Reminder: Auditors Can’t Check Their Own Work

A superfecta of PCAOB enforcement orders hit the air yesterday, so let's take a looksee, shall we?

Let's start with Turner, Jones and Company, featuring their managing partner Stephen Turner and regular ol' partner Mark Turbyfill. I'll be referring to them collectively as "Turn & Turb" from here on out.

Turn & Turb did a sloppy job of auditing Next Generation Energy Corp. by way of insufficient audit evidence, lack of due care and professional skepticism. Not very sexy in the realm bad auditing, but bad auditing nonetheless.

NextGen acquired all the assets of Knox Exploration for $500k. They financed the buy using notes from related parties. Knox's only assets were 4 oil and gas leases that it had purchased for $40k and $1. This where the footnotes get fun:

[Turn & Turb] did not perform any procedures to determine if Knox had any other assets or liabilities.  At the time of the audit, Respondents knew that Knox did not have any financial statements. 

It goes downhill from there. Turn & Turb knew that NextGen financed the buy with the related parties, but didn't "document any risk presented" by such an arrangement. The only evidence they obtained for the $500k valuation was a third-party specialist and they failed to test any of said specialist's methods, assumptions, data, etc. nor did they "evaluate whether the specialist's relationship with NextGen might impair the specialist's objectivity." 

It gets worse when NextGen determines that the Knox investment is impaired and Turn & Turb failed to perform the necessary tests around that as well. Finally, NextGen just up and forgave the related party note and Turn & Turb "failed to consider whether the forgiveness and related write-off contradicted the original valuations of the Knox leases." Like I said, not sexy stuff, but when you issue unqualified opinions that say you did an audit kosher with GAAS, you should probably have proof. 

Anyway, now for something we can all enjoy: brazen independence violations!

Here's Oliva, Goddard & Wright:

The Firm maintained and prepared accounting records and prepared financial statements for the year ended December 31, 2013 for a broker-dealer audit client ("Broker-Dealer"). The Firm did so through personnel from outside the Firm whom it retained and directed for the purpose of performing work in connection with the Firm's audit of those financial statements. As a result, the Firm was not independent of the Broker-Dealer under auditor independence criteria established by the Commission and made applicable by Exchange Act Rule 17a-5(f)(3) to audits of brokers and dealers. The Firm nevertheless audited the financial statements and issued an audit report that the Broker-Dealer included with the financial statements it filed with the Commission.

And SHEDJAMA, Inc.:

The Firm prepared the financial statements for a broker-dealer audit client ("Broker-Dealer") for the year ended December 31, 2013. As a result, the Firm was not independent of the Broker-Dealer under auditor independence criteria established by the Commission and made applicable by Exchange Act Rule 17a-5(f)(3) to audits of brokers and dealers. The Firm nevertheless audited the financial statements and issued an audit report that the Broker-Dealer included with the financial statements it filed with the Commission.

And last but not least, Reilly, Penner & Benton:

The Firm prepared the financial statements for a broker-dealer audit client ("Broker-Dealer") for the year ended September 30, 2013. As a result, the Firm was not independent of the Broker-Dealer under auditor independence criteria established by the Commission and made applicable by Exchange Act Rule 17a-5(f)(3) to audits of brokers and dealers. The Firm nevertheless audited the financial statements and issued an audit report that the Broker-Dealer included with the financial statements it filed with the Commission.

The audit reports from all three of these firm stated that they were done in accordance with generally accepted auditing standards. As you can tell from the summaries above, they were not.

Many, many moons ago, I worked on a small broker-dealer audits. They're not all that complicated, and the businesses themselves are relatively unsophisticated. That said, they were still able run bloody QuickBooks. I'm a little surprised these audit firms would be this reckless. Crikey, call up Bench or Xero or whomever and they'll make those books dance for very little cost. This is just weird. Or stupid! Or ignorant! Maybe someone can enlighten me on the latest and greatest trends in small B-D audits.

Oh! It's also worth mentioning is that if the PCAOB's warnings about the number of deficiencies in B-Ds are legit, then these three are just the tip of the iceberg. Fun!

[Turner, Jones & Company]
[Olivia, Goddard & Wright]
[SHEDJAMA, Inc.]
[Reilly, Penner & Benton]

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