Reports FT:

Democratic senators Elizabeth Warren and Sheldon Whitehouse said deficiency rates that have exceeded 40 per cent for the past two years call into question whether the Public Company Accounting Oversight Board is properly holding the industry to account.

In a letter to the PCAOB seen by the Financial Times, the senators zeroed in on BDO, the sixth-largest accounting firm in the US, where almost all audits examined by inspectors last year were found to have flaws. They asked whether “repeat offenders” are deterred by potential fines that they said are typically “a drop in the bucket” compared with firm revenues.

“The PCAOB must do better,” Warren and Whitehouse wrote. Either the audit standards written by the board were inadequate, they wrote, “or the PCAOB is failing to establish accountability for firms that do not meet them”.

Oh boy. Look, lady, the PCAOB has been very busy fining audit firms halfway across the world for not filing a timely Form 3, ain’t nobody got time to hand down some consequences to sloppy firms.

In their defense, the PCAOB has been handing down record fines in recent years. Obviously this tactic isn’t working because the firms know they can’t/won’t do shit of real consequence at the end of the day. Their largest fine to date was $25 million against KPMG Netherlands because auditors were sharing answers on BS internal training and the firm fibbed when they told the PCAOB they didn’t know it was happening (spoiler: it happens everywhere). “The PCAOB will not tolerate cheating nor any other unethical behavior, period,” said PCAOB Chair Erica Y. Williams when that fine was handed down earlier this year. “Impaired ethics threaten the investor confidence our system relies on, and the PCAOB will take action to hold firms accountable when they fail to enforce a culture of honesty and integrity.” But screwing up 86% of your job is fine, whatever. Just have Chair Williams write another scathing op-ed for the Wall Street Journal and say for the millionth time that firms must do better.

A question that gets asked any time a new PCAOB fine (or verbal tongue-lashing) happens is this: Does it matter? Did financial statements need to be restated or opinions changed as a result of the misbehavior a firm is fined for? No? Then who cares.

We all know the PCAOB is the TSA of capital markets: security theater. Evidently Senators Warren and Whitehouse are just now figuring that out too. I’ve got a free idea for them. Bully the PCAOB into forcing firms to report the exact percentage of work being performed by offshore staff. That should lead you in the right direction.

Elizabeth Warren criticises accounting watchdog over BDO audit failures [Financial Times]

The post Senators Yell at the PCAOB Because BDO’s Auditing Sucks appeared first on Going Concern.

FT wrote:

Richard Moriarty, chief executive of the Financial Reporting Council, wrote on Thursday to the bosses of the UK’s top accounting firms, saying the regulator was not “in principle” against private equity investment in the sector but there were “important risks that will need to be carefully managed”.

The intervention signals the regulator’s concerns that private equity investment could erode audit firms’ rigour and independence in auditing the accounts of large companies — key to maintaining investor confidence in the accuracy of companies’ accounts.

To be clear, the FRC isn’t wholly against private equity investment. “The FRC is not in principle against a greater participation of external private capital in the UK audit market.” said the letter dated September 26, embedded below in its entirety if you want to read the whole thing. “The FRC’s role is to protect the public interest and support growth. We are primarily concerned with outcomes and behaviors by audit firms such as delivering high quality audits, upholding high standards of ethical conduct, and fostering a culture towards always acting with the public interest in mind.”

“We recognize that access to external private capital could, in the right circumstances, have potential benefits for the UK audit market,” the FRC said. “However, there are important risks that will need to be carefully managed. As with any other major change within an audit firm that has the potential to affect its leadership and culture, a change in ownership structure via external private capital must be able to maintain and enhance over time the important public interest dimension of audit. It must also be able to protect independence as required by law and allow for any threats to that independence as a result of conflicts to be effectively safeguarded.”

On the expectation to rat themselves out, the FRC said that “a firm that is interested in, or considering, a change of ownership to introduce private capital should engage with the FRC (in addition to its Recognised Supervisory Body) at an early stage and with full candor, assured that all such discussions will be treated in strictest confidence.” In other words, the FRC wants firms to come to them well before any deal is struck. “We would also welcome engaging directly and in confidence with any investors considering entering or expanding into the UK audit market to help explain the regulatory framework and expectations,” they said.

Being the ignorant Americans that we are, we’re curious if the FRC can actually require firms to do this without official rulemaking or if this is them overreaching their authority under the banner of “we’re the regulator and we say so”? The letter does mention the public interest — both in fact and appearance — which certainly falls under the jurisdiction of the FRC. “Like for any other significant change relating to a UK firm, any party interested in a change of ownership by introducing external private capital must be able to continue to provide assurance that it will be able to support the public interest, the independence dimensions of audit and all applicable regulatory expectations,” the FRC said. “It is important to demonstrate that the legal requirements, including those pertaining to control, are met both in substance and in form.”

In the US, firms that have taken private equity investment have thus far dodged any independence concerns by forming two entities operating under one banner — the PE-backed one doing advisory and tax work, and a siloed assurance entity that’s independent from outside capital (in theory).

In its annual audit quality report issued last month, the FRC warned that private equity investors “may lack a deep understanding of audit practice objectives, and the public interest incentive to deliver audit quality. A lack of clarity or long-term thinking regarding PE exit strategies also raises concerns about maintaining audit quality and public interest motives over future years.”

The post Brit Audit Cops Want Firms to Snitch if Private Equity is Sniffing Around appeared first on Going Concern.

While the rest of the world was asking “huh? The what,” NYC-headquartered Prager Metis was buying up “real estate” in the metaverse and putting out press releases about it. In December 2022, Prager Metis put down nearly $35,000 in actual money for this three-story “property” in Decentraland, thus planting a flag on the Metisverse (groan, I know).

Let’s take a tour!

:25 killed me. My soul while watching this be like…

Wrote Kotaku’s Zack Zwiezen of Decentraland in 2022:

Decentraland is a 3D online virtual world that is built around the minting, buying, and selling of NFT items and digital land. It’s technically a game, but it seems about as fun as hanging out in a doctor’s office.

Or an accounting firm office.

It’s also hard to miss the general cheap, cluttered vibe of it all. This glimpse of Decentraland makes it look like a fictional game that was tossed together in a few hours for an episode of CSI: Whatever City, in which the investigators are trying to solve a murder that involves some “new” and “popular” online world. I can see a character actor playing this and going “Yeah, this is where I last saw Sally. Or someone who looked like Sally, we all look like the same crappy digital avatar in here.”

See? Prager was ahead of the curve. Go into any real world accounting firm and it’s the same five or six character models with only slightly customized hair options and different colored shirts.

So what if some assholes on the internet had jokes, Prager Metis was blazing virtual trails! They were providing potential clients “with the expertise needed to navigate the metaverse from a financial perspective” in the metaverse! There’s a 3rd floor you can jetpack to!

And then FTX blew up. FTX hired both Armanino and Prager Metis to audit their 2020 and 2021 financial statements (a totally normal thing to do because who doesn’t love getting a train run on you by auditors) which suddenly put a spotlight on the metaverse’s first accounting firm. When it was all over, restructuring pro and Enron biohazard cleanup leader John J. Ray III, who’d been appointed CEO after FTX went bankrupt, had this to say about the state of FTX:

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as I occurred here,” he said, incredulously. Again, this guy mopped up Enron. Remember that.

See also: No One Should Be Surprised to Learn FTX Used QuickBooks

We pretty much forgot that Prager Metis got in trouble for the whole FTX thing until now after seeing this press release the SEC put out the other day.

The Securities and Exchange Commission today announced that Prager Metis CPAs, LLC (Prager) and its California professional services firm, Prager Metis CPAs LLP, (collectively, the Prager Entities) agreed to pay $1.95 million to resolve two actions alleging misconduct in its audits of the now-defunct crypto asset trading platform, FTX, and auditor independence violations.

In one of the actions, the SEC alleges that Prager misrepresented its compliance with auditing standards regarding FTX. According to the SEC’s complaint, from February 2021 to April 2022, Prager issued two audit reports for FTX that falsely misrepresented that the audits complied with Generally Accepted Auditing Standards (GAAS). The SEC alleges that Prager failed to follow GAAS and its own policies and procedures by, among other deficiencies, not adequately assessing whether it had the competency and resources to undertake the audit of FTX. According to the complaint, this quality control failure led to Prager failing to comply with GAAS in multiple aspects of the audit—most significantly by failing to understand the increased risk stemming from the relationship between FTX and Alameda Research LLC, a crypto hedge fund controlled by FTX’s CEO.

The SEC’s complaint charges Prager with negligence-based fraud. Without admitting or denying the SEC’s findings, Prager agreed to permanent injunctions, to pay a $745,000 civil penalty, and to undertake remedial actions, including retaining an independent consultant to review and evaluate its audit, review, and quality control policies and procedures and abiding by certain restrictions on accepting new audit clients. The settlement is subject to court approval.

Will the independent consultant be strapping on a VR headset and holding classes for leadership in Decentraland? I sure hope so. It’ll probably be more interesting than Decentraland raves:

This is the #metaverse… A live rave happening right now in @decentraland for the upcoming @LightbulbmanNFT release by #BjarneMelgaard. Music from @feedelity @prins_thomas @mightbetwins #NFTdrop #rave #virtualevent #NFTCommunity pic.twitter.com/aC4WYRbgH9

— Alex Moss (@alexmoss) January 20, 2022

Don’t you hate when literally everyone at the rave is in a K-hole at the same time?

“Effective investor protection requires a collaborative approach that includes both regulators and gatekeepers such as auditors. To fulfill their role, auditors must, among other things, be independent, exercise due professional care and skepticism, and comply with all applicable professional standards. As we allege in these enforcement actions, Prager Metis fell short in all of these areas,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Because Prager’s audits of FTX were conducted without due care, for example, FTX investors lacked crucial protections when making their investment decisions. Ultimately, they were defrauded out of billions of dollars by FTX and bore the consequences when FTX collapsed. By limiting Prager’s ability to take on new business and by requiring it to retain an independent compliance consultant, today’s resolutions not only enhance investor protection, they also serve as a warning to audit professionals that are not appropriately meeting their gatekeeping obligations.”

NGL reading that quote from Gurbir S. Grewal was more fun than watching that 37 second rave clip.

“Once more we see an entity, lured by the siren song of the crypto asset markets, cutting corners on its obligations to comply with the law. As we have seen time and time again, these shortcuts do not pay. They do not pay for the entities who take them or for the multitude of victims that this misconduct leaves in its wake,” said Jorge G. Tenreiro, Acting Chief of the SEC’s Crypto Assets and Cyber Unit. “Our dedicated staff will continue to pursue investigations of those who may have violated the law, even after other wrongdoers have been identified.” I like the cut of your jib, Jorge.

Oh wait there’s more:

The SEC today also announced that the Prager Entities agreed to the entry of final judgments to settle separate, previous charges for violating auditor independence rules and for aiding and abetting their clients’ violations of federal securities laws. The SEC’s complaint alleged that, between approximately December 2017 and October 2020, the Prager Entities improperly included indemnification provisions in engagement letters for more than 200 audits, reviews, and exams and, as a result, were not independent from their clients, as required under the federal securities laws.

We wrote about that before: Prager Metis Just Got Thoroughly Boned By the SEC For Hundreds of Independence Violations

Alright, I’m done.

The post The Metaverse’s First Accounting Firm Won’t Be Paying These Big Old SEC Fines in Crypto We Assume appeared first on Going Concern.

Wrote AP:

China’s Ministry of Finance said in a statement Friday that it was imposing 116 million yuan ($16.35 million) in fines and confiscation of illegal gains on PwC Zhong Tian, also known as PwC China, as well as a six-month business suspension, revocation of PwC’s Guangzhou branch and an administrative warning.

In a separate action, the China Securities Regulatory Commission punished them to the tune of 325 million yuan ($45.8 million). This brings them to a grand total of a little more than $62 million yeeted from their revenue of approximately $1.1 billion (2022 revenue), so a 5.6% hit.

To date, this is the worst punishment a Big 4 firm has received in China. #1 in something yet again, PwC! You go.

In a statement addressing the ban, PwC said they are “disappointed” by PwC’s audit work “which fell unacceptably below the standards we expect of member firms of the PwC network.” They also threw some people under the bus:

PwC China has a long history of high quality audits and we do not believe that the behaviour of a very small number of engagement team members is representative of the work of the vast majority of PwC China’s 18,000 professionals.

“The work performed by PwC Zhong Tian’s Hengda audit team fell well below our high expectations and was completely unacceptable,” said PwC Global Chair Mohamed Kande. “It is not representative of what we stand for as a network and there is no room for this at PwC. That is why, following a thorough investigation, we ensured that actions were taken to hold those responsible to account and a comprehensive remediation programme will build a stronger PwC China firm for the future. China remains an important part of the PwC network and I remain confident in the China firm’s partners and staff as we work together to rebuild trust with stakeholders.”

PwC China and its Governance Board, with support from the PwC network, took a few accountability and remedial actions to address this matter. They:

• Terminated the employment of 6 partners and exited 5 staff directly involved in the Hengda audit work [Ed. note: Hengda is the principal subsidiary of China Evergrande Group, a listed company in Hong Kong.]
• Have taken accountability actions and commenced the process of issuing financial penalties for current and former firm leadership who were responsible for the business.

Daniel Li agreed to step down as PwC China’s Territory Senior Partner (TSP) given his former responsibilities as PwC China’s Head of Assurance. He will continue to support the business in his role as Chief Accountant of PwC Zhong Tian. Hemione Hudson, PwC’s Global Risk & Regulatory Leader, has been appointed to serve as the interim TSP and will relocate once the steps required to effect her transfer to PwC China have been completed.

Kevin Wang, Head of Assurance, will have an elevated role leading the audit and assurance business for PwC China.

When FT reported on the expected ban last month, they said PwC “assured clients that staff will keep working during the suspension and will be able to certify the audit opinions on their 2024 annual reports once the ban is lifted in March.”

The post China Puts PwC in the Punishment Corner For Six Months and Confiscates ‘Illegal Gains’ appeared first on Going Concern.

The someone added:

Just remember that Deloitte employees are never “let go” from their jobs, they are rightsized to align with the firm’s strategic objectives in light of economic uncertainty and sector level trends

Well, apparently a lot of people in audit are being rightsized this week.

Exhibit A: Plot twist, I’m ALSO being laid off.

