This week we have three (!) stories to share of auditors behaving badly.
Story #1 is Michael J. Moore of Las Vegas. Back in 2009, MJM was barred from being associated with a PCAOB registered accounting firm and suspended from practicing before the SEC as an accountant. The reason? Among other things, he issued audits that "were often the product of high school graduates hired with little or no education or experience in accounting or auditing." He did this for over 300 shell or developmental stage companies that were traded OTC.
For whatever reason, Moore was not content to be on the sidelines because yesterday we learned that he violated both of the orders:
Moore violated the SEC order when he performed accounting work for two public companies, Cytta Corp. and Monkey Rock Group, Inc., for the periods from February 2010 through September 2014 and June 2011 through January 2012, respectively.
Moore violated the PCAOB order by performing accounting work for Monkey Rock, which was an “issuer” under Section 2(a)(7) of the Sarbanes-Oxley Act of 2002 (“SOX”). By engaging in this conduct, Moore violated SOX Section 105(c)(7)(B), which prohibits any person who is suspended or barred by the PCAOB from being associated with a registered public accounting firm from willfully becoming or remaining associated with any issuer in an accountancy capacity.
Okay, technically these new violations are not related to Moore's bad auditing, but he wouldn't be here if it were not for his bad auditing. Let's not quibble.
Story #2 involves Grant Thornton running afoul of independence rules. It involves two firms: Grant Thornton India and Australia-based Grant Thornton Audit Pty Limited.
These firms audited companies that had Mauritius-based subsidiaries. Never heard of Mauritius? Me neither! It's a tiny island east of Africa and apparently it's important enough that GT has an office there. Two GT Mauritius partners sat on the boards of the subsidiaries and even "provided prohibited services for the audit clients, including controlling bank accounts and having authority to act on the audit client companies’ behalf." That's a no-no!
To make matters worse, GT India and GT Audit (i.e. Australia) didn't follow GT International's rules for compliance control:
According to the SEC’s orders, GT Audit failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations, as required by Grant Thornton International, while GT India failed to obtain the confirmation letter. According to the orders, the Grant Thornton firms failed to discover the independence violations until several months or years following the violations. The orders found GT Audit’s violations occurred with audits of four consecutive fiscal years, from 2008 through 2011, while GT’s India’s violations occurred for the 2013 fiscal year.
To give these "independence relationship checks" a little more color, GT's member firms are required to obtain an International Relationship Check (“IRC”) to confirm that no conflicts or independence violations exist. Here's what happened at GT India:
On December 31, 2012, during the course of Client A’s 2013 audit, GT India sent an IRC to GT International for circulation to relevant GT International member firms. The IRC asked about independence or potential conflicts concerning GT India’s audit of Client A. GT India specifically referenced, among other names to be examined, the two GT Mauritius partners, who were listed on the IRC as directors of Client A’s Mauritius subsidiary. GT International circulated the IRC to a number of its member firms, including GT Mauritius, on January 25, 2013.
Three days later, a GT Mauritius employee incorrectly responded to the IRC stating, “[w]e have no relationships to report.”, despite the fact that the two GT Mauritius partners were acting as directors of Client A’s subsidiary in Mauritius and Anex was performing other prohibited non-audit services to that subsidiary.
In the case of GT Audit, this went on for years:
With regard to the 2008, 2009, 2010 and 2011 audits of Client A, Respondent GT Australia/Audit failed to follow required independence compliance checks for GT Mauritius, including the IRC process and annual independence confirmations, although Respondent did send annual independence confirmations to GT member firms in the countries where a supporting audit was required. Respondent did not make efforts over the course of the performance of these audits to learn whether an independence violation was implicated by Client A’s corporate presence in Mauritius or the activities of GT Mauritius’ partners.
Isn't that, uh, kind of important? I mean, did they forget to check with the Mauritius office? Or just say, "Oh, it's fine. No one cares about us being independent anyway. It's Mauritius! No one even knows where that is!"
Finally, just this morning, we learned that David A. Aronson, CPA — no connection to Aronson LLC of Rockville, MD that we're aware of — admitted to the facts, findings and violations of the PCAOB. The Board stated that this is the first order where the respondent admitted to the charges, rather than taking the ol' "neither admit or deny" route.
Aronson (again, David A. not LLC) neglected to follow AS No. 7 Engagement Quality Review for 10 audits, including one where he was already on notice from the PCAOB's Division of Enforcement and Investigations. Details, man.
But the best part of the Aronson case was the hilariously egregious independence violation:
During five of the above-mentioned audit engagements, Respondents failed to comply with PCAOB independence requirements because Aronson's son served in an accounting role at VDO during fiscal year 2010, at FFG during fiscal years 2011 and 2012, at Flow Tech during fiscal year 2013, and at Sipup during fiscal year 2013. Aronson was aware that these audit clients had hired a bookkeeping firm owned by his son because Aronson had recommended his son's firm to the audit clients. Aronson's son's firm served as the primary bookkeeper (recording journal entries directly to the clients' general ledgers) and preparer of the financial statements for the clients. Respondents audited those financial statements, and issued unqualified audit reports by the Firm, in violation of PCAOB independence rules and standards.
Maybe the Aronsons skipped the day in their CPA review class that covered the definition of "close family member"? Maybe they were estranged and this was the beginning of the reconciliation, so in their minds they weren't "close"? I dunno, this seems like an easy one, guys.
So while these three cases lack the high drama of BDO botching the confirmation of a CD or audits with no workpapers or balance sheets that don't foot, I think we can all appreciate them for what they offer.
[Litigation Relase: Michael J. Moore]
[Accounting and Auditing Enforcement: Grant Thornton Audit Pty Limited]
[Accounting and Auditing Enforcement: Grant Thornton India]