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Citrin Cooperman Got Sent to Their Room By the PCAOB For Broker-Dealer Audit Screw-Ups

Posted on by Jason Bramwell

After doing a quick Google search, it looks like the PCAOB hasn’t punished a public accounting firm for failures in its audits of brokers and dealers since 2016. But top 25 firm Citrin Cooperman broke that drought yesterday after being fined $200,000 by a disappointed PCAOB for violating standards related to broker-dealer audits. And three Citrin Cooperman partners were fined a total of $55,000 for their roles in the firm’s subpar auditing.

Here’s what the PCAOB had to say on Wednesday:

The Public Company Accounting Oversight Board (PCAOB) today announced that it has sanctioned Citrin Cooperman & Company, LLP (“Citrin Cooperman”) and three of its partners (Joseph Puglisi, Mark Schniebolk, and John Cavallone) for violations of PCAOB rules and standards in connection with the December 31, 2016 and December 31, 2017 audits and examinations of a broker-dealer that holds customer assets.

The PCAOB found that Citrin’s engagement and quality review partners failed to adhere to PCAOB standards over multiple years. The PCAOB found that Puglisi, as engagement partner on both the 2016 and 2017 engagements, failed to sufficiently evaluate whether the broker-dealer (1) maintained effective internal controls over compliance with the Securities and Exchange Commission’s Customer Protection Rule and (2) complied with the reserve requirements of the Customer Protection Rule.

The Board also found that Puglisi failed to perform sufficient audit procedures to test the related supplemental information accompanying the broker-dealer’s financial statements. The Board determined that Schniebolk and Cavallone, as the 2016 and 2017 engagement quality reviewers, respectively, failed to appropriately evaluate the conclusions reached by Puglisi and the engagement team and to perform their reviews with due professional care.

The PCAOB also sanctioned Citrin Cooperman for failing to establish and implement appropriate quality control policies and procedures to provide it with reasonable assurance that work performed by its engagement personnel would comply with PCAOB standards and regulatory requirements. The Board further found that Citrin Cooperman did not take the necessary steps, after learning of deficiencies identified through the Board’s inspection of the firm’s 2016 audit and examination of the broker-dealer, to ensure that work was assigned to personnel having the degree of technical training and proficiency required in the circumstances.

“Firms must take into consideration the results of the Board’s inspection process and ensure that their systems of quality control prevent deficiencies from reoccurring,” said PCAOB Chair Erica Y. Williams.

As a result, Citrin Cooperman was censured, fined $200,000, and was ordered to undertake and certify improvements to its system of quality control. Puglisi was fined $25,000, suspended for one year from being an associated person of a registered public accounting firm, followed by a  one-year limitation from serving as an engagement partner or engagement quality reviewer on a similar engagement. Schniebolk and Cavallone each received a censure, a one-year limitation from serving as an engagement quality reviewer, and a $15,000 fine. The PCAOB also ordered Puglisi, Schniebolk, and Cavallone to complete an additional 20 hours of continuing professional education related to the audits and examinations of broker-dealers under PCAOB standards.

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Another KPMG Client Gets ID’d in a PCAOB Inspection Report

Back in March, Bloomberg’s Jonathan Weil called attention to a PCAOB report that was pretty harsh on KPMG-Bermuda’s audit of Alterra Capital Holdings. At the time he wrote the column, KPMG, the PCAOB and Alterra weren’t talking but then Alterra filed a 8-K admitting that they were the filer in question.

Today Weil lets the cat out of the bag again and yes it’s another KPMG client, Motorola:lockquote>Four years ago, inspectors for the auditing industry’s chief watchdog discovered that KPMG LLP had let Motorola Inc. record revenue during the third quarter of 2006 from a transaction with Qualcomm Inc. (QCOM), even though the final contract wasn’t signed until the early hours of the fourth quarter. That’s no small technicality. Without the deal, Motorola would have missed its third-quarter earnings target.

The regulator, the Public Company Accounting Oversight Board, later criticized KPMG for letting Motorola book the revenue when it did. Although KPMG had discussed the transaction’s timing with both Motorola and Qualcomm, the board said the firm “failed to obtain persuasive evidence of an arrangement for revenue-recognition purposes in the third quarter.” In other words, KPMG had no good reason to believe the deal shouldn’t have been recorded in the fourth quarter.

This may sound familiar to some of you that read PCAOB Chairman James Doty’s speech from last week when he said this:

PCAOB inspectors found at one large firm that an engagement team was aware that a significant contract was not signed until the early hours of the fourth quarter. Nevertheless, the audit partner allowed the company to book the transaction in the third quarter, which allowed the company to meet its earnings target. Although the firm discussed the timing of the transaction with the customer, it failed to obtain persuasive evidence of an arrangement for revenue recognition purposes in the third quarter. The company had been an audit client of the firm for close to 50 years.

Weil writes, “KPMG has been Motorola’s auditor since 1959; it had been Motorola’s auditor for 47 years at the time of the Qualcomm deal.” So, yeah. How did he piece this one together? Elementary, my dear auditors:

Motorola’s identity was disclosed in public records last month as part of a class-action shareholder lawsuit against the company in a federal district court in Chicago. The plaintiffs in the case, led by the Macomb County Employees’ Retirement System in Michigan, filed a transcript of a September 2010 deposition of a KPMG auditor, David Pratt, who testified that Issuer C was Motorola. KPMG isn’t a defendant in the lawsuit.

Pratt also identified the Motorola customers cited in the board’s inspection report. It’s his deposition that allows me to describe the report’s findings using real names.

The oversight board said a significant portion of the company’s earnings for the 2006 third quarter came from two licensing agreements that were recorded during the last three days of the quarter. One was the Qualcomm deal that wasn’t signed until the fourth quarter. The board also cited other deficiencies in KPMG’s review of Motorola’s accounting for the transactions.

As is their wont, KPMG isn’t talking. Motorola isn’t talking (but maybe there’s another 8-K in our future?). The PCAOB, bound by the law -which, some say, is debatable – isn’t talking. My guess is that Jon Weil will continue to talk…er…write columns shining the lights on shoddy audits until the Board breaks its silence.

Dirty Secrets Fester in 50-Year Relationships [Jonathan Weil/Bloomberg]

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