After getting no real work done today, completely consumed by today’s events i.e. everyone around me being laid off… I also received my business update email to the shock, not only of myself, but of my team. I know you’ll all be in the comments asking, so let’s get that out of the way, I’m an audit senior, west region.

So my staff and I were laid off, it honestly feels like a mistake. There will be no one left on my team except for my manager and above, I feel a little sorry for them too. We had deadlines coming up.

I know the people around the office will try and make sense of this all, “they must’ve been a low performer” or “they must’ve missed too many time sheets.” Etc…

For the record, I was rated strongly agree on my last snapshot for both metrics. I was explicitly told this. I had made strong relationships with my team and the client. I was leading the engagement. I was doing well and my managers made that known. I hadn’t missed a time sheet this year, although I think I missed 2 last year so maybe that’s what did me in lol. Maybe it was some compliance thing that I missed last year? Who knows? They’ll chalk it up to market conditions. And no, I don’t have my cpa, even people with cpa were being laid off today/tomorrow.

TLDR: I received the “business update meeting” invite and spoiler the update is that I no longer work here anymore.

Another: Got laid off. It’s not performance related. It’s related to low business. I kind of already knew but it still stings

We don’t have much info other than a few Reddit posts, will see what more we can dig up and let you know. We don’t anticipate Deloitte will be making a public announcement but perhaps with enough stink they’ll feel forced to (spoiler: they won’t). It sounds like the numbers will be significant when all’s said and done. Wasn’t AI supposed to prevent a bloodbath like this?

Let us know if you were affected by this round of cuts and/or have more info by text or email.

The post Layoff Watch ’24: Deloitte’s Busy Scaring People with Business Update Meetings appeared first on Going Concern.

We knew this was coming. In July, BDO put out a damage control press release that used words like “continuous improvement” and promised the firm implemented “multiple strategic initiatives” to strengthen audit quality and build trust and confidence in the capital markets. In other words, “We really bungled this and the one before it wasn’t great either but pinky swear, we’re doing better. Trust us.”

So what’s the total damage? 25 out of 29 audits inspected scored Part I.A. deficiencies.

Oftentimes, and rightfully, we criticize the PCAOB for excessive paper-pushing and nitpicking but in this case, one issuer restated its financial statements to correct misstatements and in another audit, an issuer revised its report on internal controls over financial reporting (ICFR). In both cases, BDO revised its opinion and in the latter case, the firm expressed an adverse opinion. 2022 and 2021 also had some mess to be cleaned up:

In addition, in connection with our 2022 inspection procedures for two other audits, the issuer corrected a misstatement in a disclosure or an omission of a required disclosure in a subsequent filing. Our 2022 inspection procedures also involved one audit for which the issuer, unrelated to our review, revised its report on ICFR and the firm revised its opinion on the effectiveness of the issuer’s ICFR to express an adverse opinion and reissued its report.

Our 2021 inspection procedures involved one audit of an issuer that was formed by a merger between a non-public operating company and a special purpose acquisition company (SPAC) for which the issuer, unrelated to our review, restated its financial statements to correct a misstatement and the firm revised and reissued its report on the financial statements.

The most common Part I.A deficiencies in 2023 related to identifying controls related to a significant account or relevant assertion, performing substantive testing to address a risk of material misstatement, and testing the design or operating effectiveness of controls selected for testing. The Part I.B deficiencies in 2023 related to consideration of fraud, retention of audit documentation, audit committee communications, risk assessment, the firm’s audit report, management communications, critical audit matters, and Form AP.

We propose the PCAOB add a new data point to its inspections and public reports: What percentage of audit work is performed offshore. Hell, throw in what kind of work it is, too.

Revenue and related accounts tripped BDO up the most followed by inventory, business combinations, and finally goodwill and intangible assets. At least they’ve gotten better at goodwill.

We don’t need to cover each deficiency but Issuer A is worth a look, a health care client that went on to restate its financial statements in connection with the PCAOB inspection:

With respect to Revenue:

The issuer recorded revenue at the time its services were provided to its customers. The firm did not perform any substantive procedures to test whether the performance obligation had been fully satisfied before revenue was recognized. (AS 2301.08)
The firm used information produced by the issuer in its testing of transaction prices, but did not perform any procedures to test, or test any controls over, the accuracy and/or completeness of certain of this information. (AS 1105.10)

With respect to Warrants:

During the year, the issuer issued warrants that were recorded as liabilities. The firm did not identify and evaluate misstatements in the fair value measurement of these warrants. (AS 2810.30)

In connection with our review, the issuer reevaluated its accounting for these warrants and concluded that misstatements existed that had not been previously identified. The issuer subsequently corrected these misstatements in a restatement of its financial statements, and the firm revised and reissued its report on the financial statements.

In its response to the PCAOB inspection, BDO linked their 2023 Audit Quality report and said the “numerous investments” they’ve made in improving audit quality can be found there.

Better luck next time.

The full 2023 PCAOB inspection of BDO USA, P.C. can be found here [PDF]

The post BDO Aced Its 2023 PCAOB Inspections! JK, It Was F**ked appeared first on Going Concern.

Several PIE and non-PIE audit firms in the UK have entered into private equity (PE) deals, and larger firms have also been approached periodically for discussions. We are closely monitoring this situation through our PIE Auditor Registration team and our supervisory engagement discussions with firms.

Historically, audit firms have been funded by their equity partners, supplemented by traditional bank financing. Recently, there has been a notable trend in the UK and internationally of PE investors acquiring substantial equity stakes in smaller audit firms, which through consolidation have moved into the top 30 firms by turnover. PE investment might drive growth and innovation in the UK economy, but there is a risk that PE investors may lack a deep understanding of audit practice objectives, and the public interest incentive to deliver audit quality. A lack of clarity or long-term thinking regarding PE exit strategies also raises concerns about maintaining audit quality and public interest motives over future years.

PE investment could have the potential to offer opportunities in the audit market, but it is essential to avoid conflicts of interest that may impair auditor independence or undermine the resilience of the market.

Ya think?

FRC Annual Review of Audit Quality [PDF]

The post “There is a Risk That PE Investors May Lack a Deep Understanding of Audit Practice Objectives” appeared first on Going Concern.

The FRC explains the rule EY broke:

The Revised Ethical Standard 2019, which reflects the requirements of UK law, imposes restrictions on the amount of non-audit services that an audit firm may provide to a Public Interest Entity. The cap on non-audit work is 70% of the average of the fees paid to the audit firm over the previous three consecutive years. The cap applies at both Network level (i.e. members of the global EY network) and at Firm level (EY UK). EY UK tested the fee ratio at Network level but not at Firm level, and so accepted and carried out non-audit work in breach of the 70% fee cap. This breach was not intentional or dishonest.

EY was the auditor of record for Evraz from the time it was listed on the UK stock exchange in 2011 until late 2022 when the UK government imposed sanctions on Russia due to their invasion of Ukraine.

As for what exactly happened:

In early 2021 EY accepted an engagement by Evraz to carry out non-audit work in connection with a proposed disposal of the Evraz Group’s coal-related interests. These were principally held through a Russian company, PJSC Raspadskaya. It was proposed that this company would demerge from the Evraz Group and that a dividend in kind would be paid as part of the demerger. The proposed disposal was known as Project Gemini.

EY’s non-audit work in connection with Project Gemini related to the provision of working capital reporting, assistance with correspondence with the Financial Conduct Authority (“FCA”), and a comfort letter in connection with the information in the circular that was prepared to support the demerger.

The average of the fees paid to EY UK for its audits of Evraz in the three consecutive financial years prior to it carrying out work on Project Gemini was $400,462. 70% of this figure is $280,323. The total fees for EY UK’s non-audit services on Project Gemini that were subject to the 70% cap amounted to $535,000 and therefore exceeded $280,000 by a significant margin.

For their sins, EY received the following financial and non-financial wrist slaps:

• A financial sanction comprising: i) £121,305 in respect of disgorgement* of profits earned on fees in excess of the fee-cap; and ii) an additional £200,000 component. The additional component has been discounted for admissions and early settlement to £130,000, such that the total financial sanction is £251,305.

*The disgorged sum represents the profits on non-audit work that EY earned from Evraz plc, over and above the fee cap, which it would not have earned had it complied with the Ethical Standard, and which the FRC has now required EY to give up as part of the financial sanction imposed.

Non-financial sanctions as follows:

• A published statement in the form of a reprimand.
• A root-cause analysis report to be prepared and presented to the FRC identifying the reasons for the breach and actions taken since, including in response to the wider issue around EY’s handling of the approval and assessment of non-audit services, identified in the FRC’s 2023 Audit Quality Inspection and Supervision Report.
• Any further remedial action proposed by the FRC to be implemented as necessary.

“The Ethical Standard sets clear limits on the value of non-audit services an auditor can provide. Its aim is to uphold high standards of auditor independence and ensure public confidence in audit,” said Claudia Mortimore, Deputy Executive Counsel at the FRC. “In this instance, EY’s systems and controls failed to ensure compliance with the Ethical Standard which led to the fee-cap being breached. In addition to the financial sanctions announced, EY is required to report to the FRC on the reasons for the breach and to provide assurance that appropriate measures are in place to avoid any future recurrence.”

We’re sure they’re very, very sorry and won’t ever get caught doing do this again.

The post EY UK Gets Hit With a Weakass Fine for an Ethics Conflict appeared first on Going Concern.

“These artificial intelligence capabilities enhance our overall transformation to deliver a better audit experience for our people and the companies we audit,” he added. “Our AI capabilities will further strengthen our engagement teams to more effectively engage Audit committees and management committees.”

And now, the press release talking points:

KPMG Clara with AI is connected to our broader transformation efforts to enhance audit quality through our Trusted AI framework. For example, new generative AI capabilities will help teams:

• Refine risk assessments: AI assistants can review documents to help engagement teams identify risk factors. For instance, within KPMG Clara, engagement teams can leverage AI to help review meeting minutes and flag possible accounting and fraud risks.
• Develop substantive testing procedures: Our AI assistant has direct access to our audit methodology, enabling auditors to design appropriate substantive testing procedures to respond to risks quicker.
• Enhance audit documentation: By working with our AI assistant, team members can quickly summarize, question and consider improvements to engagement-specific audit documentation within KPMG Clara.

And:

KPMG today also unveiled AI and generative AI capabilities that will be deployed in the workflow in the coming months. These include:

• A growing prompt library that will, over time, include AI-powered agents to assist Audit teams in driving audit quality;
• Automated quality scoring to generate AI assessments and deliver feedback to Audit teams on actions for quality improvement;
• Use of AI and machine-learning to automate the review of financial statements, augmenting engagement teams’ assessment that all required disclosures have been made to the capital markets; and
• Assurance capabilities integrated into the workflow for teams delivering assurance over disclosures, such as emissions disclosures. 

“All of our auditors are trained on how to effectively use AI with a human-in-the-loop mindset to maintain quality, accuracy and professional skepticism,” said Thomas Mackenzie, KPMG U.S. and Global Audit Chief Technology Officer.

We trust this development will help KPMG push its deficiency rate below 25% for the first time since 2011.

KPMG Announces AI Integration into Global Smart Audit Platform, KPMG Clara [KPMG

The post Maybe AI Will Help KPMG Finally Get Gud at Auditing appeared first on Going Concern.

The PCAOB’s standard-setting agenda includes a research project to assess whether there is a need for guidance, changes to PCAOB standards, or other regulatory actions in light of the increased use of technology-based tools in the preparation and subsequent audit of financial statements.

As part of this research, the PCAOB asked mostly larger firms — that is, US global network firms and several U.S. non-affiliated firms that audit more than 100 issuers — how they’re using generative AI right now and how they foresee using it in the future.

Here’s what the firms said about right now:

Current Use of GenAI: Some firms stated that their staff can use GenAI when preparing certain administrative documents or initial drafts of memos and presentations related to the audit. Some firms also indicated that they had developed and deployed GenAI-enabled tools to assist staff in researching internal accounting and auditing guidance. Generally, the global network firms we spoke to are further along in developing and deploying GenAI-enabled tools than non-affiliated firms are.

And the future:

Investment in GenAI: Most firms indicated that they are continuing to invest in GenAI enabled tools either by developing them internally or by partnering with third parties. These firms identified several potential areas where such tools may assist engagement teams in the future with planning and performing audits. The areas could include assisting with summarizing accounting policy and legal documents, evaluating the completeness of audit documentation against relevant documentation requirements, performing certain risk assessment procedures, scoping the audit, evaluating the completeness of financial statement disclosures, and comparing amounts in the financial statements or notes to the financial statements with audited amounts.

The PCAOB also canvassed preparers of financial statements and here’s what they said:

Current Use of GenAI: Some preparers noted that their personnel use GenAI in creating initial drafts of internal documents (e.g., summaries of accounting standards and interpretations, presentations, and benchmarking of company information with publicly available information from competitors). In addition, some preparers also use GenAI to assist in the performance of less complex and repetitive processes, such as preparing account reconciliations or to assist with identifying reconciling items.

Both groups are rightfully concerned about the reliability of AI output with the audit firm side insisting humans must still be involved due to AI’s tendency to hallucinate (related read on that topic from Scientific American: ChatGPT Isn’t ‘Hallucinating’—It’s Bullshitting!). “[S]upervisors who review work performed with the assistance of GenAI are expected to apply the same level of diligence as when reviewing work where GenAI was not involved,” said the PCAOB. Our condolences to the supervisors who now have to review the offshore team’s work, the AI’s work, and the offshore team’s AI work.

Full Spotlight below. It’s short, don’t worry.

The post The PCAOB Asked Big Firms How They’re Using Generative AI appeared first on Going Concern.

Side note: Say what you will about the monarchy, you gotta love the pomp and showmanship of it all. Imagine Paul Sarbanes and Michael Oxley dressed up like this when they announced legislation named after them that would completely transform the audit industry.

Accountancy Age identified the four areas in which the Draft Audit Reform and Corporate Governance Bill would change things up in the name of audit quality and trust in UK capital markets:

• Establishing the Audit, Reporting and Governance Authority (ARGA) to replace the Financial Reporting Council, with expanded powers to investigate and sanction directors.
• Extending Public Interest Entity (PIE) status to large private companies, subjecting them to more rigorous audit requirements.
• Introducing a new regime to oversee the audit market, protect against conflicts of interest, and build resilience in the sector.
• Removing unnecessary rules on smaller PIEs to reduce regulatory burden.

