After getting rid of the boil on its butt (that boil being ex-chairman William Duhnke) last June, the PCAOB seems to be feeling pretty good now under the leadership of Erica Williams. And that’s bad news for audit firms.
The PCAOB has created new ways of disciplining audit firms and auditors who bend the rules, as the new chair and board members put more of a focus on enforcement and increasing their scrutiny of the guardians of the capital markets.
We saw the first such instance early last month when the PCAOB fined former KPMG vice chair of audit Scott Marcello $100,000 for “failure to reasonably supervise” other KPMG audit executives who engaged in a scheme from 2015 until 2017 to illegally obtain and use confidential PCAOB information in an attempt to improve KPMG’s PCAOB inspection results. It was the first time the PCAOB handed down that particular punishment to an individual. Williams said:
“This ‘first of its kind’ disciplinary action demonstrates that the PCAOB is committed to sanctioning top-level personnel at the largest firms when they fail to take sufficient supervisory steps aimed at preventing violations by their subordinates. Following the Department of Justice’s and the Securities and Exchange Commission’s actions against the perpetrators of the scheme, the Board believes it is important to hold Mr. Marcello accountable as their supervisor for contributing to a culture that led to this serious misconduct.”
Marcello was not one of the five KPMG executives who were indicted for their roles in the scandal, but he was fired by the firm in April 2017.
Then in late April, the US audit cops handed out two other first-time punishments to audit firms for improperly using non-US firms that aren’t registered with the PCAOB. In the first case, San Mateo, CA-based CPA firm WWC, which has offices in Hong Kong and Guangzhou in China, was taken to the PCAOB’s woodshed for “failure reasonably to supervise an unregistered firm.” The PCAOB said:
WWC used audit work performed by its unregistered Hong Kong affiliate in ten issuer audits. During these audits, WWC allowed the unregistered affiliate to exceed the level of participation requiring registration with the Board and thereby failed reasonably to supervise the Hong Kong firm in a manner designed to prevent violations of the Sarbanes-Oxley Act and PCAOB rules. Specifically, WWC took no steps to ensure that the unregistered affiliate’s participation would be consistent with PCAOB registration requirements. Accordingly, the Board found, among other violations, that WWC failed reasonably to supervise its unregistered affiliate.
WWC also failed to make timely and accurate Form AP and annual report filings, according to the PCAOB disciplinary order. WWC got censured, fined $50,000, and was ordered to take steps to improve its quality control policies and procedures.
In the second instance, Flushing, NY-based CPA firm JLKZ, which has locations in China and Malaysia, and its Managing Partner Jimmy Lee were given a joint fine of $50,000 for issuing an audit report where a separate, unregistered firm had conducted the underlying audit. This is the first time the PCAOB imposed this type of punishment to an audit firm. The audit regulator said:
Under an arrangement with an unregistered Chinese firm [SBA Stone Forest CPA Co.], JLKZ issued  audit reports for two issuers after personnel of the unregistered firm acted as the engagement partner, audit staff, and engagement quality reviewer for the audits. The unregistered firm received most of the audit fees. The Board found that JLKZ violated PCAOB standards (AS 3101) by issuing audit reports where it had not conducted the underlying audits. The Board also found that JLKZ managing partner Jimmy P. Lee, CPA, directly and substantially contributed to the firm’s violations.
In its disciplinary order for JLKZ, the PCAOB said Stone Forest submitted a registration application to the PCAOB on or around Feb. 1, 2019. On Feb. 26, 2019, the PCAOB requested that Stone Forest provide certain additional information, but Stone Forest still hasn’t responded to the board’s information
request and isn’t registered with the PCAOB.
In addition to the fine, JLKZ and Lee were censured and JLKZ’s ability to accept new issuer or broker-dealer audit engagements was restricted for two years.
According to a recently released report from Cornerstone Research, the PCAOB disclosed 18 accounting and auditing enforcement actions in 2021, up from 13 in 2020 but down from 24 in 2019. Last year’s total is also lower than the five-year average of 29 enforcement actions from 2016 and 2020.