The PCAOB has scored its first-ever sanctions related to a firm’s membership in an accounting alliance and as one would expect, there is a press release. The press release doesn’t quite explain what happened though, for that we will have to go to the settled disciplinary order. First things first:
The PCAOB found that Warren Averett violated independence requirements during its 2019 and 2020 audits of an issuer, because the firm audited valuations performed for the issuer by another accounting firm that sponsored an alliance of which Warren Averett was a member. Given its alliance membership and association with the other accounting firm, Warren Averett had a disincentive to question the reasonableness of the other accounting firm’s valuation work. Thus, both Warren Averett and the issuer shared a mutual interest in the reasonableness of the valuations.
Warren Averett LLP is a member of the BDO Alliance, a wholly-owned subsidiary of BDO USA, LLP (technically BDO USA, LLP no longer exists after the firm switched from a partnership to a corporation as of July 1 and is now BDO USA P.A but this happened a while ago). According to BDO’s website, there are more than 800 independent Alliance firm locations across the country.
Here’s what happened. Warren Averett audited a biotech company called CytoDyn, their former CEO was charged with insider trading and fraud by the SEC last year but that’s neither here nor there. BDO performed some services for CytoDyn, Warren Averett audited CytoDyn, Warren Averett is in the alliance named after and wholly-owned by BDO, therefore the PCAOB said it’s reasonable to say that Warren Averett was not independent in auditing BDO’s work.
Explains the PCAOB in the order:
During the 2019 fiscal year, BDO performed certain purchase price allocation valuation services for CytoDyn with respect to acquired intangible assets. During the 2020 fiscal year, BDO performed certain derivative valuation services for CytoDyn. Warren Averett audited the BDO valuation work as part of its 2019 and 2020 audits of CytoDyn.
CytoDyn had an interest in the accuracy of its financial statements, including with respect to the valuation work performed by BDO. Warren Averett likewise had an interest in the quality of BDO’s valuation work because Warren Averett marketed itself based on its association with the BDO Alliance and the quality denoted by the BDO brand name. Based on this mutual interest, a reasonable, knowledgeable investor would conclude that Warren Averett was not capable of exercising objective and impartial judgment in auditing BDO’s valuation work.
One example of this touting of the alliance is a brochure aimed at nonprofits talking about how membership in the BDO Alliance offers Warren Averett the opportunity to “further enhance our client services and broaden capabilities overall.”
Says that brochure [PDF]:
BDO Alliance USA membership offers Warren Averett access to the resources of BDO USA, LLP, one of the nation’s leading professional services firms, as well as other Alliance members. Warren Averett also has access to an international network of people and firms through our membership in the BDO Alliance USA.
Warren Averett has been a member of the BDO Alliance since 2015. In return for paying an annual license fee, Warren Averett received a number of BDO Alliance membership benefits, including the right to use the BDO Alliance brand name and logo “[s]o that [member] firms may fully benefit from BDO USA’s domestic presence” and so that “clients and business contacts . . . know that they have access to these resources.” Warren Averett also received the right to distribute and co-brand BDO marketing materials, and access to certain other BDO resources.
Another marketing brochure advertised that Warren Averett “offers clients the unique resources of both an international and regional firm by utilizing the combined, vast resources made possible by our membership in the BDO Alliance USA.” Warren Averett also rebranded BDO marketing publications under the firm’s name and published BDO marketing materials with both BDO and Warren Averett branding.
We feel compelled to note here that as far as accounting firm website news sections go, the Warren Averett website has a ton of news and unlike many firms, it is regularly updated with a few articles a month. Nice to see. Unfortunately Warren Averett also posted many articles authored by BDO personnel with a note on them that said “Warren Averett is an independent member of the BDO Alliance USA. This article was borrowed with permission from BDO USA, LLP,” the PCAOB interpreted this as further advertising the firm’s connection to BDO. Example: “How to Retain, Recruit and Engage Great Board Members,” a piece that originally appeared in BDO’s “Nonprofit Standard” newsletter in summer 2016.
Thus, says the PCAOB, Warren Averett violated PCAOB rules and standards requiring an auditor to maintain independence from its audit client. In addition, Warren Averett violated PCAOB quality control standards by failing to implement quality control policies and procedures sufficient to provide reasonable assurance that the independence implications of its BDO Alliance membership would be given appropriate consideration. Without admitting or denying the findings, Warren Averett settled with the PCAOB and consented to a disciplinary order that censures the firm, imposes a $200,000 civil money penalty, and requires the firm to review and certify its auditor independence policies and procedures.
There’s a bunch more in the PCAOB order if you care to read it, this article is already way too long.
PCAOB Sanctions Warren Averett, LLC for Auditor Independence and Quality Control Violations [PCAOB]