Of the King’s audit shout-out the FRC said it “welcomes the Government’s announcement of draft legislation to modernize its regulatory toolkit.”

The FRC has transformed in recent years into a more robust and effective regulator. But despite this progress, there are serious gaps in the regulatory toolkit that have long been identified as being in need of reform so we can act fully in the public interest and support growth and the ability of companies to attract the capital they need. Without these changes we are the regulatory equivalent of being a sheriff for only half the county and with weaker powers than are needed.

Hmm this sounds vaguely familiar. Where have we heard this before…

This positive direction of travel recognizes our important role in supporting the UK’s reputation for good corporate governance, financial reporting, and audit. Our work underpins domestic and international investor confidence, resulting in businesses being more readily able to access the capital they need to grow and create jobs and wealth in every community across the UK.

We will work with the Department of Business and Trade as it brings forward this draft legislation while continuing to use our existing powers to deliver good standards of corporate governance, financial reporting and audit and fulfilling our remit to support growth across the UK.”

City A.M. has some reactions from the big dogs:

Hywel Ball, EY UK Chair said: “EY has consistently advocated for a stronger regulator and enhanced director accountabilities,” noting “we are pleased to see audit and corporate governance reform return to the legislative agenda.”

Cath Burnet, head of audit, KPMG UK noted that “reform of the whole corporate ecosystem is important for driving trust and confidence in the financial reporting of UK businesses.”

Agreeing, Paul Stephenson, UK managing partner for audit and assurance at Deloitte, stated that “inclusion of audit and corporate governance reform” today “is encouraging for our industry and UK business as a whole, and must push ahead at pace.”

Ball also noted that the “UK’s attractiveness as an investment destination, international competitiveness and economic growth depend on the implementation of smart, considered regulation.”

“Initial proposals were drafted several years ago and will need to be updated to reflect the current UK market, so we look forward to seeing further details once they are released,” Ball added.

Most interesting of the reactions was Forvis Mazars audit and assurance head David Herbinet who seems a bit annoyed that Big 4 get all the business. “To achieve the Bill’s goals will require Managed Shared Audit in the FTSE350. This is the only way we will build audit market resilience,” he said. “After years of reform being on the agenda the dominant four firms still account for 98 per cent of audit fees in the FTSE350.”

Managed Shared Audit = joint auditing. We’ll get to that in a second.

“This cannot be allowed to go on,” he said. “Were one of them to leave the market for whatever reason many leading listed companies would likely be left at short notice without an auditor which is untenable and would place the government in an impossible position.” Managed shared audit would “allow challenger firms to build up their market position in a practical way over five to seven years for the benefit of all listed market stakeholders,” he added.

Forvis Mazars pitches the joint audit idea here:

In a joint audit, several independent auditors are appointed to conduct an audit of the annual or consolidated financial statements. This means the audited company engages two (in rare cases three or more) audit firms. The unique feature compared to an ordinary single audit is that joint auditors both jointly conduct the audit and jointly certify the audited financial statements. It is important to distinguish here that a joint audit is not a dual audit, where the entire audit is carried out twice.

What sounds like a little more work at first glance can actually offer added value for companies. A joint audit promotes both a strengthening of independence of both auditors through the “four-eyes” principle, and improved audit quality through two quality assurance systems. After all, four eyes see more than two. This creates security and trust between stakeholders and the public. Building trust is very important following recent, high-profile, and much-discussed accounting scandals. Companies also benefit from the different professional expertise of two audit firms that bring in different auditors. This is particularly true in cases where there are complex accounting issues, or with regards to expertise in certain business segments or geographical areas.

In a submission to the Business and Trade Committee Inquiry on Audit Reform in May, the then-Forvisless Mazars said more choice in the market is needed to increase competition and resilience, particularly in audits of Public Interest Entities (PIEs). They also suggested the proposed Audit, Reporting and Governance Authority (ARGA) “could more simply and clearly be renamed the UK Corporate Governance Authority.”

Come on bro, the government can’t do anything simply and clearly.

Anyway, we look forward to seeing how this one shakes out.

The post King Charles Gives Audit Reform a Shout-Out, Guy Not at Big 4 Complains Big 4 Gets All the Business appeared first on Going Concern.

The firm, with 781 partners and nearly 19,000 employees in mainland China as of last September, according to its website, is also mulling laying off about 20% of the staff in other auditing teams and non-auditing business lines, they added.

PwC China’s layoffs started last week, and the overall target is expected to be met over a period of time, said the sources, who declined to be identified as they were not authorised to speak to media.

“In light of changes to the external environment, we are making some adjustments to better optimise our organisational structure to align with market demand,” a PwC spokesperson said in an emailed statement.

Bloomberg reported last week that PwC China began “mass layoffs” due to losing dozens of clients as a direct result of the Evergrande debacle (timeline of that situation here, we don’t need to get into it here). The number they threw out was 100 people from different teams working in Beijing, Shanghai, and others; one person told Bloomberg more than half of one team was laid off.

At that time, a spokesperson gave Bloomberg the same “changes to the external environment blah blah” spiel and added: “These adjustments are a difficult decision. We are actively communicating with our people and will ensure that the plan is in compliance with all relevant labor laws in China.”

It was reported in March that Chinese authorities — a group of people you really don’t want to get on the bad side of — were looking into PwC and questioning some of the people who worked on the Evergrande engagement. “There are serious questions about PwC’s role in the Evergrande fraud, specifically what it knew about the improper revenue recognition,” said Nigel Stevenson, analyst at Hong Kong accounting research firm GMT Research Ltd., to Bloomberg. At that same time, Evergrande founder Hui Ka Yan was fined 47 million yuan ($6.5 million USD) and totally banned from China’s capital markets for the remainder of his miserable days on Earth.

According to a Reuters source, earlier this month the firm asked the 1,000 people working in financial services audit in Shanghai to take 15-day leave in July and August during which time they’d be paid 1/5th of their usual salary.

Exclusive: PwC weighs halving of China financial services audit staff, say sources [Reuters]

Update: Financial Times has followed up with a story published on July 16: PwC loses two-thirds of accounting revenues from clients listed in mainland China

The post Layoff Watch ’24: Things Aren’t Looking Good at PwC China [UPDATED] appeared first on Going Concern.

The current state of audit technology is not static. With a number of different solutions rapidly becoming available — some of them containing more advanced technologies such as generative AI (GenAI) — audit firms are looking to adopt new tech for a number of reasons that come down to one overarching theme: doing work faster, but at the same or better quality.

Indeed, according to the survey, technology adoption benefits cited by at least half of respondents include improving efficiency, freeing up an auditor’s time to address more complex issues, streamlining processes, and improving quality. “Audits of the size we perform are high in hours and low [in] recovery based on the high level required to meet compliance standards that provide little value to the audited client,” said one survey respondent. “It would be beneficial to have tools to increase the efficiency of audits.”

The issue is, however, that efficiency is needed for a number of different use cases. When respondents who said they use AI or GenAI and were asked how they were using the technology, they responded in a number of different ways. Some said their efforts were focused on back-end, internal data management and processing. Others said they were more client-focused, with risk management and customer support. Still others said they were looking to be more forward-thinking with the technology, using predictive analytics and modeling.

Here are some of the things the 180 audit professionals in the US, Canada, and UK surveyed are using — or plan to use — AI for at their firms:

Almost half of respondents (44%) said their firm has implemented or is starting to implement progressive tech while 36 percent said their firms are considering it but haven’t taken action. Peep this though: 21 percent or about one out of five respondents said their firms either haven’t even considered it or outright ruled against it. Best of luck to them.

Let’s revisit this quote from earlier: “Indeed, according to the survey, technology adoption benefits cited by at least half of respondents include improving efficiency, freeing up an auditor’s time to address more complex issues, streamlining processes, and improving quality.” That bit about freeing up time to let professionals focus on more complex issues comes up a lot whether it’s audit or tax. Here are just a couple excerpts that show up in a cursory Google search:

• AI frees up accountants to think strategically and focus on high-level tasks such as preparing assets and capital account entries. [BankBeat]
• With AI and machine learning in place, these tasks have been automated, freeing up accountants and bookkeepers to focus on higher-value tasks. [New Jersey Society of CPAs]
• AI can automate repetitive tasks such as data entry, invoice processing and reconciliation. This frees up accountants to focus on more strategic activities. [University of New Haven]
• AI is a tool that streamlines tasks, freeing up accountants to focus on higher-value activities and strategic decision-making… [Accounting Today]

This may be why 54 percent of respondents to the survey said their firms are looking specifically for staff with critical thinking and problem-solving skills. Anyone who’s dabbled in AI will tell you neither of those are the technology’s strong suit. Then again, those traits can be hard to find in auditors, too. “It may seem that audit teams want to use these new technologies, but they might not have the personnel to do a full rollout,” wrote TR.

To get around this issue, the report suggests the following:

Firm leaders and managers can look for the most time-consuming, repetitive tasks being done by their audit professionals — such as data entry, data cleansing, reviewing documents, and more — and determine for each task whether technology could provide a way to do the job quicker, at the same (or better) quality, in order to free up personnel for more client-centric tasks.

As for the top challenges facing audit firms, the headline of this post spoiled it. Attracting and hiring skilled professionals (58%) and retention of staff (41%) dominate the list.

Anecdotally, we’ve been hearing from recruiters that audit is becoming increasingly difficult to staff beyond the usual “there’s a shortage of accounting graduates” talking point. These days, auditors seem to be bailing out in large numbers and trying to pivot to regular accounting work, even if it’s way outside of the scope (no pun) of what they’ve always done. Hell, even firms are bailing out of audit. This is an interesting phenomenon that could potentially be disastrous not just for firms but to capital markets unless the technology suddenly gets really, really good at doing the work of dozens of human auditors. Just something worth mentioning. If any audit refugees would like to share their story of why they got out and where they landed, please get in touch.

Beyond talent both new and experienced, here’s a breakdown of how many respondents listed the following topics as top challenges:

We can see at least two or three items on that chart that can be effectively made less of a challenge by existing AI technology without too much hassle, how many do you see?

Audit firms have hiring challenges — Is this where technology can help? [Thomson Reuters]

The post Attracting and Retaining Staff Are By Far the Biggest Problems at Audit Firms appeared first on Going Concern.

In the wake of Colorado firm and former Trump Media auditor BF Borgers being charged with “massive fraud” by the SEC in May, law firm Armstrong Teasdale has helpfully crafted some thought leadership aimed at those seeking audit services. The TLDR is don’t trust them, bro. The actual text can be found a few paragraphs down but first let’s catch you up on the story if you don’t know it.

Former Borgers clients were unceremoniously launched into the auditorless abyss by the quick shuttering of Borgers’ “sham audit mill” and there were so many of them that the SEC put out a notice aimed directly at these clients to remind them of all the stuff they are required to do upon finding out their auditor is trash. Losing your auditor at a time even larger audit firms are exiting the public company audit space completely is not a good time. Luckily for capital markets, most Borgers clients were small fry so their inconvenience didn’t exactly send 2008-level shockwaves through the economy.

But we aren’t talking small violations at Borgers here. It takes a lot to get “permanently closed” by regulators. Just look at Big 4 firms still happily chugging along despite racking up record fines over the years.

The lesson: Do your due diligence before choosing your audit firm, clients. Borgers’ reputation for shoddy drive-thru audits was known long before the SEC started typing out an order. Then again, maybe that’s why some clients chose them (not accusing anyone, just sayin’). Anyone seeking rubber stamp audits I guess can just ignore this advice and look for a firm that gets really pissed off at you if you start asking questions.

These are just a few basic questions Armstrong Teasdale encourages clients to ask potential auditors. Yes, it’s tedious. Yes, it’s a lot. Yes, they could still bullshit you.

• Basic Firm Information: What is the name and address of the firm, how long have they been in business, and how long have they been registered with the PCAOB? Are onsite client visits available? Does the firm have any references from its existing clients? Has the firm been involved in previous litigation brought by a client, and if so, how was it resolved?
• Organizational Information: What is the corporate structure of the firm? Are decisions made by a board of directors, officers or a management committee? Who conducts supervision over an audit engagement, and how is that review documented?
• Ownership and Leadership: Who are the individual owners, executives or managers of the audit firm? Do publicly available records reflect any risk concerns with respect to those individuals?
• Regulatory Oversight: Does the PCAOB have any records that reflect concerns with the firm? The PCAOB oversees audits of publicly traded companies and broker-dealers. The PCAOB inspects registered accounting firms, and portions of the inspection reports are publicly available. The registration application, annual reports and any disciplinary proceeding information are also available on PCAOB’s website. PCAOB status is also relevant to investment advisers in their SEC Rule 206(4)-2 obligations.
• Business Risks: Does the audit firm maintain written policies requiring it to comply with the PCAOB requirements? How often are those policies updated? Does it maintain audit documentation as required by PCAOB standards? Does it maintain an internal Code of Ethics, a business continuity plan or controls to maintain the privacy of client information?
• Audit Firm Engagement: Is the audit firm willing to respond to a due diligence questionnaire? Does the engagement letter with the auditor contain a limitation of liability in favor of the audit firm? Alternatively, does it provide that the audit firm will defend or indemnify the client against any losses caused by the audit firm’s services?

In recent years the PCAOB (that’s the Public Company Accounting Oversight Board for the plebs) has made it super easy to search inspection reports to dig up dirt on audit firms. It can be a little tough for people unfamiliar with the language of PCAOB inspection reports to parse what’s genuinely bad and what’s just PCAOB nitpicking but they do you a solid and put the deficiency rate for a particular year in the search results. Part I.A. Deficiencies are the bad ones on the PCAOB scale, “deficiencies that were of such significance that [the PCAOB believes] the firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion(s) on the issuer’s financial statements and/or ICFR. 100% Part I.A. Deficiency Rate = couldn’t audit their way out of a paper bag. See:

A reasonable person could argue here (and probably will in the comments) that PCAOB deficiencies are often meaningless paper-pushing unless restatements and/or lawsuits get involved but let’s not confuse the clients OK?

For more tips on picking an auditor, see “Hiring a quality auditor: Your guide to the selection process” [PDF] from the AICPA.

The post PSA to Clients: Be Sure to Ask Your Auditor If They’ve Committed Egregious Standards Violations Before Signing That Engagement Letter appeared first on Going Concern.

