Ex-EY Audit Partner’s Lousy Audit Judgment Landed Him a $25,000 Fine From the PCAOB

Earlier today, we talked about audit quality or the lack thereof in Australia, the U.S., and, for that matter, all over the world. Well, this latest enforcement order from the PCAOB doesn’t help make a case that audit quality at the biggest accounting firms in the U.S. is getting any better.

Compliance Week reported:

The Public Company Accounting Oversight Board has barred William Trainor, former partner at EY, over its allegations that Trainor bungled the 2013 audit of internal control over financial reporting for Forest Oil Corp. Trainor was the engagement partner with ultimate responsibility for the audit of financial statements and internal controls.

The PCAOB reported it found during its 2014 inspections that Trainor failed to adequately evaluate whether the company’s internal controls were effective. The engagement team identified “pervasive deficiencies” in certain IT controls for two significant systems at the company but relied too easily on a series of compensating controls, which were also defective, the PCAOB says in its disciplinary order.

William Trainor

Trainor and his team had identified seven controls that they thought reduced the risks from the IT general control deficiencies, according to the June 4 enforcement order:

  • Four supposedly mitigated risks to revenue estimates, which Trainor and his team identified as a fraud risk.
  • One allegedly mitigated risks to reserves calculations, which was also identified as a fraud risk.
  • One purportedly mitigated risks concerning valuation of derivatives, which was identified as a significant risk of material misstatement.
  • One that supposedly mitigated the risks in all significant accounts affected by the deficiencies. That control involved reconciliations of “significant or critical accounts” in the general ledger.

Because Trainor thought the compensating controls were designed and operating effectively during the 2013 audit, and mitigated the risks from the IT general control deficiencies, he decided that he didn’t need to issue an adverse ICFR opinion, or change his strategy for auditing the financial statements, which was to rely on controls and limit substantive testing, the enforcement order says.

And here was the PCAOB’s response to Trainor’s decision:

The PCAOB concluded:

Based on the evidence Trainor reviewed during the audit, he knew, or should have known, that Forest Oil’s IT control deficiencies had not been mitigated. He failed, however, to evaluate that evidence with due professional care and recognize that it directly contradicted his audit conclusions. As a result, he failed to obtain sufficient appropriate audit evidence supporting both his ICFR and financial statement audit opinions.

Trainor failed to obtain sufficient appropriate audit evidence supporting his financial statement audit opinion for an additional reason. Specifically, he improperly relied on controls that failed to address the risks he had identified for a key process at Forest Oil—the division of interests process, which the company used to allocate revenues and costs among the fractional owners of its oil and gas properties. Because Trainor improperly relied on ineffective controls, and performed no substantive testing of divisions of interests, he failed to obtain sufficient appropriate audit evidence supporting the relevant assertions for multiple accounts, including revenue.

The enforcement order bars Trainor, who left EY in 2016, from associating with a registered public accounting firm and fines him $25,000.

He’s the second former Big 4 auditor who was barred by the PCAOB within the last week or so. Humayoun Khan, a former PwC auditor, was accused of improperly altering a previously archived workpaper in anticipation of a PCAOB inspection. He was barred for failing to cooperate with a board inspection and violating PCAOB audit documentation standards.

Related article:

PCAOB Doesn’t Take Kindly to Auditors Who Alter Audit Documentation Prior to an Inspection

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