September 17, 2019

PCAOB Inspections

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

For years, the PCAOB has pleaded with auditors to quit altering audit workpapers after being notified of an inspection, and some auditors continue to thumb their noses at the PCAOB. Like Humayoun Khan, a former PwC auditor, who was accused of improperly altering a previously archived workpaper in anticipation of a PCAOB inspection. A PCAOB […]

PCAOB Releases Teaser Trailer of 2018 Inspection Findings

Testing internal control over financial reporting, assessing risks of material misstatement, and auditing accounting estimates (you know, the yoozh) continue to trip up auditors, according to the PCAOB, which offered a sneak preview of what we can expect in 2018 audit firm inspection reports. More than 160 U.S. audit firms were inspected by the PCAOB […]

Broker-Dealer Audits Are Still Sloppy, But Hey, Auditor Independence Violations Are Down, So That’s Something

The Public Company Accounting Oversight Board released its report on 2017 inspections of broker-dealer audits on Aug. 20, and once again, there was some disappointing news for those who champion audit quality. According to a PCAOB press release: In this inspection period, the PCAOB inspected 75 audit firms and reviewed portions of 116 audits and […]

pcaob inspection reports

PCAOB Inspection Reports Have Been MIA Lately

Here’s something odd that was brought to our attention: @going_concern @PCAOB Why has the PCAOB not posted an inspection report on their website since July? pic.twitter.com/nMZzKFEB0q — Know Your Audience (@csilvey) December 1, 2017 Sure enough, if you cruise the PCAOB’s Firm Inspection Reports page, you’ll find that the last report was for Crowe Horwath’s […]

Ex-Deloitte Partner Learns That Procrastination Has Its Consequences

All humans procrastinate from time to time. Whether it's putting off washing the car or feeding the kids, we simply can't get to everything. I mean, who can? As indentured servants to the capital markets, you are all too familiar with this dilemma. The to-do list grows long quite quickly and it's difficult to prioritize. […]

Here’s How the Top Eight Audit Firms Ranked in PCAOB Inspection Error Rate

This got by us for some reason, but Compliance Week noted Crowe Horwath's atrocious error rate in its 2011 PCAOB inspection reports was by far the worst among the eight largest audit firms. Here's the ranking of firms, from best to worst, and their error rate: 1. KPMG — 22.6%2. EY — 35.7%3. BDO — 39.1%4. Grant […]

The PCAOB’s Disappointing Deal with Chinese Regulators

As is its wont, the PCAOB has made a major announcement in very close proximity to a major American holiday. I've been assured in the past that this bad timing is not intentional, but from a PR perspective, it has the tendency to soften the thunder of an important message. But whatever, we'll go with […]

PCAOB Bans Former Auditors From Faking the Audit Trail For the Near Future

The PCAOB has banned former Ernst & Young partner Peter O’Toole from associating with a PCAOB-registered firm for the next three years and fined him $50,000 for his part of a 2009 scheme to fake audit paperwork. E&Y removed O’Toole from the audit engagement team in June of 2010 and canned him several months later in September. The three year ban from audits is the longest bar that the PCAOB has imposed on a partner of a Big 4 accounting firm to date.

“These actions threatened to undermine the integrity of PCAOB inspection processes, and the ability of the Board to discharge its mandate to inspect the auditors of public companies,” said James R. Doty, PCAOB Chairman in a statement. “The Board moved swiftly to address this conduct, having commenced litigation against these respondents within seven months of learning of their conduct. I commend the Board’s Division of Enforcement and Investigations for its timely and effective work,” he added.

The PCAOB has also banned Darrin Estella from working with a PCAOB-registered firm for two years in connection with the improper creation, addition, and backdating of audit documentation in this case. Estella was a senior manager with E&Y’s Boston office and also let go in September of 2010.

The Board found that, shortly before a PCAOB inspection of an E&Y audit, O’Toole and Estella — acting with O’Toole’s knowledge and authorization — created, backdated, and added a document to the audit working papers that related to the most significant issue in that audit. The Board also found that O’Toole authorized other members of the audit engagement team, including Estella, to alter, add, and backdate other working papers in advance of the PCAOB inspection.

Additionally, the Board found that O’Toole and Estella provided a written document to PCAOB inspectors in which E&Y represented to the Board that no changes had been made to the audit working papers following the documentation completion date for the audit. Neither O’Toole nor Estella ever disclosed to the PCAOB inspectors that, in fact, the working papers were altered after the documentation completion date and shortly before the inspection.