Here’s what they said:

BDO’s 2023 Audit Quality Report

BDO’s commitment to quality – and a mindset of continuous improvement – reflects the firm’s core purpose and values as well as its ongoing efforts to engage in important and constructive dialogue with stakeholders, including investors, regulators, audit committees and clients.

In BDO’s 2023 Audit Quality Report, the firm shares how the implementation of multiple strategic initiatives strengthens audit quality and builds trust and confidence in the capital markets. These initiatives, building on the strategic foundation set in 2022, are multifaceted and interdependent. The firm is working to ensure changes are not only embraced by BDO professionals but embedded in processes, decisions and daily work. BDO’s leadership and professionals are engaged in this journey and are committed to audit quality excellence in the pursuit of a sustainable and resilient business that serves the interest of the capital markets.

BDO has made numerous investments to improve the quality of its audits over the past two years, including, among others, the deployment of a reimagined approach to learning, an enhanced approach to audit phasing, the implementation of a new methodology enablement group, the continued nationalization and standardization of its assurance practice, as well as the continued expansion of its digital audit suite. To learn more about these initiatives, see BDO’s 2023 Audit Quality Report.

TLDR: We’re getting better. Promise.

BDO racked up deficiencies for more than half of the audits inspected by the PCAOB for its 2021 inspection report. Here’s what we wrote at that time:

Terrible PCAOB inspection reports are par for the course for BDO lately. For the second straight inspection cycle, the PCAOB found significant mistakes in more BDO audits than ones without (16 out of 30 in 2021 and 13 out of 24 in 2020). As a result, BDO followed its 54.2% failure rate in its 2020 inspection report with a failure rate of 53.3% in 2021.

For 2021 inspections, six audits had problems in both internal control over financial reporting and in the financial statement, nine had deficiencies in the financial statement only, and one ICFR audit wasn’t up to snuff.

The news release also mentioned the firm has added PCAOB alum John Fiebig as the second independent member to BDO’s Audit Quality Advisory Council (AQAC), established in 2022. Fiebig is founder of ADIGEO Consulting, LLC — “a consulting firm focused on advancing audit quality for the benefit of strong capital markets” — and prior to that was senior deputy director and program leader for the Global Network Firm Program at the PCAOB.

Bloomberg Tax wrote about the press release when it came out and has now followed up with this article: BDO Pares Back Clients, Reforms Audit Practice to Boost Quality. Resident accounting firm watcher Amanda Iacone writes:

In the past few years BDO, among the six largest audit firms in the country, has restructured its audit practice, shrunk its book of public company clients, and launched a new learning program meant to train entire audit teams. It’s also aiming to frontload more work for its auditors to ease the burdens of the busy annual report filing season.

“Humans work a lot better when they have time to think and they’re not dealing with battlefield conditions,” Lillian Ceynowa, BDO’s national managing principal of audit quality, said in an interview with Bloomberg Tax.

Oh the poor India team. See: Rise Up! BDO USA Is Gonna Double Its Offshore Workforce, Mostly in India

Ceynowa said the changes are meant to improve regulatory inspection results and to remake the firm’s culture and shift auditor behavior.

“We are moving in the right direction,” she said, though predicting the firm’s progress won’t pay dividends until BDO’s current 2024 inspection results are published.

The next inspection report coming out will be for 2022. And, as mentioned above, it will have to be significantly worse than the last deficiency rate of 53.3% to prompt a press release that reaffirms a commitment to audit quality.

But wait! There’s more!

BDO is also considering updates to its audit methodology and a revamp of the core platform that auditors use every day. Last year, the firm began to shift the calendar for its audits, aiming for the bulk of its work to be completed before a client’s fiscal year ends.

Those changes won’t erase the strains of the busy annual report filing season but are meant to carve out more time for staff to research decisions or dig into red flags. Completing more work earlier in the audit also could help lead to fewer inspection findings, Ceynowa said.

A source of ours postulates there’s some kind of big regulatory settlement coming down the pike, we’ll just have to wait to see if that prediction materializes.

BDO Pares Back Clients, Reforms Audit Practice to Boost Quality [Bloomberg Tax]

The post BDO Is in Damage Control Mode appeared first on Going Concern.

TLDR: Independence and ethics should come before profits. Firms shouldn’t be sweeping incidents under the rug. THE SEC IS WATCHING YOU.

To illustrate his point, he offers this oddly specific scenario:

Picture the following scenario: An issuer’s audit committee solicits competitive bids from audit firms for the company’s independent audit work. In an effort to secure the lucrative engagement, a senior partner at an audit firm secretly promises the issuer’s CFO that if his firm is chosen as the company’s auditor, his firm would provide tax and other permissible non-audit services to the company at reduced rates. The audit firm wins the audit engagement.

Following an investigation by the SEC’s Division of Enforcement, the Commission institutes an administrative proceeding and finds that because of the mutual conflict of interest created by the audit firm’s provision of non-audit services at reduced rates in exchange for being chosen as the company’s auditor, the audit firm and audit partner were not independent within the meaning of Rule 2-01(b) of Regulation S-X. The Commission orders a censure, monetary penalties, and a suspension from appearing or practicing before the SEC for the audit partner.

In the aftermath of such an enforcement action, how might the audit firm respond?

We already know how most of them respond but let’s entertain Mr. Munter anyway, he obviously spent a lot of time and energy on this.

The firm may opt to sweep the incident under the rug. It may treat the independence violation as an isolated incident—an efficient breach or just the “cost of doing business”—and wait things out by allowing the partner to focus on non-audit business development until being reinstated.

Alternatively, the firm may opt to address the incident head-on. Firm leadership may openly discuss among its personnel what went wrong; use the underlying violations as an opportunity to teach and instill in all staff the critical importance of professional integrity, ethics, and serving the public trust; and possibly internally sanction, terminate, or suspend the audit partner.

Firms’ version of the second option: The firm develops a new module of independence training that’s mandatory for all staff and partners to complete. Then everyone shares answers so they can get back to real work and firm leadership feels the issue has been adequately addressed.

Although he doesn’t speak to any specific matter (darn, this would be so much better with names), he does say the SEC has observed firms choose option one. “[A]ccountants, including high-profile audit partners, remain in positions of firm leadership following an enforcement action that results in discipline against the accountant with seemingly no professional repercussions while waiting for a prescribed reinstatement period to pass.” Well yeah. What do you want firms to do, ship them off to Naughty Partner Island? These partners have been building their networks for decades, you can’t just throw that away because they got sued and fined by the SEC.

“But what sort of tone does that response set at the firm?” he asks. “What message does it send to the accounting profession and firm staff, particularly less-experienced staff and staff in service lines other than audit? Does it teach them that skirting the rules is acceptable, as long as you don’t get caught? And if you do get caught, is it simply the cost of doing business and the firm will take care of you until your ‘time out’ from appearing and practicing before the Commission as an accountant is over?”

And then the cycle repeats itself when those less-experienced staff start rising through the ranks themselves. Hey, I remember this from a PSA.

This guy is smoking some strong shit if he thinks any of this will be internalized by growth-at-any-cost audit firms. Bless him for trying though.

Less-experienced staff watch what their managers do. If they see their managers bend the rules or make exceptions for profitable partners who engage in inappropriate conduct, less-experienced staff may assume that this behavior is the path to rise through the ranks. This is why firm leadership must make ethics and character a fundamental part of the firm’s hiring, retention, and promotion criteria for all professionals, regardless of service line within the firm—even at the expense of a more profitable bottom line in the short-term. Professionals trained to conduct themselves, and to expect others on their team to conduct themselves, with integrity in an ethical and professional manner reinforce one another with the support of firm leadership. By contrast, leadership that encourages corner cutting to save time on audit engagements, promotes individuals that do not exhibit key indicia of professional ethical conduct, and fails to support and defend professionals that make difficult decisions in favor of high audit quality will, in the end, fail in their role as public watchdogs.

“Leadership should reward individuals or engagement teams that took difficult stands and sacrificed short-term profitability in order to preserve independence and other professional responsibilities of the firm,” he said completely unironically. “Technical excellence and integrity should be rewarded at least as much as billing, profitability, and business development.” Imagine bonuses being tied to how often you flag potential independence violations and ethical dilemmas.

Another item from his statement stood out like a glaring klaxon (this thing: ). It reads like a big hint that the SEC (and, by extension, the PCAOB because they have nothing better to do) will be keeping a close eye on the private equity arrangements popping up and how firms taking these deals are sectioning off their audit practices.

He said:

Audit firms have also sought investments from third parties, such as private equity firms, that have not been subject to the same independence and ethical responsibilities as auditors. Depending on how those investments are structured, they could lead the firm’s professionals to question the firm’s commitment to both independence and high-quality audits. Firm leaders need to be sensitive to the message such arrangements could send and stand ready to correct any such misimpressions.

And later in the statement, using “cost of doing business” for the third time:

So when firm leadership fails to set a strong tone at the top­—for example, by sweeping mistakes and bad behavior under the rug, treating violations of law as isolated incidents or the “cost of doing business,” not holding wrongdoers throughout the firm and across service lines accountable, or changing their firm structures in ways that could pose future independence challenges for the firm with respect to its audit engagements—they risk eroding the firm’s culture, professional skepticism, quality control systems, and public responsibility as gatekeepers of our capital markets.

[insert Ain’t Nobody Got Time Fo’ Dat gif here]

In conclusion:

Accountants serve a trusted public role in promoting the integrity of our markets and the protection of investors. The value of an audit and auditors depends on their credibility and trustworthiness. Audit professionals in particular have a difficult job—they sometimes must make difficult determinations that pit the public interest against self- or firm-interest. But that is precisely how public accountants fulfill their gatekeeping function to help protect investors: by ensuring that issues are promptly identified and addressed. To maintain that function, and in training the next generations of public accountants, it is critical that leaders of public accounting firms lead by example and foster a healthy tone at the top by prioritizing integrity and professionalism over profit and growth.

It’s a good thing the next generation of public accountants will be algorithms. It’s easier to program in than to demonstrate ethics.

Fostering a Healthy “Tone at the Top” at Audit Firms [SEC]

The post Audit Firms’ Tone at the Top Sounds Like a Brown Note, Says SEC Chief Accountant appeared first on Going Concern.

The new quality control standard requires PCAOB-registered firms to identify their specific risks and then ensure their QC system adequately protects against those risks with appropriate policies and procedures.

The new standard supersedes current PCAOB quality control standards with an “integrated, risk-based standard,” QC 1000, A Firm’s System of Quality Control and applies to all registered firms. See: PCAOB Rulemaking Docket Matter No. 046 (PDF).

Additionally the standard will:

• expand the auditor’s responsibility to monitor for and respond to deficiencies on completed engagements under an amended and retitled AS 2901, Responding to Engagement Deficiencies After Issuance of the Auditor’s Report, and related amendments to attestation standards for broker-dealer engagements;
• supersede existing PCAOB standard ET 102, Integrity and Objectivity, with a new standard, EI 1000, Integrity and Objectivity, to better align ethics requirements with the scope, approach, and terminology of QC 1000

Here are the key provisions of the new QC standard as summarized by the PCAOB and bolded by us:

• The new standard strikes a balance between a risk-based approach to QC (which should drive firms to proactively identify and manage the specific risks associated with their practice) and a set of mandates (which should assure that the QC system is designed, implemented, and operated with an appropriate level of rigor).

• All PCAOB-registered firms would be required to design a QC system that complies with the new standard. Firms that perform audits of public companies or SEC-registered brokers and dealers would be required to implement and operate the QC system they design, monitor the system, and take remedial actions where policies and procedures are not operating effectively – creating a continuous feedback loop for improvement.

• Those firms would be required to annually evaluate their QC system and report the results of their evaluation to the PCAOB on new Form QC, which would be certified by key firm personnel to reinforce individual accountability.

Oh yay another form! Way to perpetuate that paper-pushing reputation, P.

• Firms that audit more than 100 issuers annually would be required to establish an external oversight function for the QC system, referred to as an External QC Function (EQCF), composed of one or more persons who can exercise independent judgment related to the firm’s QC system. In response to comments, the new standard clarifies that the EQCF’s responsibilities should include, at a minimum, evaluating the significant judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system.

“When quality control systems operate effectively, quality audits follow, and investors are better protected,” said PCAOB Chair Erica Y. Williams. “We thank all the commenters who provided us with valuable perspectives on enhancing our approach to quality control, and we look forward to monitoring the new standard’s implementation and impact.”

The new standard is subject to approval by the U.S. Securities and Exchange Commission. Assuming that goes ahead, it takes effect on December 15, 2025.

Earlier:

The post The PCAOB Made Its Own Quality Control Standard and It Took Only 22 Years appeared first on Going Concern.

A Part IA deficiency like the one in the screenshot above is of such significance that the PCAOB believes the firm had not obtained sufficient appropriate audit evidence to support its opinion on the issuer’s financial statements and/or ICFR at the time it issued its audit report. “In other words, the reported deficiencies had to be so serious that, in our view, the audit firm could not provide reasonable assurance that the financial statements were free from material misstatement due to error or fraud,” explained former board member J. Robert Brown Jr. (that’s a mouthful) in this 2020 speech “Seeing Through the Regulatory Looking Glass: PCAOB Inspection Reports.”

So you can imagine the comments that will pour in from companies if this idea gains any traction. And you thought NOCLAR was controversial.

The idea:

America’s auditing regulator is exploring whether it should reveal the names of companies that received deficient audits of their financial information as part of its inspection reports, a hot-button issue that in the past was weighed but not acted on.

“That’s an issue that we have definitely heard, and it’s under consideration,” Public Company Accounting Oversight Board Chair Erica Williams told The Wall Street Journal, referring to investor feedback. “There have been previous boards that have focused on that issue, and so we’re looking at the work that they’ve done there.”

PCAOB staff are looking into this issue as it has for years under previous boards, Williams said. No formal consideration is under way, meaning the staff could recommend the issue be added to the agenda or drafted as a proposal for the board to vote on, but hasn’t yet, she said.

“Like every issue that comes to us, we take a look at it and take it under consideration,” Williams said. “This issue, which is a longstanding one, is one that the staff is still taking into consideration.”

“Regulator Explores Naming Companies Tied to Auditing Deficiencies Amid Investor Pushback,” Wall Street Journal May 6, 2024

As it stands, the PCAOB doesn’t require firms to disclose to the client if an audit is up for inspection but the PCAOB inspectors sniffing around the audit committee usually gives it away. Clients don’t know if deficiencies were found unless the firm chooses to disclose this to the client.

