Memo to Audit Firms: Altering Workpapers Is Still Frowned Upon

Amid all the drama and turmoil going on at the PCAOB right now, one thing hasn’t changed: PCAOB inspectors really love busting auditors for improperly altering workpapers. Eight auditors—two at Deloitte Korea and six at BDO Mexico—found this out the hard way recently.

Because these auditors ignored the memo that altering audit workpapers is never OK, Deloitte Korea (Deloitte Anjin) was fined $350,000 and BDO Mexico (Castillo Miranda y Compañía, S.C.) was fined $500,000 by the PCAOB on Oct. 31. The eight auditors also got various degrees of sanctions.

However, both Deloitte Korea and BDO Mexico were given gold stars because of their “extraordinary cooperation” with the PCAOB, which included conducting internal investigations and sharing the factual results of those internal investigations with PCAOB staff. And Deloitte, always the overachiever, “also self-reported misconduct and undertook personnel- and policy-related remediation,” the PCAOB said. Therefore, both firms’ fines could’ve been a lot worse had they not kissed the PCAOB’s ring.

In Deloitte Korea’s case, two former partners—Seul Hyang Wee and Hyun Seung Lee—were sanctioned because they allowed the engagement team they oversaw to backdate electronic workpapers and alter hardcopy workpapers after finding out that the firm’s largest issuer audit would be selected for PCAOB inspection in 2014.

For example:

Wee, Lee, and other Firm personnel backdated the preparation and review dates on several electronic work papers. They applied preparation and review dates that were earlier than the actual dates to conceal the post-issuance performance of procedures and, in those cases where procedures had been performed prior to issuance, to conceal the post-issuance preparation or review of the work papers themselves.

Some of the Firm’s personnel used Firm audit software that allowed them to select a date to apply to the electronic work papers other than the date of the actual sign-off, while others rolled back the clock on their computers to a date and time of their own choosing.

This backdating was widespread among the Firm personnel assigned to the 2013 Audit. The backdated electronic work papers failed to comply with PCAOB audit documentation requirements.

After learning on June 9, 2014, that the PCAOB had selected the 2013 audit for review and after the June 14 deadline Deloitte was given to get together the final and complete set of audit documentation, staff really exercised some poor professional judgment by improperly altering hardcopy workpapers, including adding handwritten descriptions of audit procedures relating to the internal controls of the issuer’s largest subsidiary.

Because this documentation was added after the documentation completion date and did not indicate the date it was added, the name of the person who prepared it, or the reason for adding it, the altered hard-copy work papers failed to comply with PCAOB audit documentation requirements.

Wee and Lee were aware of the efforts by personnel assigned to the Subsidiary Work to improperly alter the hard-copy work papers after the documentation completion date. Yet, despite that knowledge, Wee and Lee took no action to stop those efforts or report them to PCAOB inspection staff or the Firm’s senior management.

The PCAOB fined Wee and Lee $10,000 each and barred them from being an associate of a public accounting firm for two years.

In the case of BDO Mexico, the firm and six partners—Ignacio García Pareras, Juan Martín Gudiño Casillas, Luis Raúl Michel Domínguez, Juan Francisco Olvera Díaz, Carlos Rivas Ramos, and Bernardo Soto Peñafiel—were sanctioned for participating in, directing, or contributing to the improper alteration of audit documentation.

There were a whole lot of things Bravo Delta Oscar and those partners tried to get away with:

Beginning in 2015, BDO-Mexico and its personnel routinely violated PCAOB standards, including by failing to timely archive issuer audit documentation; improperly altering numerous work papers in multiple audits after those work papers should have been locked down and archived; changing the dates on their computer clocks, which concealed when they actually performed and documented work; failing to cooperate with a PCAOB inspection; and failing to maintain a system of quality control that would provide reasonable assurance that personnel would act with integrity and in compliance with PCAOB rules and standards. These violations were committed and/or directed by partners at the highest level of the Firm’s issuer audit practice and reflect a systematic failure, during those years, to adhere to professional standards.

The disciplinary order gives a play-by-play of the incompetence of the six BDO Mexico partners, including Gudiño, Michel, Olvera, and Soto providing misleading information to PCAOB inspectors during their 2017 inspection of the firm.

Here are the penalties the PCAOB doled out:

  • Luis Raúl Michel Domínguez, audit and assurance managing partner: $10,000 fine, barred from being an associate of a public accounting firm for three years, and must take 40 hours of additional continuing professional education in subjects directly related to the audits of issuer financial statements under PCAOB standards.
  • Bernardo Soto Peñafiel, engagement partner with overall responsibility for the firm’s audits of Issuer A’s 2014 and 2015 financial statements, and signed the audit opinions: $10,000 fine, barred from being an associate of a public accounting firm for two years, and must complete 40 hours of additional CPE.
  • Juan Martín Gudiño Casillas, engagement partner on the firm’s audit of Issuer B’s 2015 financial statements and signed the audit opinion: $5,000 fine, barred from being an associate of a public accounting firm for one year, and must complete 40 hours of additional CPE.
  • Juan Francisco Olvera Díaz, served as the lead partner on the firm’s 2014 and 2015 audit work for two components of Issuer A: $5,000 fine, barred from being an associate of a public accounting firm for two years, and must complete 40 hours of additional CPE.
  • Ignacio García Pareras, performed a review of the workpapers for the firm’s 2015 audits of Issuer A and Issuer B in advance of the PCAOB’s 2017 inspection of the firm; served as the firm’s primary contact with the PCAOB during that inspection: Suspended from being an associate of a public accounting firm for one year, and must complete 40 hours of additional CPE.
  • Carlos Rivas Ramos, engagement partner on the firm’s audit of Issuer B’s 2014 financial statements and signed the audit opinion; lead partner on the firm’s 2015 audit work for four Issuer A components: Suspended from being an associate of a public accounting firm for one year, and must complete 40 hours of additional CPE.

BDO Mexico was also ordered to undertake certain remedial actions, including revising or establishing policies, procedures, and controls that will prevent auditors from altering workpapers in the future; providing auditors with four hours of additional training concerning compliance with AS 1215, Audit Documentation, and PCAOB Rule 4006, Duty to Cooperate with Inspectors; and adopting enhanced reporting procedures for the reporting and investigation of suspected wrongdoing by firm personnel.

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