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Three McGladrey Auditors Learn a Tick in Time Saves Nine

Everyone knows if you're going to add evidence after an audit is over, you have to do it before the documentation completion date and you better be sure to document the additional material thoroughly. But for McGladrey (then McGladrey & Pullen) auditors Dale Arnold Hotz, Jyothi Nuthulaganti Manohar and Michael Jared Fadner, an impending PCAOB inspection must have gotten them in a bit of a panic when they realized they were missing a few tiny insignificant documents like, uh, a signed engagement letter and a cash flow worksheet. No biggie, right?

Instead of trying the old "ooops our bad we can't find it" trick, Hotz, Manohar and Fadner decided that the PCAOB probably wouldn't even notice if they just, you know, scribbled a bunch of tickmarks on a fresh cash flow worksheet, dated it for March of 2010 and slipped it into the hard copy work papers. The part that sucks for Fadner is that he was supervised by Hotz and Manohar and they made him put in all the important auditor scribbles the morning the PCAOB was on its way to check their work.

During the December 3, 2010 meeting between Manohar and Fadner, Manohar noticed that the electronic Audit work papers did not contain a cash flow worksheet. Fadner reviewed the hard copy work paper files, but could not find the cash flow worksheet there, either. On his laptop computer's hard drive, Fadner found an electronic copy of a cash flow worksheet that was prepared and provided by the Company and that was not in the electronic work papers. There were no tick-marks or other evidence that it was used during the Audit.

Manohar directed Fadner to print the cash flow work sheet from his computer and add it to the hard copy work papers. On December 3, 2010, Fadner printed the cash flow worksheet from his computer.

On the morning of December 6, 2010, the day Inspection field work began, Fadner handwrote tick-marks, cross-references, footings and recalculations to the cash flow worksheet he printed on December 3, 2010, to reflect work purportedly performed during the audit. On the cover page of the cash flow worksheet, Fadner wrote his initials and backdated the cash flow worksheet to March 6, 2010 (a date during the Audit). Fadner added the cash flow worksheet, with his new tick-marks, cross-references, footings and recalculations, to the hard copy work paper files. Manohar knew that Fadner added the cash flow worksheet to the hard copy work papers. The cash flow worksheet that Fadner added to the hard copy work papers, upon Manohar's instructions, did not indicate the date it was added to the audit documentation or the reason for adding it.

And what about that missing signed engagement letter? No biggie either, Fadner just called up the company's controller to ask for a hard copy to be sent to Manohar's office ahead of the PCAOB inspection. It arrived the morning the PCAOB was headed over and they just slipped it into the work papers. No harm, no foul! Seriously though you guys, it's the engagement letter! Talk about airballing an easy layup.

The excitement in the days leading up to the PCAOB inspection didn't end there, however. There was also the matter of coming up with a Fair Value Memorandum and slipping that into the mix too:

On the evening of Sunday, December 5, 2010, Manohar drafted a Fair Value Memorandum for the Audit (using the format of a Fair Value Memorandum that was prepared in connection with another audit). Manohar emailed her first draft of the Fair Value Memorandum to Hotz. Hotz commented to and corrected Manohar on the first draft of the Fair Value Memorandum. The first draft of the Fair Value Memorandum stated that Company management had provided certain assumptions to one of the specialists retained by the Company to calculate its fair value calculations. Hotz commented, "Kind of begs the questions whether we reviewed those assumptions and if they were reasonable." In response, Manohar revised the draft Fair Value Memorandum to remove reference to management providing those specific assumptions. In an email, Manohar also stated that she added information to the next draft of the memo about the evaluation of a specialist because "[w]e indicated in the partner planning memo that we would."

Manohar sent a revised draft Fair Value Memorandum to Hotz, who approved it as the final memorandum. Hotz printed the final Fair Value Memorandum; initialed it; wrote "Footnote 20" at the top of the first page; and added the newly-created final Fair Value Memorandum to the hard copy work paper files for the Audit. The Fair Value Memorandum did not indicate the date it was added to the audit documentation or the reason for adding it.

I know you guys aren't going to believe it but there's even more to this sloppy audit. These are the headings throughout the order:

  • Fadner Altered and Backdated the Cash Flow Worksheet, and Upon Manohar's Instructions, Fadner Improperly Added the Cash Flow Worksheet to the Hard Copy Work Papers
  • Manohar and Fadner Improperly Added the Engagement Letter with Original Client Signature to the Hard Copy Work Papers
  • Hotz and Manohar Created the Fair Value Memorandum and Improperly Added it to the Hard Copy Work Papers
  • Hotz Improperly Added the Specialist Memo to the Hard Copy Work Papers
  • Hotz Improperly Signed Documents Within the Hard Copy Work Papers
  • Hotz Improperly Initialed Documents Within the Hard Copy Work Papers
  • Hotz Improperly Altered a Document Within the Hard Copy Work Papers by Adding Information

Oh, and Hotz forgot to mention the work papers had been altered after the documentation completion date but you can't fault him for that, really, because what is he going to tell the PCAOB, "yeah, totally, we added a bunch of crap we didn't have because we knew you jerks were on your way over here to grill us."

All three have – obviously – been censured. Hotz is barred from being an associated person of a registered public accounting firm and can petition the PCAOB in two years for permission to come back. Manohar is suspended for a year and poor Fadner with the sore arm from making up all those tickmarks the morning the PCAOB was on the way has not been suspended but probably feels like a tool right now.

Hotz and Fadner are no longer with McGladrey. Manohar remains but her activities are "restricted" per a McGladrey spokesperson. It's also worth noting that while this reflects really poorly on the three auditors involved, McGladrey discovered this situation, immediately notified the PCAOB and concurrently began their own internal investigation. The firm was not included in the PCAOB enforcement action and McGladrey supports the PCAOB's actions regarding these three.

Good times.

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