From PCAOB Release No. 2012-003, Information For Audit Committees About the PCAOB Inspection Process [PDF]:

The Sarbanes-Oxley Act of 2002 does not, however, permit the Board to make public, or otherwise to share with an audit committee, all of the information obtained by the Board that could assist an audit committee in carrying out its role. Because of restrictions in the Act, many PCAOB inspection reports include a portion that is nonpublic. By law, the Board cannot disclose to an audit committee the nonpublic portion of an inspection report or other nonpublic inspection information – including whether the inspection identified deficiencies in the audit that the audit committee oversees – and the Board cannot compel an audit firm to disclose such information to an audit committee. Beyond the public portion of an inspection report, voluntary disclosure by the inspected audit firm is an audit committee’s only means of obtaining information concerning a PCAOB inspection.

Going back to that looking glass speech linked above, ex-board member Brown suggested three disclosures the PCAOB could make, one of which is name-and-shame:

First, the PCAOB could disclose in the inspection reports the identity of issuers where the audit deficiencies occurred.

Second, the PCAOB could disclose in the inspection report for each firm a complete list of the issuers whose audits were inspected that year.

Third, we could at least publish on a regular basis (every three years, for example), a list of all public companies whose audits are inspected. This would at least provide insight into our engagement selection process and provide greater accountability to investors and other stakeholders.

Apparently name-and-shame was a controversial topic going back to the early days of the PCAOB. Not so much inside the Board but at the SEC. This is from a 2019 POGO investigative report on “an agency you’ve never heard of” (a.k.a. the PCAOB):

The board has argued that the law prohibits it from naming the affected corporations.

Kayla Gillan, one of the first board members, told POGO that was a matter of interpretation on which the original board was divided. Gillan said she favored disclosure. The SEC, which held sway, opposed naming the affected companies and worried that naming them would hurt their stock prices, Gillan said.

“I personally thought [that] was a frivolous argument,” Gillan said.

The Sarbanes-Oxley Act says inspection reports shall be “made available in appropriate detail to the public”—subject to a section of the law discussing confidentiality “and to the protection of such confidential and proprietary information as the Board may determine to be appropriate, or as may be required by law.”

Former board member [Lewis H.] Ferguson said the law “is ambiguous.”

“I think there was a sense that the issuers themselves”—the audited companies—“would have gone berserk” if their names were disclosed, Ferguson said.

“How an Agency You’ve Never Heard of Is Leaving the Economy at Risk,” POGO September 5, 2019

Imagine the possibilities! This could be the most chaotic thing the PCAOB has done in the 20 years since it was born out of the ashes of Enron. We’re all for it.

Regulator Explores Naming Companies Tied to Auditing Deficiencies Amid Investor Pushback [Wall Street Journal]

The post Imagine the Chaos If the PCAOB Starts Naming and Shaming Audit Deficiency Clients appeared first on Going Concern.

Fresh off the SEC press release press, the Securities and Exchange Commission today charged audit firm BF Borgers CPA PC and its owner, Benjamin F. Borgers with deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023.

The SEC also charged Ben F Brogers* with falsely representing to their clients that the firm’s work would comply with PCAOB standards; fabricating audit documentation to make it appear that the firm’s work did comply with PCAOB standards; and falsely stating in audit reports included in more than 500 public company SEC filings that the firm’s audits complied with PCAOB standards.

YIKES. The SEC did not mince words in this press release.

“Blake F Borgers* and his audit firm, BF Borgers, were responsible for one of the largest wholesale failures by gatekeepers in our financial markets,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As a result of their fraudulent conduct, they not only put investors and markets at risk by causing public companies to incorporate noncompliant audits and reviews into more than 1,500 filings with the Commission, but also undermined trust and confidence in our markets. Because investors rely on the audited financial statements of public companies when making their investment decisions, the accountants and accounting firms that audit those statements play a critical role in our financial markets. Borgers and his firm completely abandoned that role, but thanks to the painstaking work of the SEC staff, Borgers and his sham audit mill have been permanently shut down.”

The SEC order finds Ben F Vonesh* failed to adequately supervise and review the work of the team performing the audits and reviews; did not properly prepare and maintain workpapers, and failed to obtain engagement quality reviews. According to the SEC’s order, of 369 BF Borgers clients whose public filings from January 2021 through June 2023 incorporated BF Borgers’s audits and reviews, at least 75 percent of the filings incorporated BF Borgers’s audits and reviews that did not comply with PCAOB standards.

And the faking of workpapers:

The SEC’s order further finds that, at Ben F orgers*’s direction, BF Borgers staff copied workpapers from previous engagements for their clients, changing only the relevant dates, and then passed them off as workpapers for the current audit period. As a result, the order finds, BF Borgers’s workpapers falsely documented work that had not been performed. Among other things, the workpapers regularly documented purported planning meetings – required to discuss a client’s business and consider any potential risk areas – that never occurred and falsely represented that both Benjamin Borgers, as the partner in charge of the engagement, and an engagement quality reviewer had reviewed and approved the work.

Thus, the SEC order finds that Borgers and the firm named after himself engaged in improper professional conduct and violated, and caused violations of, the antifraud, recordkeeping, and other provisions of the federal securities laws.

Without admitting or denying the SEC’s findings as to each of them, BF Borgers and Benjamin Borgers both consented to an order, effective immediately, which bars him from appearing or practicing before the SEC as an accountant.

To settle the SEC’s charges, BF Borgers agreed to pay a $12 million civil penalty, and Benjamin Borgers agreed to pay a $2 million civil penalty. Both Respondents also agreed to permanent suspensions from appearing and practicing before the Commission as accountants, effective immediately.

Earlier:

*the name thing is a joke from this.

The post The SEC Just Charged Trump Media’s Spelling-Challenged Auditor with “Massive Fraud” appeared first on Going Concern.

According to the most recent data from the gubmint, the cannabis market in Canada was a $5.07 billion Canadian dollar ($3.7 billion USD) business in 2023, up 12.2 percent from the prior year.

And now KPMG is walking away from it.

The post Once Leaders in the Cannabis Space, Canuck KPMG Decides to Ditch All Its Weed Clients appeared first on Going Concern.

Jeffrey Johanns, associate professor at The University of Texas at Austin McCombs School of Business and regular audit industry commentator, wrote a really good LinkedIn Pulse post about the situation when the redaction first appeared. This, uh, unique choice by the PCAOB obviously led to more questions than answers. Such as:

· The other 13 reports issued along with KPMG’s included each firm’s Deficiency Rate, including the other three Big 4 firms. Why was KPMG handled differently?

· In KPMG’s listing of “Audits with Unsupported Opinions”, containing issuers labeled as “A” through “P”, issuer “N” is omitted from the list? Who is the mysterious Issuer N? Are there other missing issuers?

· After more than two years of inspection, discussion, and negotiation with KPMG, why can’t the PCAOB decide whether any particular audit is deficient? It is the regulator. The Board has the final say. It is their responsibility to draw a conclusion and move on, whether the firm agrees or not. The purpose of the response letter included in the report is for the inspected firm to indicate if they have any disagreements with the determinations in the report. If KPMG doesn’t agree with the Board’s decisions about individual audits, they should say it in their response letter.

· Why didn’t KPMG (apparently) not agree with some of the Board’s conclusions, or object in the normal inspection process? This question raises a lot of speculation, not particularly helpful to KPMG. Are there one or more audits they are being advised not to agree to as deficient? For what reasons?

We still don’t have answers to those questions but we do now have a number: 30 percent.

So a 30 percent Part I.A. deficiency rate, up from 26 percent in 2021 and 2020. Why does this feel so anticlimactic?

The number of audits selected for review was on par with previous years:

What was the secrecy all about then?? Why is this all so weird? Bloomberg Tax has an explanation:

The US accounting oversight board issued a complete version of KPMG LLP’s 2022 inspections review on Friday that detailed an extra audit with a single deficiency tied to income tax accounting.

KPMG had appealed portions of the Public Company Accounting Oversight Board’s inspection findings resulting in the release of a partially redacted report in February. In total, inspectors found fault with 30% of the firm’s inspected audits, work that generally covered 2021 financial statements, according to the amended report.

Quick update: The PCAOB tweeted about the inspection report and didn’t even mention KPMG by name. HMM.

This low-key post is in reference to the @KPMG_US 2022 Inspection Report that previously redacted key #audit deficiency related information, including the firm's overall Part 1A deficiency rate (now known to be 30% of audits inspected) and the nature of the previously redacted… https://t.co/LPBWdv9ACP

— Jeffrey Johanns (@JohannsAudit) April 28, 2024

Full report embedded below for your reading pleasure.

The post Solved: The Mystery of KPMG’s Redacted PCAOB Inspection Report (Kinda) appeared first on Going Concern.

Industry OG and commentator Gene Marks has written an opinion piece for The Hill about what audits actually are that is less opinion and more brutal fact: Why you should be very skeptical of that auditor’s report. Those of us who’ve worked or even simply seen behind the curtain of audit know the things he points out to be true — assurance is reasonable not absolute, financial statements are the responsibility of management not auditors, “finding fraud” is not the ultimate goal of audits — but do investors? Probably not, that’s why they’re always suing audit firms when companies go bust with millions of dollars of fraud hidden in plain sight on their balance sheets. Most of the time, auditors can confidently (and legally) shrug their shoulders and say “not my job.”

He writes:

Basically, the accountant is saying to the world that all the information in the financial statements comes from management and that they’ve made efforts to verify that the financial statements are mostly right. But if the you-know-what hits the fan, their attorneys have plenty of cover (and insurance) for when the litigation starts.

So they might catch a fine from the audit regulators. What’s a few hundred thousand or even million dollars to a firm bringing in tens of billions a year? The PCAOB is busy going after firms for sharing answers on internal training exams anyway, who has time to figure out ways to fine audit firms for doing the minimum audit work required by existing standards.

The entirety of his article is worth a read and should be passed along to any naive investors in your life. I wanted to call attention to this bit though:

During an audit, the lion’s share of critical work on the ground (inventory observations, cut-off testing, analytical reviews, receivables confirmation) is being done by children — yes, children — who are still hung over from their college graduations. I was once that person, and looking back, I am shocked by the responsibility I had, given my lack of experience at the time. The accounting profession’s desperation to find recruits has not only lowered the competence bar but also added more tasks on the shoulders of an already exhausted staff, to the point where reports are being delayed.

To address this particular issue, he has a crazy idea:

And on the topic of partners, they and their managers need to cut down on the client lunches and instead get in the trenches. Like our annual continuing professional education requirements, the leaders of accounting firms should be professionally required to do a portion of staff work, like observing inventories, grilling the accounting managers on expenses or even checking bank reconciliations. Why? Because someone my age not only has more experience, they have a much different perspective on these things than a green 22-year-old. The devil’s in the details, people.

I dunno, you guys. I feel like partners would rather eat the million dollar fines.

The post Audits Are a Joke and Here’s Why According to a Salty Old Industry Veteran appeared first on Going Concern.

As described in the PCAOB’s orders, from 2017 to 2019, Deloitte Philippines’s audit partners and other personnel engaged in widespread answer sharing – either by providing answers or using answers – or received answers without reporting such sharing in connection with tests for mandatory firm training courses. Baltazar directly and substantially contributed to Deloitte Philippines’s violations. On at least six occasions, Baltazar, in his capacity as the partner responsible for e-learning compliance, shared answers to training assessments with other audit partners at the firm. (Baltazar has since left the firm.)

In his role as National Professional Practice Director, Baltazar was responsible for, among other things, promoting audit quality, facilitating audit consultations, and monitoring and managing the compliance by the firm’s auditors with online training and professional training requirements.

The order against him explains what happened:

During the relevant time period (2017-2019), Respondent recognized that the Firm’s audit partners had fallen behind in their rates of compliance with trainings because their workloads and utilization rates made it difficult for them to keep up with required continuing professional education and trainings. Respondent e-mailed answers to e-learnings to the audit partners and others in the Firm at least six times from 2017 through 2019. For example, on January 4, 2019, Respondent sent an e-mail to the audit partner listserv with the subject “IFRS E – Learnings.” The email included answers to 21 different questions on three different IFRS topics. Respondent explained that those answers would result in a passing rate, but not a score of 100%.

Brilliant actually. The PCAOB did not find this brilliant.

Respondent violated PCAOB Rule 3502 because he knew, or recklessly did not know, that his actions and omissions would directly and substantially contribute to the Firm’s violations described above. As the NPPD, Respondent had responsibility for Firm personnel’s compliance with the Firm’s e-learnings and trainings. When Respondent recognized that Firm personnel’s compliance rates had fallen, he began sharing answers to exams.

As described above, Respondent shared answers with the Firm’s audit partners on at least six occasions from 2017-2019. Additionally, he was aware that others at the Firm were involved in improper answer sharing. Respondent failed to put a stop to or report that misconduct during the relevant period, despite his responsibilities for personnel management and promoting an ethical culture at the Firm.

Instead, as the Firm’s NPPD in charge of Firm training, Respondent created and fostered an environment in which it was acceptable to share answers and use shared answers on e-learning and training tests.

As for the situation at Deloitte Indonesia, says the PCAOB in the press release:

Additionally, from 2021 to 2023, more than 200 Deloitte Indonesia professionals engaged in answer sharing. The firm’s failure to detect and deter improper answer sharing by its personnel occurred despite numerous warnings from Deloitte Global and regional leadership that answer sharing was impermissible.

Legit, they really didn’t give a shit even when Deloitte Global started telling everyone to cool it on the answer sharing. Says the order:

During the relevant time period, large numbers of DT Indonesia personnel were involved in improper answer sharing. Indeed, more than 200 of its personnel, including two partners, participated in instances of improper answer sharing by, among other means, sending emails with answers to training test questions, providing screenshots of training questions and answers, or discussing answers when taking tests in the presence of others.

Despite this widespread answer sharing by the Firm’s personnel, none of those aware of the improper answer sharing timely reported the answer sharing (a) to anyone at the Firm not involved in answer sharing; (b) to anyone within regional leadership or Deloitte Global; or (c) to any relevant regulator. Moreover, the misconduct occurred notwithstanding numerous warnings from Deloitte Global and regional leadership that answer sharing was improper.