The Board found that O’Toole and Estella’s actions violated PCAOB Rule 4006, which requires cooperation with Board inspections, as well as PCAOB Auditing Standard No. 3, which governs audit documentation.

The PCAOB has not released the name of the company involved, who hired E&Y as  independent auditor in 2002. E&Y expressed an unqualified opinion on the company’s September 30, 2009 financial statements, which led to notice by the PCAOB that an inspection of the unknown company’s audit was being performed on March 30, 2010. The partner, senior manager and manager on the engagement were given notice on March 31, 2010. The inspection fieldwork was set to begin on April 19, 2010.

This comes on the heels of an earlier PCAOB decision which censured 27-year-old Jacqueline Higgins for her part in the scheme. Word is she has since taken a job with McGladrey’s Boston office (unconfirmed rumor), who could probably use the help.

PCAOB to Start Inspecting Firms Who Audit Broker-Dealers…Sort Of

Prior to Dodd-Frank, auditors who inspected the books of nonpublic brokers and dealers were required to register with the PCAOB but managed to avoid being subjected to the Board Insepctors’ Monday Morning QBing. Now that we’ve entered a new, exciting era of mind-numbingly complex financial regulation, auditors of all broker-dealers will soon know the pleasure of the PCAOB inspection process.

But before any of you get your knickers in a twist, it’s technically an “Interim Program,” because, in all honesty, the Board isn’t exactly sure who should be getting extra-special attention and who they can ignore.


This is part of the statement from Perpetual-acting Chair Dan Goel://pcaobus.org/News/Releases/Pages/12092010_OpenBoardMeeting.aspx”>today’s open meeting (full statement on following slide):

About 520 brokerage firms provide clearing or custodial services. Many of the others are introducing firms that, at least in theory, do not have access to client funds or securities. Some are floor brokers without public clients; some are insurance agents that sell products that are technically securities; some are finders active in the M&A market; some are captives that serve the trading needs of a single, affiliated client. Other categories undoubtedly exist. This diversity raises questions about whether we should devote resources to inspecting the auditors of all of these types of brokers and dealers or whether some of their auditors can safely be exempted from PCAOB oversight without compromising investor protection.

While the Board does not yet have the answers to those questions, the temporary rule will allow the Board to begin inspections of broker-dealer audits so that we can develop an empirical basis on which to eventually address them.

So, in other words, the Board has NFI where to start since the broker-dealer biz encapsulates a lot of different services. The unfortunate thing for auditors is that the inspectors have to start somewhere and that’s what this interim program will do. Mr Goelzer gives you a taste of the fun to come:

The interim inspections will focus both on reviewing the work performed on specific audits and on gathering facts to inform the Board’s consideration of a permanent program. The information-gathering aspect of the interim inspections will provide the Board with insight about the potential benefits of broker-dealer inspections to the investing public and about the potential costs and regulatory burdens that would be imposed on different categories of accounting firms and classes of brokers. Armed with this type of information, the Board will be in a better position to decide on possible exemptions from oversight and to determine the objectives, nature, and frequency of inspections for firms that remain subject to PCAOB jurisdiction.

So if you’re lucky, you might – just might! – get out of the whole process altogether, although, we suggest you don’t get your hopes up. When will this all get sorted out, you ask?

Decisions about the permanent inspection program are probably at least a year away. In the mean-time, there will be ample opportunity for the public to learn what the Board is finding in the interim program and to participate in the decision process.
The proposed temporary rule provides for transparency, in that the Board will issue public reports at least annually on the progress of the interim program and on any significant observations. The permanent broker-dealer auditor inspection program will be predicated on rules that will only be adopted by the Board after public notice-and-comment and will only take effect after Securities and Exchange Commission approval.

So if this whole thing sounds like a dry run, it is. However if inspectors stumble across some über-shoddy audits (bound to happen), the Board is reserving the right to lay the smackdown. From Board Member Steven Harris’s statement (full text on last slide), “While the temporary inspection rules anticipate that firm-specific inspection reports would not begin until after a permanent program takes effect, it is important to note that the Board will still take disciplinary action, as appropriate, against an auditor where inspections under the interim program have identified significant issues in the firm’s audit work.” Likewise, if the inspectors happen across out of the ordinary at the B-D (again, a distinct possibility), they will be ringing up the SEC.

So while on the one hand they’re testing the waters, if you happen to be a downright horrible auditing firm, they’re going to make an example out of you. Investor protection is still at stake, you know.

