Maybe it’s because the PCAOB had a new chairman and a whole new board at the beginning of last year. Or maybe it’s because the audit regulator’s longtime enforcement chief bolted last May and the position still hasn’t been permanently filled. Whatever the reason, the PCAOB settled only 13 enforcement actions against accountants in 2018, down 63% from the 35 actions settled in 2017, which was the most in PCAOB history, according to a new analysis from Cornerstone Research.
The 13 cases were the lowest amount settled by the PCAOB since 2013, when the regulator settled only 11 enforcement actions.
The SEC wasn’t much better in 2018, as it finalized 32 enforcement actions against accountants, 20% less than the 40 in the previous year.
Cornerstone Research said the decrease in SEC settled enforcement actions was due to there only being 16 actions brought against CPAs employed by SEC registrants, down from 27 in 2017 and the lowest number of actions in the past six years. However, actions against auditors and audit firms rose slightly, from 12 in 2017 to 14 in 2018.
But the SEC is showing signs of buckling down more on accountants and auditors, as the agency settled more cases in the second half of 2018 than in the first half. And the SEC is continuing to target individuals more than audit firms. In 2018, 24 of the 32 settled cases were against individuals, and in six cases, the respondents were both individuals and firms.
Two of those six cases involving individuals and firms were Crowe and BDO USA, which settled with the SEC as a result of their crappy auditing.
The PCAOB was stuck in an enforcement drought during the latter part of 2018, as there were no settled actions involving U.S. auditors or audit firms after Oct. 2., according to Cornerstone Research.
Seven of the 13 cases were settled against auditors and audit firms, which is down significantly from prior years, as this graph from Cornerstone Research shows:
Seventy percent of final PCAOB actions involved both an audit firm and one or more auditors in 2018, up from the 2013–2017 average of 54%.
All told, monetary settlements in final SEC and PCAOB actions were levied against 32 of the 67 individual and audit firm respondents (48%), but totaled less than $3.3 million.
Prior to Dodd-Frank, auditors who inspected the books of nonpublic brokers and dealers were required to register with the PCAOB but managed to avoid being subjected to the Board Insepctors’ Monday Morning QBing. Now that we’ve entered a new, exciting era of mind-numbingly complex financial regulation, auditors of all broker-dealers will soon know the pleasure of the PCAOB inspection process.
But before any of you get your knickers in a twist, it’s technically an “Interim Program,” because, in all honesty, the Board isn’t exactly sure who should be getting extra-special attention and who they can ignore.
This is part of the statement from Perpetual-acting Chair Dan Goel ://pcaobus.org/News/Releases/Pages/12092010_OpenBoardMeeting.aspx”>today’s open meeting (full statement on following slide):
About 520 brokerage firms provide clearing or custodial services. Many of the others are introducing firms that, at least in theory, do not have access to client funds or securities. Some are floor brokers without public clients; some are insurance agents that sell products that are technically securities; some are finders active in the M&A market; some are captives that serve the trading needs of a single, affiliated client. Other categories undoubtedly exist. This diversity raises questions about whether we should devote resources to inspecting the auditors of all of these types of brokers and dealers or whether some of their auditors can safely be exempted from PCAOB oversight without compromising investor protection.
While the Board does not yet have the answers to those questions, the temporary rule will allow the Board to begin inspections of broker-dealer audits so that we can develop an empirical basis on which to eventually address them.
So, in other words, the Board has NFI where to start since the broker-dealer biz encapsulates a lot of different services. The unfortunate thing for auditors is that the inspectors have to start somewhere and that’s what this interim program will do. Mr Goelzer gives you a taste of the fun to come:
The interim inspections will focus both on reviewing the work performed on specific audits and on gathering facts to inform the Board’s consideration of a permanent program. The information-gathering aspect of the interim inspections will provide the Board with insight about the potential benefits of broker-dealer inspections to the investing public and about the potential costs and regulatory burdens that would be imposed on different categories of accounting firms and classes of brokers. Armed with this type of information, the Board will be in a better position to decide on possible exemptions from oversight and to determine the objectives, nature, and frequency of inspections for firms that remain subject to PCAOB jurisdiction.
So if you’re lucky, you might – just might! – get out of the whole process altogether, although, we suggest you don’t get your hopes up. When will this all get sorted out, you ask?
Decisions about the permanent inspection program are probably at least a year away. In the mean-time, there will be ample opportunity for the public to learn what the Board is finding in the interim program and to participate in the decision process.
The proposed temporary rule provides for transparency, in that the Board will issue public reports at least annually on the progress of the interim program and on any significant observations. The permanent broker-dealer auditor inspection program will be predicated on rules that will only be adopted by the Board after public notice-and-comment and will only take effect after Securities and Exchange Commission approval.
So if this whole thing sounds like a dry run, it is. However if inspectors stumble across some über-shoddy audits (bound to happen), the Board is reserving the right to lay the smackdown. From Board Member Steven Harris’s statement (full text on last slide), “While the temporary inspection rules anticipate that firm-specific inspection reports would not begin until after a permanent program takes effect, it is important to note that the Board will still take disciplinary action, as appropriate, against an auditor where inspections under the interim program have identified significant issues in the firm’s audit work.” Likewise, if the inspectors happen across out of the ordinary at the B-D (again, a distinct possibility), they will be ringing up the SEC.
So while on the one hand they’re testing the waters, if you happen to be a downright horrible auditing firm, they’re going to make an example out of you. Investor protection is still at stake, you know.