Beginning in October 2019 through September 2022, DT Indonesia partners were repeatedly told through a series of calls, townhalls, meetings, emails, and mandatory e-learnings that answer sharing was not acceptable. Despite these warnings, answer sharing at DT Indonesia continued until 2023, when the Firm discovered the misconduct and began an internal investigation.

“Few things erode trust like impaired ethics,” said PCAOB Chair Erica Y. Williams. “To protect investors, the PCAOB will continue to address serious quality control deficiencies at PCAOB-registered firms around the world.”

Yeah, we know. Do you really have nothing better to do?

PCAOB Imposes $2 Million in Fines on Deloitte Indonesia and Deloitte Philippines, Bars Firm Leader After Exam Cheating [PCAOB]

The post We Forgot to Mention Deloitte Got in Trouble For Cheating This Week, Too appeared first on Going Concern.

Here’s something interesting right off the bat: There were 239 firms conducting audits for 6,607 Securities and Exchange Commission (SEC) registrants as of the end of January, 2024. This is a 4.9 percent decrease in registrant population from the year prior and the first year within the last five that Ideagen Audit Analytics observed a decrease in total SEC registrants. Neat!

These are the top ten audit firms with the most SEC registrant clients if you include special purpose acquisition companies (SPACs).

These ten firms account for 68 percent of the total population.

Said Ideagen Audit Analytics in their report, the majority of firms in the top ten decreased in clients from 2023 except for Deloitte who upped theirs from 887 in 2023 to 900 in 2024. The top ten firms collectively audit 68% of the total population. And then they called out Withum specifically:

Withum, a firm notable for auditing numerous SPACs, continued to slide in the rankings in terms of SEC registrant clients. They fell from sixth to ninth between 2022 and 2023 and dropped to tenth for 2024. Withum audited 113 clients in 2024 compared to 177 clients in 2023 and 296 clients in 2022.

Excluding SPACs, the top ten looks like this:

In 2024, the number of large accelerated filers is down by three percent. Big 4 counts 90 percent of these as clients and for the eighth consecutive year EY has the most (577). EY lost 23 of these clients from last year to early 2024, even with that they own the category at 28 percent of all large accelerated filers.

Excluding Deloitte, EY, KPMG, and PwC, 31 audit firms handle the other 10 percent of these filers and Grant Thornton has the most (4 percent).

For accelerated filers, Big 4, Grant Thornton, and BDO have the most market share. Deloitte tops the list with 153 clients (20 percent of the market). These six firms audit 72 percent of accelerated filers, 49 firms take care of the remaining 215.

In visual form:

And that’s your who audits public companies update for 2024.

The post For the Eighth Year in a Row, EY Is the Busiest Public Company Auditor appeared first on Going Concern.

First, the earlier reporting. DutchNews wrote in July 2023:

At least 500 workers at KPMG in the Netherlands have cheated during the compulsory exams which accountants are required to take, the consultancy group has confirmed.

KPMG said it had imposed sanctions on an unknown number of employees, and “a handful” had been fired following an internal investigation into the claims that staff had swapped answers to the tests.

KPMG Nederland director Marc Hogeboom is also stepping down as boss of the accounting arm, but remains an auditor and partner at KPMG. He said in a statement he “should have been more alert to signals” that pointed towards workers sharing their answers.

We brought the situation up again late last month when Mazars’ Dutch arm reported their own “misconduct on exams” in its annual report. If the PCAOB wasn’t interested in digging around already, that certainly would have gotten their attention.

Alas, they had already been on the case. Announced today, the PCAOB has hit both KPMG Netherlands and former Head of Assurance Marc Hogeboom with some hefty fines related to cheating.

Said the PCAOB in a press release:

As described in the PCAOB’s orders, from 2017 to 2022, hundreds of professionals at KPMG Netherlands engaged in improper answer sharing – either by providing access to test questions or answers, or by receiving such access without reporting it – in connection with tests for mandatory firm training courses. These courses related to a variety of topics, including U.S. auditing standards, professional ethics, and independence. The improper answer sharing reached as far as partners and senior firm leaders, including Hogeboom (at the time the firm’s Head of Assurance and a member of the firm’s Management Board). The growth of this widespread answer sharing was enabled by the firm’s failure to take appropriate steps to monitor, investigate, and identify the potential misconduct. For example, starting in June 2020, the firm was aware that (1) answer sharing had occurred at a KPMG service delivery center serving KPMG Netherlands and KPMG LLP (United Kingdom) and (2) the sharing had extended to the U.K. firm’s personnel. Nevertheless, KPMG Netherlands took virtually no steps to investigate potential answer sharing among its personnel until a whistleblower reported such misconduct in July 2022.

During the PCAOB’s investigation, the firm submitted – and failed to correct – multiple inaccurate representations to the PCAOB. In the submissions, the firm claimed that it had no knowledge of answer sharing by its personnel until it received the July 2022 whistleblower report. These submissions, reviewed by the firm’s Management Board and Supervisory Board, were false because members of those two Boards had themselves already engaged in answer sharing misconduct before July 2022.

The above misconduct revealed an inappropriate tone at the top of KPMG Netherlands and a failure by firm leadership to effectively promote an ethical culture among firm personnel with respect to improper answer sharing and monitoring of the firm’s system of quality control.

“The PCAOB will not tolerate cheating nor any other unethical behavior, period,” said PCAOB Chair Erica Y. Williams. “Impaired ethics threaten the investor confidence our system relies on, and the PCAOB will take action to hold firms accountable when they fail to enforce a culture of honesty and integrity. I thank the Dutch Authority for the Financial Markets for its cooperation in the investigation of this matter and applaud the enhanced supervision measures it has taken to hold the firm accountable going forward.”

Don’t say we didn’t warn you.

Look, a historic fine is great and all but the question that always gets asked in the comments every time this issue comes up is does it really matter? There was a big scandal with PwC Canada sharing answers that came to a head in 2020 — staff thought helping each other out on these bullshit training exams was “collaborative culture” — yet while it was happening the firm was getting ZERO deficiencies in its PCAOB inspections. Isn’t that what we want? Isn’t that peak performance?

To be fair, the lying to the PCAOB part is a little out of line.

PCAOB Imposes Record $25 Million Fine on KPMG Netherlands and Bars a Firm Leader After Exam Cheating, Misinforming Investigators [PCAOB]

The post The PCAOB Just Handed Out Its Biggest Fine to Date to Some KPMG Cheaters appeared first on Going Concern.

Fresh academic research has found that audit seniors are more likely to offer better constructive feedback and coaching to their juniors via review comments if the seniors think they’ll be working with that staff again. The paper “Coaching Today’s Auditors: What Causes Reviewers to Adopt a More Developmental Approach?” was published in Volume 112 of the journal Accounting, Organizations and Society and authored by Lindsay M. Andiola (Virginia Commonwealth University), Joseph F. Brazel (North Carolina State University), Denise Hanes Downey (Villanova University), and Tammie J. Schaefer (University of Missouri – Kansas City).

The researchers’ experiment considered not only local teams but international ones, an important aspect given the rapid globalization of professional services and key to this specific study. “[T]his study is the first to consider how reviewers contribute to the poor audit quality observed on some engagements involving international auditors,” wrote the researchers in the intro. If we read too deep into that, it sounds like they’re saying seniors are at least partially to blame for poor audit work performed by offshore staff because they can’t be arsed to correct their mistakes but we won’t get into that.

The abstract:

Audit workpaper review is a quality control mechanism intended to detect preparer errors and professionally develop preparers. In this study, we experimentally investigate two factors that theory predicts affect the degree to which audit reviewers adopt a developmental approach: local versus international preparer office affiliation and likely versus unlikely preparer recurrence. We find that reviewers adopt a less developmental approach for international preparers but a more developmental approach for preparers likely to recur. The adoption of a more developmental approach not only results in more coaching via review comments but is associated with greater detection of seeded preparer errors. Taken together, our findings highlight the susceptibility of quality control efforts in the global audit environment and identify recurrence as a potential intervention.

Abstract of “Coaching Today’s auditors: What causes reviewers to adopt a more developmental approach?” [ScienceDirect]

And here’s what they did:

To test our hypotheses and examine our research questions, we conducted an experiment where 136 practicing audit seniors completed a workpaper review of a preparer’s search for unrecorded liabilities. We manipulated the preparer’s office affiliation (local or international) and the likelihood of preparer recurrence (likely or unlikely) in a 2 × 2 between-participants design. Participants received information about the engagement and the preparer, followed by the preparer’s workpaper and supporting evidence. While performing their review, participants could leave review comments for the preparer and make changes to the workpaper. Following the task, participants explained their review approach and completed a post-experimental questionnaire.

As predicted, reviewers focus more on the professional development of preparers who are local instead of international. Also, regardless of office affiliation, reviewers are more apt to adopt a developmental approach when preparers are more likely to recur. Importantly, this developmental approach increases their provision of coaching-oriented review comments. These review comments, in turn, are positively associated with greater reviewer detection of seeded preparer errors. Thus, the developmental and instrumental aspects of review – professional development and error detection – are complementary in our experiment. In addition, reviewers’ performance assessments are driven by their identification of errors and not by how much they choose to professionally develop the preparer through review comments.

Co-author Joseph Brazel elaborates in Phys.org:

“We found that senior auditors were more likely to explain errors and provide coaching when the staff person was in their local office,” he said. “However, the biggest effect we saw was that coaching was much better if senior auditors thought the staff person was likely to work on the client again—regardless of where they were located.

“In cases where senior auditors seemed unlikely to work with a staff person again, they sometimes didn’t even let the staffer know they’d made a mistake—the senior auditor just fixed the mistake themselves without mentioning it.

“We also found that the senior auditors who were better coaches—providing more meaningful, constructive feedback—were also more likely to identify errors in the staffer’s work. Senior auditors who put in the time to professionally develop a staffer also appear to be thinking more deeply about the work and recognizing errors that other senior auditors often missed. The tasks of coaching and quality control complemented each other.”

Brazel said the research offers an important takeaway for early-career staff. “If you want coaching that will help you get better in your profession, let the folks reviewing your work know that you want to work with them again,” he said. “This incentivizes them to train you to the best of their ability.”

The post Research: Seniors Give Better Review Comments If They Think the Staff Will Stick Around appeared first on Going Concern.

Prior to the Engagement Management System (EMS) update in November 2016, Deloitte auditors were permitted to manually enter sign-off dates for both audit work and reviews. After the update, now hindered by a software limitation, some auditors got creative and changed the date on their computers to do effectively the same thing for over 930 audit working papers in at least 39 audit engagements. Eventually they got caught when Deloitte ratted themselves out to regulators at CPA Ontario in 2019, leading to a $1.59 million ($1.2 million USD) fine. And some mild embarrassment.

Before bringing the matter to CPA Ontario, Deloitte implemented a software update that prevented anyone from changing the date and time on their computers. After March 2, 2018, anyone trying to do so would get a pop-up that says “you do not have permission to perform this task. Please contact
your computer administrator for help.”

Bringing things back to current day, The Globe and Mail had an update last week on the five partners involved in this backdating saga now that their CPA Ontario hearings are over. G&M specifically called out the fact that CPA Ontario included information on the partners’ performance ratings in each of their orders which is hilarious. Let’s take a look, shall we? We’ll include how many workpapers each partner personally backdated so we can keep score.

Nancy Ewings, with Deloitte since 1995, was the deputy leader of its private audit practice for Ontario at the time and remains a partner today.

The regulator says Deloitte lowered her quality rating for the 2019 fiscal year – a performance metric used in part to determine incentive pay – to “Meets Expectations” from “Exceeds Expectations,” resulting in a reduction of $56,000.

Workpapers backdated: Unknown. According to CPA Ontario, Ms. Ewings could not recall which working papers or engagements were impacted and Deloitte did not provide CPA Ontario with information sufficient to specifically identify the impacted working papers and audits. She served as lead engagement partner on 80 audits during the time period in question.

Still at Deloitte: Yes.

CPA Ontario settlement agreement [PDF]

Steven Lawrenson, with Deloitte since 1991, leads its Southwestern Ontario public-company audit practice.

CPA Ontario says Deloitte lowered his quality rating for the 2018 fiscal year to “Improvement Required” from “Meets Expectations,” resulting in a pay reduction of $65,750.

Workpapers backdated: 241

Still at Deloitte: Yes.

CPA Ontario settlement agreement [PDF]

Stacy Levac, with Deloitte since 2016, worked in audit in the Ottawa office exclusively for privately owned companies.

Deloitte lowered his quality rating for the 2019 fiscal year to “Improvement Required” from “Meets Expectations,” eliminated his incentive compensation and reduced a discretionary bonus by $10,000.

Workpapers backdated: 199

Still at Deloitte: No.

Ratan Ralliaram, with Deloitte since 1993, was the team leader for the GTA audit financial services group from 2017 to 2019.

CPA Ontario says Deloitte lowered his quality rating for the 2018 fiscal year to “Improvement Required” from “Meets Expectations,” resulting in a pay reduction of $52,600.

CPA Ontario settlement agreement [PDF]

Workpapers backdated: 268+3. He told two auditors underneath him to backdate three workpapers on top of the 268 he backdated personally.

Still at Deloitte: Yes.

Mervyn Ramos, with Deloitte since 2002, had been a lead engagement and EQCR partner and worked for clients in the financial services industry.

CPA Ontario says Deloitte lowered his quality rating for the 2018 fiscal year to “Meets Most Expectations” from “Meets Expectations.”

Workpapers backdated: 41

Still at Deloitte: No.

CPA Ontario settlement agreement [PDF]

Earlier: Deloitte Auditors Got Caught Changing Their Computer Clocks to Backdate Workpapers

The post Deloitte Partners Tragically Hit With “Improvement Required” Performance Ratings For Backdating Workpapers appeared first on Going Concern.

Today’s lucky contestants are CHOI Chung Chuen (“Choi”), MA Hong Chao (“Ma”), and DONG Chang Ling (“Dong”), all partners of mainland China-based KPMG Huazhen LLP.

The three were accused of violating PCAOB standards in connection with the firm’s audit of the 2017 financial statements of Tarena International, Inc. (n/k/a TCTM Kids IT Education Inc.), a mainland China-based education service provider listed in the United States. In 2019, Tarena restated its 2017 financial statements for, among other things, intentional revenue inflation and improper charges against accounts receivable.

Tarena’s audit committee opened an independent investigation in April 2019 and retained Kirkland & Ellis International LLP as independent legal counsel to advise the committee. K&E was assisted by Deloitte & Touche Financial Advisory Services as forensic accounting expert.

