards on documentation by failing to ensure that portions of each Audit’s working papers in connection with audit remediation bore correct dates. As a result, certain hard copy remediation work papers for the Audits (the “Remediation Work Papers”), when archived, reflected that those work papers had been completed earlier than they actually had been.

The documentation violations involving the Remediation Work Papers resulted, at least in part, from the Firm’s insufficient QC system related to audit documentation, which failed to provide reasonable assurance that the engagement teams would document their audit work in accordance with professional standards.

The funny thing about this is not only did Homsley have no experience auditing companies that operated aircraft or with accounting rules pertaining to the aviation industry prior to joining the engagement for the FY 2012 Erickson audit, and not only did the engagement teams’ members also lack aviation industry audit experience outside the Erickson engagement, but Grant Thornton offered no aviation industry training to the engagement teams working on the audits.

So you figured bad things were gonna happen. Oh and get this, GT had reservations about putting Homsley on the FY 2015 audit as engagement partner because he had some “audit quality issues” but did so anyway:

The Firm had audit quality concerns about Homsley before retaining him as engagement partner for the FY2015 Audit. Indeed, the Firm placed Homsley on a Partner Support Plan in September 2015, due to issues with Homsley’s FY2013 and FY2014 Audits. The Firm and Homsley discussed reducing Homsley’s client workload in connection with his transition to a different role at the Firm, but the Firm did not notify Homsley that it had placed him on the Partner Support Plan.

Wait, how did Homsley not know he was on a PSP? He didn’t get the hint when GT took away clients from him? Isn’t that something Grant Thornton should have told him about?

Anyhoo, back to the order:

The Firm considered removing Homsley from all issuer audits before the FY2015 Audit, but, among other things, determined that doing so “could also negatively impact the workload of the partner the work was transferred to.” The Firm decided to retain Homsley as the engagement partner for Erickson’s FY2015 Audit, despite being aware of Homsley’s audit quality issues.

As a result, there were a slew of screw-ups by Homsley and the engagement teams, which those of you who have aviation industry clients will get a kick out of, that are detailed in the PCAOB order—from failing to adequately address risks, to failing to obtain sufficient audit evidence to support the lack of liabilities, to failing to adequately evaluate Erickson’s ability to continue as a going concern, to failing to appropriately supervise the work of the engagement teams, to failing to ensure that the remediation workpapers relating to the FY 2013, FY 2014, and FY 2015 audits had the correct dates.

Leslie, according to the PCAOB, “failed to perform his role as EQR partner with due professional care.”

Specifically, Leslie violated Auditing Standard (“AS”) No. 7, Engagement Quality Review (“AS 7”) by, among other things, failing to evaluate appropriately the engagement teams’ significant judgments with respect to planning, including consideration of the risk of certain Erickson lease-related liabilities and consideration of Erickson’s ability to continue functioning as a going concern. As a result of the inadequacy of his engagement quality review, Leslie lacked an appropriate basis for his concurring approval of the issuance of GT’s unqualified opinion in the FY2014 Audit and FY2015 Audit.

And now, the punishments:

  • Homsley was fined $15,000 and is barred from being associated with a registered public accounting firm for at least two years. If his ban is lifted after two years, Homsley will be restricted from participating in certain audit activities.
  • Leslie was not fined but his activities in connection with any audit will be limited for two years.

According to Homsley’s LinkedIn page, he is a retired Grant Thornton partner in Portland, OR. He worked at Grant Thornton from September 1998 until July 2019.

Leslie, who worked at GT from October 2004 until October 2018, is CFO of The Odom Corp. in Seattle, according to his LinkedIn page.

According to the PCAOB, Erickson, which provided aviation services, mainly in the logging, firefighting, construction, and defense sectors, filed a voluntary petition for relief under chapter 11 of the U.S. Bankruptcy Code on Nov. 8, 2016. Erickson emerged from bankruptcy in April 2017 and is now under private ownership.

Related article:

Grant Thornton Gets Dinged for Giving Partners with Audit Quality Issues More Work

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