1 — 101214 Proposed Temporary Broker Dealer Inspections–Goelzer Statement


Harris Broker Dealer Open Meeting 12 14 10 FINAL

PCAOB Is Still Overachieving: Issues Inspection Reports for BDO, Grant Thornton, PwC

Well team, despite the little setback for the PCAOB earlier this week, Team Peek is not discouraged. In fact, they were so motivated by the SEC’s little stunt that they thought they’d churn out three major inspection reports today, just to show everyone that they get to say what’s what with these accounting firms (even if it is in an indecipherable combination of vague and wonky prose).

BDO, Grant Thornton and PwC all got their papers issued today, which leaves just KPMG as the last major U.S. firm to not have their report issued. We’ll give you the quick and dirty on these three but if you want the gory details, you’ll have to read them in depth yourself (some o know). We’ll go in alphabetical order so no one gets bent out of shape.


BDO had eight issuers mentioned in its report. Issues included not testing the underlying data used by a specialist, failure to identify a departure from GAAP before issuing its audit report, loan losses and “[failure] to perform sufficient procedures to evaluate the reasonableness of a significant assumption management used to calculate the gain on the sale of a business,” among others.

PCAOB_2010_BDO_Seidman_LLP

GT only had five issuers listed in their report with problems including two instances of departures from GAAP that weren’t identified before the issue of the audit report, testwork related to fair value determination of illiquid assets and testwork around revenue recognition. Steve Chipman got away from the teleprompter long enough to sign the letter to the PCAOB himself, along with Trent Gazzaway, the National Managing Partner of Audit Services.

PCAOB 2010 Grant Thornton LLP


Nine issuers were noted by the inspectors for P. Dubs. Various issues ranging from inadequate testing of foreign locations, loan loss issues (that’s a given) and fair value (another surprise). PwC’s response made it sound like they actually enjoy the whole inspection process, “We continue to support the PCAOB and we wish to convey our sincere appreciation for the professional efforts of the PCAOB staff.” Wonder if the engagement teams that were inspected feel the same?

PCAOB_2010_PricewaterhouseCoopers_LLP

Accounting News Roundup: Tax Cuts Debate Rages On; Tax Issues for A-Rod’s 600th; Wyclef’s Campaign Stumbles Out of the Blocks | 08.05.10

Geithner Pushes Tax Boost for Wealthy [WSJ]
“Treasury Secretary Timothy Geithner made the Obama administration’s economic case for letting tax cuts for high earners expire at the end of this year, saying that failure to do so would harm rather than help economic growth.

In a speech Wednesday in Washington, part of the administration’s broader strategy to overcome Republican opposition on the issue, Mr. Geithner said that keeping current tax levels even on a short-term basis “would hurt economic recovery by undermining confidence that we are prepared to make a commitment today to bring down our future deficits.” The government needs the revenue it would get from allowing tax rates for the wealthy to rise, he said.”

PCAOB Logs No Progress on International Inspections [Compliance Week]
“The Public Company Accounting Oversight Board isn’t yet making much headway in catching up on overdue international inspections, but the Dodd-Frank financial reform bill at least clears an obstacle the board has repeatedly blamed for its inability to meet its inspection mandate.”

Regulator fears auditors may abandon scepticism to meet deadlines [Accountancy Age]
“The Auditing Practices Board (APB), which sets standards for the industry, is concerned auditors might be abandoning their professional scepticism to meet contractual audit deadlines, and wants to coach them in how to be sceptical.

Audit contracts are often negotiated on the assumption few problems will be revealed, according to the APB. When a potential issue does arise timetables often have to be extended.”

A-Rod’s Home Run Ball: a Tax Headache for the Record Books? [WSJ]
The ball is reportedly worth around $100k and if the ball is technically Yankees’ property and the team were to give it to A-Rod, then he may owe tax and the Yanks would get a corresponding deduction. The team could also argue that the ball is technically A-Rod’s property and then neither would owe tax.

Of course then the question remains, what if A-Rod sells or donates the ball to a nonprofit? If he sold it, then it would depend on how long he keeps it (less than a year would be at ordinary rates, greater than a year would be at capital gain rates). While donating the ball after one year could net him a near full deduction.

TheStreet.com names Thomas Etergino finance chief [AP]
Tom starts his new gig on September 7th.


IRS Hits Wyclef With $2.1 Million In Tax Liens [The Smoking Gun]
Whether it’s the U.S. or Haiti, this is not how you want to start a Presidential campaign.

Delta Said to Plan New York JFK Hub Renovation for $1.2 Billion [Bloomberg]
Anyone that has been to Terminal 3 at JFK is aware of the problem.