That investigation revealed quite a bit:

• Revenue Inaccuracies: The Audit Committee’s independent review found that the Company’s reported revenues for fiscal years 2014, 2015, 2016 and 2017 and previously announced unaudited revenues for each quarter of and full year 2018 were not accurate. Factors contributing to the misstatement of revenue included intentional revenue inflation, inaccurate student account, status and loan data recorded in the company’s customer relationship management (CRM) system, premature recognition of revenue from certain students, and inaccurate accounting treatment of tuition refunds.

• Expense Inaccuracies and Irregularities: The audit committee discovered instances of improper charges against accounts receivable and/or bad debts through payment to third parties, as well as guarantee payments to certain financial institutions or peer-to-peer financial tools for certain overdue student loans. The audit committee also identified certain expenses that were not supported by appropriate documentation and indications that funds or other benefits were provided to third parties contrary to company policy.

• Conflicts of Interest and Related Party Transactions: The audit committee found evidence that the company engaged in business transactions with organizations owned, invested in or controlled by company employees or their family members which in some instances were not properly disclosed by the company.

• Interference With External Audit Process: It was found that certain employees interfered with the external audit of the company’s financial statements for certain periods.

Back to the PCAOB order against Choi, Ma, and Dong. Specifically, the PCAOB found that Choi and Ma, the engagement partner and a second partner on the 2017 audit, respectively, failed to obtain sufficient appropriate audit evidence to support Tarena’s reported revenue. In evaluating Tarena’s revenue, Choi and Ma planned to rely on the company’s internal controls, including information technology-related controls. However, after learning of numerous unremediated deficiencies in Tarena’s IT Controls, Choi and Ma improperly continued to rely on those controls to support their audit conclusions as if those controls were effective.

The PCAOB also found that Choi and Ma failed to exercise due care and professional skepticism and failed to obtain sufficient appropriate audit evidence to support Tarena’s net accounts receivable. Specifically, they did not appropriately evaluate the reasonableness of Tarena’s allowance for doubtful accounts. Choi and Ma did not obtain an adequate understanding of how management developed the estimate, did not appropriately evaluate its reasonableness, and did not adequately consider evidence indicating that the estimate might not be reasonable.

Finally, the PCAOB found that Dong, the partner with overall responsibility for the involvement of the Firm’s IT professionals in the Tarena audit, failed to sufficiently supervise those IT professionals. As a result, Dong failed to identify several deficiencies in the IT audit procedures.

Without admitting or denying the findings, the respondents consented to the PCAOB order that includes censure, civil money penalties in the amounts of $75,000 on Choi, $50,000 on Ma, and $25,000 on Dong, and the usual stuff like Choi and Ma being barred for at least a year and continuing professional education for all involved.

Earlier settled enforcements with China firms are below. Two were for violating PCAOB quality control standards related to integrity and personnel management (they were sharing exam answers), the third was more serious with issuing a false audit report, failing to maintain independence from their issuer client, and improperly adopting the work of another accounting firm as their own among the violations.

PDF alert

• PricewaterhouseCoopers Zhong Tian, LLP (“PwC China”)
• Hong Kong-based PricewaterhouseCoopers (“PwC Hong Kong”)
• Shandong Haoxin Certified Public Accountants Co., Ltd. (“Haoxin”)

Article:

PCAOB Sanctions Three Partners of KPMG China for Violations of Audit Standards [PCAOB]

The post The PCAOB Racks Up Its Fourth Enforcement Against a Chinese Affiliate With This KPMG China Order appeared first on Going Concern.

It all started when the client discovered accounting errors and restated its FY2018 profit in the FY2019 annual accounts. This prompted a FRC investigation into the audit which led them to dig into revenue recognition, journal entries, and the year-end consolidation process.

KPMG and lead engagement partner Adrian Wilcox admitted breaches of relevant requirements in these areas:

• A failure to audit with sufficient professional scepticism the release of WIP credits (a type of client payment on account), which increased revenue by £1,200,000. These releases, processed as UK sub-consolidation adjustments, were subsequently reversed in the FY2019 annual accounts.
• Failures to properly audit journal entries across a number of subsidiary companies, including a lack of any journals-testing at all for two subsidiaries, and a failure to identify potentially high-risk journals for testing across a number of entities.
• A failure to document the auditors’ reasoning, or complete their enquires with management, in relation to the retention of rebates under a contract which, on its face, appeared to require such rebates to be passed back to a client. The level of professional scepticism was insufficient.

The FRC acknowledges it was a “challenging” audit and that “the auditors demonstrated some robustness in pushing back the signing date until they obtained further evidence from management.” However, the FRC said, “the breaches of relevant requirements included serious failings and, specifically, breaches relating to UK sub-consolidation adjustments affecting or potentially affecting a significant number of people in the United Kingdom such as the public, investors, or other market users.”

Taken together, the breaches undermine confidence in statutory audit and the truth and fairness of financial statements, wrote the FRC in the press release.

For the fiscal year ended March 2022, UK audit firms were fined a record £46.5 ($59.2 million USD) by the FRC, more than half of that was levied against KPMG alone. 2023 saw £40.4 million in penalties — including investigation costs paid by the firms — and KPMG was at the center of four out of five concluded FRC investigations. They also earned the highest fine ever recorded by the FRC for their work on collapsed construction company Carillion. The £21 million ($26 million USD) fine was a mere £8 million more than the £29 million Carillion paid in audit fees over 19 years.

Sanctions against KPMG LLP and audit partner [Financial Reporting Council]

The post KPMG UK Going For a FRC Penalty High Score Again This Year appeared first on Going Concern.

Bracknell News:

Accountancy firm EY is responsible for carrying out the council’s annual external audits – examinations of its finances. But after long delays, EY announced in February that it will leave two years’ audit reports incomplete.

One angry councillor, Mike Smith, accused the firm of ‘downing tools and walking away’ from the job. He added: “Clearly something is catastrophically wrong.”

By law, every local authority has to have its finances audited by an external accountancy firm. But delays beginning during the coronavirus pandemic mean there is now a huge national backlog leaving years upon years’ worth of audits still to be completed.

The 2020-2021 audit was finally completed last year for which EY charged an extra £60,654 (about $77,000 USD) because the firm hadn’t gotten timely information on infrastructure assets and pension funds. The council complained about this, naturally.

The pension fund is managed by the neighboring Royal Borough of Windsor and Maidenhead and they, too, are having issues with timely information. Deloitte is still trying to finish their 2020-2021 audit and about ready to dip out. “If audits are not finished by the backstop date [in September], then the audit will be stopped, and the opinion modified on the basis that the work is not complete,” said Deloitte partner Jonathan Gooding at a meeting of the RBWM audit and governance committee just last week.

What’s funny is EY said they can’t complete the delayed audits for Wokingham now because the people who would do them are doing other things. Yeah, like other terrible government audits.

Councillor Stephen Newton asked EY to reconsider – pointing out that the government has recently given firms extra time to complete delayed audits.

But Janet Dawson from EY said the firm had already allocated its staff to other jobs and couldn’t move them back.

She said EY had expected to be able to complete the audits before Christmas, but hadn’t received sufficient information on how council-owned properties had been valuated. The Council disagrees, arguing the information it has given should be enough.

The firm will issue a disclaimer of opinion for the 2021-22 and 2022-23 audits it was unable to receive sufficient and appropriate evidence for.

While not cutting as deep as the accountant shortage here in the US (yet), the UK is dealing with its own dearth of accounting professionals, particularly in certain regions that are less attractive to young recruits fresh out of college.

In December 2023, audit watchdog Financial Reporting Council expressed “disappointment with the unacceptable delays in financial reporting and audit in the local government sector” across the country as it released a report that noted more than 900 incomplete local government audits in England at the end of September 2023. Because of this, the FRC’s ability to inspect higher risk audits had been severely restricted.

The FRC inspected just 10 audits this year – 6 NHS [National Health Service] and only 4 in local government – compared to its usual 20. With most local government audits incomplete, often for multiple years, the FRC said it had to significantly reduce inspections to allow audit firms to focus resources on clearing the backlog.

So basically the whole thing is buggered and EY was probably smart to walk away.

The post EY Gave a Hilarious Excuse For Walking Away From This Awful Municipal Audit Client appeared first on Going Concern.

As you may have heard, the United States Marine Corps recently received an unmodified opinion from EY. In any other sector this might prompt a hearty “who cares?” but for the Marines it’s a huge deal, the first of its kind for any branch of the military. And for real this time (we’ll get to that in a minute).

As you can imagine, the two-year process was no easy feat. Wrote Military.com of prior attempts:

In 2017, the Marine Corps became the first military service within the Defense Department to undergo a full financial audit, which at the time meant sifting through more than 4,300 sample items and 30,000 documents. Verifying similar items in a 2012 limited audit included a trip to Afghanistan. Ultimately, the service failed to pass either previous attempt.

This time around it was no less daunting:

In 2023, it meant going to more than 70 sites worldwide to look at thousands of real property assets; more than a million other operating assets, such as vehicle spare parts and weapons and communications systems; and more than 24 million rounds of ammunition — sometimes within Army and Navy stockpiles where the Marine Corps had property stored.

The ammo was just one checkbox among assets of $46.3 billion. “We had to have documentation for that asset, in addition to the auditors having to view those assets and count those assets,” said Gregory Koval, the assistant deputy commandant for resources, to Military.com in an interview. “So, not just numbers, not just systems, not just data, but they were actually evaluating what we have on hand, what we have on site, and if something was not there, we had to provide them with information to show where it was.”

From the DoD OIG’s press release:

The auditors considered the material weaknesses in determining the type and extent of audit procedures performed. The auditors used a substantive-based testing approach throughout FY 2022 and FY 2023. A substantive-based approach means that the auditors had to increase the amount of testing necessary because they were unable to rely solely on USMC’s internal control over financial transactions. This included the auditors examining specific transactions, account balances, and other adjustments made while preparing financial statements, as well as physically counting military equipment, ammunition, and other property – all designed to result in adequate audit evidence.

Inspector General Storch noted, “The two-year audit cycle of the U.S. Marine Corps was unprecedented for the Department of Defense. The U.S. Marine Corps staff, EY, and DoD OIG auditors performed a tremendous amount of work to complete the audit. I encourage the U.S. Marine Corps to continue the momentum of this unmodified (clean) opinion and focus on improving its internal controls to remediate the identified material weaknesses. These efforts will be important for the U.S. Marine Corps to improve audit efficiency and establish sustained financial reporting and operational readiness.”

If this announcement sounds familiar, it’s because the Marines were the first military branch to “pass” an audit before. After a big celebration in 2014 — then-Secretary of Defense Chuck Hagel famously told revelers at a Pentagon Hall of Heroes party “I know that it might seem a bit unusual to be in the Hall of Heroes to honor a bookkeeping accomplishment, but, damn, this is an accomplishment” — the opinion was rescinded and then promptly ragged on as just more piss poor work from Grant Thornton. Full story on that here:

This time the Marines contracted a real firm and here we are. Although the opinion is good, EY identified seven material weaknesses related to internal controls over financial reporting within the USMC so they have some homework to do. But overall it seems they’ve done the impossible. Impossible for the Pentagon anyway.

The post EY Gives the Marine Corps the Thing Grant Thornton Couldn’t appeared first on Going Concern.

The firm reported one instance of potential non-compliance with PCAOB Rule 3500T regarding firm personnel negotiating prospective employment with an audit client. This instance involved a member of an engagement team engaging in substantive employment discussions with, and accepting an offer of employment from, the audit client for an accounting role.

2022 PCAOB Inspection of Ernst & Young LLP (Headquartered in Toronto, Canada), Part I.C Independence [PDF]

The section on auditor independence is new to PCAOB inspection reports as of last year and has a lot of potential for LOLs. Everyone better review the rules now because we all know the auditors of auditors are looking for any petty thing they can ding firms for these days.

The post Shout-Out This Person Whose Jumping Ship Made It Into EY’s PCAOB Inspection Report appeared first on Going Concern.

Said the PCAOB press release:

From January 2020 through December 2021, WithumSmith+Brown, PC accepted a substantial number of special purpose acquisition company (SPAC) audit clients, resulting in a dramatic increase in its issuer audit practice and putting a significant strain on its quality control system. In 2021, for example, the firm’s issuer audit practice increased almost 500%, from approximately 80 audit reports to almost 450. Yet the number of partners assigned to these audits increased by only 50% (from 15 to 23). The firm’s quality control system failed to provide reasonable assurance that its personnel complied with applicable professional standards and regulatory requirements, including those related to appropriately staffing issuer audits.

The PCAOB found that the firm’s system of quality control failed to provide reasonable assurance that the firm would:

• Undertake only those issuer engagements that the firm could reasonably expect to be completed with professional competence and appropriately consider the risks associated with providing professional services in the particular circumstances;
• Ensure that partner workloads were manageable to allow sufficient time for engagement partners to discharge their responsibilities with professional competence and due care;
• Ensure that personnel were consulting with individuals within or outside the firm, when appropriate, when dealing with complex issues;
• Perform sufficient procedures to test estimates, including sufficiently evaluating the reasonableness of certain significant assumptions underlying the estimate;
• Make all required communications to issuer audit committees;
• Perform sufficient procedures to determine whether certain matters were critical audit matters;
• Perform sufficient procedures to test journal entries; and
• Timely and accurately file Form APs.

Withum settled with the PCAOB without admitting or denying the findings and will have to bring in an independent consultant who will no doubt tell them to stop taking on more work than their overworked audit partners can handle. The firm will also have to conduct “certain training” for all audit staff so yay, more tedious WBLs.

“Growth must not come at the expense of quality. The PCAOB will hold firms accountable for upholding quality control systems that protect investors,” said PCAOB Chair Erica Y. Williams.

Audit partners should note the PCAOB included this note at the bottom of the press release:

Firms or individuals wishing to report suspected misconduct by auditors, or to self-report possible misconduct, may visit the PCAOB Tips and Referrals page.

The PCAOB does not provide monetary awards for tips or referrals. Only the warm fuzzy feeling that comes from making audit partners’ lives worse than they already are.

Imposing $2 Million in Fines, PCAOB Sanctions WithumSmith+Brown, PC for Pervasive Quality Control Violations Involving SPAC Audits [PCAOB]

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Once again EY is losing a client because someone over there just couldn’t resist banging them which leads us to wonder out loud: what is it with EY and hooking up with clients?

The Telegraph on why EY dropped UK grocery chain Asda:

EY has quit as auditor to Asda amid one of its senior partners starting a romantic relationship with billionaire chief executive Mohsin Issa, The Telegraph can reveal.

EY has confirmed that the partner in question has left the firm, and that she had never carried out any work relating to Asda’s audit. Filings show she resigned as a partner the day after EY resigned as Asda’s auditor. The firm said its exit was related to a restructure of the Issas’ businesses.

Via lawyers, the EY partner herself said she had done no work for Asda and had complied with all relevant policies. She said the firm had told her she had made all appropriate disclosures to its ethics and compliance teams throughout her career.

Well at least it wasn’t someone working directly with the client this time. In 2014, real estate investment trust Ventas had to fire EY when the company discovered an inappropriate relationship between an audit partner and the company’s former chief accounting officer and controller. That’s one person who held both titles, not a polyamory situation. Wouldn’t that have been fun! Would the firm catch a 2x multiplier bonus on independence violation penalties from the SEC if a single auditor is hooking up with two people in the client’s accounting department?

In 2016, EY agreed to pay the SEC $9.3 million to settle charges that two of the firm’s auditors got “too close to their clients on a personal level.” One of these was the Ventas situation, the other was a partner who really loved sports tasked with winning an unhappy client back by “developing” and “mending” EY’s relationship (internally, the firm said the client was a “troubled account”). The latter went on to incur approximately $109,000 in entertainment-related expenses—meals, sports tickets, and related travel and lodging—which he billed to the client’s charge code. As far as we know the sports-loving partner was merely a BFF to the client’s CFO and not banging him. Though they did have a lot of sleepovers and vacations together.

From an SEC press release dated Sept. 19, 2016 that lumps together Ventas and the other partner in one juicy $9.3 million settlement:

SEC investigations found that the senior partner on an engagement team for the audit of a New York-based public company maintained an improperly close friendship with its chief financial officer, and a different partner serving on an engagement team for the audit of another public company was romantically involved with its chief accounting officer. Ernst & Young misrepresented in audit reports issued with the companies’ financial statements that it maintained its independence throughout these audits.

“These are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, in that press release. “Ernst & Young did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors.”

Don’t shit where you eat!

The post Why Are EY Clients So Stupid Sexy? appeared first on Going Concern.

You should know this but Part I.A. deficiencies are those of such significance that the PCAOB believes the firm, at the time it issued its audit report, had not obtained sufficient appropriate audit evidence to support its opinion on the issuer’s financial statements and/or ICFR. When people say “deficiencies” in relation to PCAOB reports, that’s what they mean.

New to 2022 inspection reports is the Part I.C section intended to flag instances of noncompliance with PCAOB rules related to maintaining independence and potential noncompliance with U.S. Securities and Exchange Commission independence rules. According to PwC, Part I.C of their upcoming 2022 inspection report includes 129 instances across 74 issuers identified through their own compliance procedures, and one instance identified by the PCAOB.

On the 2023 inspection cycle the firm said:

Our FY23 internal inspections program is substantially complete, and of the 201 audit engagements subject to internal inspection, 97% were deemed compliant. In addition, the PCAOB’s most recent 2023 inspection cycle (generally covering 2022 audits) is substantially complete. In both our internal and external inspections, we have noted a modest increase in observations related to executing routine and non-complex audit procedures in normal risk areas.

Based on our analysis to date of potential contributing factors we do not believe any of the observations raised are indicative of a systemic issue or broader issue in a particular audit area. As a learning organization, we took prompt actions to assess and respond to the nature of the matters identified, and we continue to monitor, assess, and respond to feedback to maintain and further enhance audit quality. Through guidance and various communications, we’ve reinforced to our teams the importance of consistent execution in our day-to-day work — from planning through completion of the audit. This includes both the careful preparation of audit work and the appropriate level of supervision and review throughout the audit. We’ve also encouraged our teams to seek additional opportunities to enhance experiential learning and team collaboration.

It could be worse. EY said in November the PCAOB identified deficiencies in almost half (46%) of their audits inspected for the 2022 report, also not yet released. At a Baruch speech late last year, newbie member of the board George Botic said of upcoming inspection results 40% of all audits reviewed will have one or more Part I.A deficiencies and “the average Part I.A finding rate across the six U.S. Global Network Firms will increase from approximately 20% of audits reviewed in 2021 to 30% in 2022.”

Feel free to do the math to figure out who else is dragging the average down. You are also free to complain about the PCAOB in the comments as always.

Related:

The post PwC Admits the Next PCAOB Inspection Report Won’t Be Great appeared first on Going Concern.

The short (and good) news from the paper: their findings suggest that AI job displacement will be substantial, but also gradual. And for now, mass deployment simply isn’t worth it for most businesses, even massive employers like Walmart.

We find that at today’s costs U.S. businesses would choose not to automate most vision tasks that have “AI Exposure,” and that only 23% of worker wages being paid for vision tasks would be attractive to automate. This slower roll-out of AI can be accelerated if costs falls rapidly or if it is deployed via AI-as-a-service platforms that have greater scale than individual firms, both of which we quantify.

The premise hinges on current costs of deployment, meaning it costs more to replace you with the AI we’ve got now than it does to keep using your eyeballs to count widgets.

One example they offer is a bakery:

Consider a small bakery evaluating whether to automate with computer vision. One task that bakers do is to visually check their ingredients to ensure they are of sufficient quality (e.g. unspoiled). This task could theoretically be replaced with a computer vision system by adding a camera and training the system to detect food that has gone bad. Even if this visual inspection task could be separated from other parts of the production process, would it be cost effective to do so? Bureau of Labor Statistics O*NET data imply that checking food quality comprises roughly 6% of the duties of a baker. A small bakery with five bakers making typical salaries ($48,000 each per year), thus has potential labor savings from automating this task of $14,000 per year. This amount is far less than the cost of developing, deploying and maintaining a computer vision system and so we would conclude that it is not economical to substitute human labor with an AI system at this bakery.

Thus:

The conclusion from this example, that human workers are more economically-attractive for firms (particularly those without scale), turns out to be widespread. We find that only 23% of worker compensation “exposed” to AI computer vision would be cost-effective for firms to automate because of the large upfront costs of AI systems. The economics of AI can be made more attractive, either through decreases in the cost of deployments or by increasing the scale at which deployments are made, for example by rolling-out AI-as-a-service platforms (Borge 2022), which we also explore. Overall, our model shows that the job loss from AI computer vision, even just within the set of vision tasks, will be smaller than the existing job churn seen in the market, suggesting that labor replacement will be more gradual than abrupt.

To determine if similar technology would be economically viable at audit firms, you’d have to calculate how much time it takes to do inventory counts, figure out how much of an auditor’s salary goes toward that activity, multiply that by however many auditors it takes to get all done, and then put that up against the costs of a computer vision replacement. Partners are no doubt doing that math as we speak.

A CPA Canada/AICPA paper entitled “The Data-Driven Audit: How Automation and AI are Changing the Audit and the Role of the Auditor” [PDF] published in 2020 talks about how computer vision can assist auditors on this specific and annoying task:

Inventory counts
With computer vision, an AI-based app can look at millions of pictures taken from cameras (whether statically mounted in a warehouse or mounted on moving drones) and identify articles. Articles that have indexing information (such as bar codes) are even easier to identify and if the “eye sees them all,” then it can count them all, giving the auditor the ability to obtain more coverage.

The risks identified by that paper are the reliability of images “(e.g., are the images being viewed authentic or is there a risk that the image could be manipulated?)” and difficulty accessing the inventory. As in, they can force first years to cram themselves into a cold warehouse among giant stacks of boxes with mere inches between them or shit-smeared barns full of livestock inventory, a machine not so much.

“If task automation of that extent were to happen rapidly, it would represent an enormous disruption to the labor force,” said the MIT researchers in their paper. “Conversely, if that amount of automation were to happen slowly then labor might be able to adapt as it did during other economic transformations (e.g. moving from agriculture to manufacturing). So, making good policy and business decisions depends on understanding how rapidly AI task automation will happen.”

Probably a lot sooner than we think if the cost to do it drops significantly.

The post AI Probably Won’t Be Taking Over All the Inventory Counts Any Time Soon appeared first on Going Concern.

Per the SEC:

Hackert also repeatedly failed to assemble complete and final audit documentation within 45 days of the report release date for 126 (or approximately 53%) of the audit engagements. These failures violated PCAOB auditing standards. Further, in connection with the 2018 through 2020 audits of Ault Alliance Inc., where Hackert served as the engagement partner, Hackert violated additional PCAOB auditing standards, including failing to exercise due professional care.

Some highlights from the SEC order:

In October 2021, in a video presentation for Marcum personnel, Hackert admitted that Marcum’s audit work fell short of the PCAOB auditing standards, stating: “the standard of how we carry out our work, and document it, according to the auditing standards, . . . we’re still coming up short.” (Emphasis added.)

And:

Hackert repeatedly failed to review the work of the engagement team members and to document that review prior to the report release date. In 204 of the 240 audits on which Hackert was the engagement partner during the relevant period (or about 85%), Hackert did not review significant portions of the audit work performed or conclusions reached prior to the report release date.

For two audit engagements, the audit of Operating Company 14 for 2015 and the audit of Operating Company 18 for 2016, Hackert did not review and sign off on any work papers containing substantive audit work by the engagement team.

In 2017, in response to findings made by the PCAOB after an inspection, Marcum changed its policy to require engagement partners and engagement quality review (“EQR”) partners to sign off on certain specific work papers in every audit binder, as well as work papers related to other significant risk areas. This policy became effective for audits with fiscal years ended December 31, 2016, or later.

But even after Marcum’s policy changed, Hackert’s review and sign off practices did not improve. In at least 14 audit engagements to which this policy applied, Hackert failed to review the work of the engagement team on significant audit areas and key work papers and to evidence his review before the report release date.

This is just the latest in several blows from the SEC and PCAOB. The SEC charged former National Assurance Services Leader Alfonse Gregory Giugliano in September and threw a $10 million penalty at the firm earlier in 2023 for widespread failures related to taking on too many clients. “Marcum neglected its essential gatekeeper function in service to its own growth,” said SEC Chair Gary Gensler in June. “Marcum took on more than 600 new SPAC clients for a nearly six-fold increase in just one year, churning out audits at an unsustainable pace causing widespread quality control and audit standard violations that put its clients and the investing public at risk.”

The SEC has charged Hackert with engaging in improper professional conduct within the meaning of Section 4C(a)(2) of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the SEC’s Rules of Practice and causing Marcum’s violations of Rule 2-02(b)(1) of Regulation S-X.

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We haven’t heard anything similar coming out of the UK but according to recent reporting by FT, Grant Thornton UK is definitely dipping out on certain clients.

Grant Thornton has been relegated from the UK regulator’s top tier of audit supervision after the firm cut its number of high profile clients, removing more than 70 per cent of those in the “public interest” category, which includes listed companies, credit institutions and insurers.

The Financial Reporting Council industry watchdog moved the UK’s sixth-largest accounting firm from “tier one” to “tier two” supervision status last year, according to regulatory filings.

It means the watchdog will only conduct inspections of the firm’s “public interest entity” audits every three years, rather than every 12 months.

Grant Thornton cut the number of PIEs it audits by more than 70 per cent between 2016 and 2022, auditing 20 of them in 2022, while rival BDO had 217 PIE clients during the same period.

The are, or were, seven firms in the FRC’s top tier: BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars, and PwC. Their 2023 supervision reports are here if you’re going to be stuck on the can this afternoon. Said FRC in its July 2023 Tier 1 review [PDF]:

Of the audits inspected, 77% were categorised as good or limited improvements required (2021/22: 75%). Over the last four years we have seen a 10% increase in this key measure of audit quality (2019/20: 67%). We reviewed 100 individual audits (2021/22: 96) across the seven Tier 11, firms this year.

Six of the seven firms have improved or maintained their audit quality results, with at least the same percentage of inspections requiring no more than limited improvements. It is particularly encouraging that five of the firms had no audits requiring significant improvements, with the number of audits requiring significant improvement having reduced to 3% (2021/22: 7%).

The FTSE 100 audits are often the most complex entities and, of the 16 audits inspected, none were identified as requiring significant improvements. The percentage requiring no more than limited improvements was 81%, which is higher than the 77% across all audits. Of the 27 FTSE 250 audits we reviewed this year, we assessed 22 (82%) as achieving this standard.

Following a re-evaluation of all firms that fall within the scope of our supervision, we have re-allocated several firms within our tier system. This includes Grant Thornton UK LLP who, effective May 2023, are now included within Tier 2.

Good for them. Seriously, good for them.

In its last FRC inspection report [PDF], GT actually got good marks compared to the recent past, due in part to this shedding of problematic (for them) clients. Said the FRC:

In our 2021/22 public report, we concluded that Grant Thornton had continued to respond positively and make good progress on actions to address previous findings in relation to its audit execution and firm-wide procedures.

We are pleased that the firm has maintained its focus on audit quality and for the second year in a row, 100% of the audits inspected were assessed as good or limited improvements required. These are very positive results and form part of a three year trend of improved inspection results compared to the 2019/20 and 2018/19 inspection cycles.

The firm’s concerted effort and progress to improve audit quality continues to be very encouraging and we have seen improvements in the underlying culture, systems and processes that support audit quality. Never-the-less, to put these inspection results into perspective, there are likely to be other factors that have also contributed, such as our small sample size (to reflect the number of audits within the scope of the FRC) and the firm’s approach of de-risking its audit portfolio.

We can’t even rag on them for this, it’s a smart move.

The post Grant Thornton Gets Downgraded to a Tier 2 Firm, That’s Probably a Good Thing appeared first on Going Concern.

Municipalities across the US are at risk of having their credit ratings downgraded or withdrawn by S&P Global Ratings because staffing shortages have delayed financial disclosure documents.

S&P has placed 149 long-term, underlying and program ratings on a negative credit watch this year because the ratings company hasn’t received 2021 financial statements from the issuers. That’s the most since at least 2018, and materially higher than the prior five-year average of 95 such moves, according to S&P data.

Ten months after that story, here’s a specific tale out of Wyoming.

Said the Sheridan Press today:

The city of Sheridan and Sheridan County’s FY2023 audits will come in after the state-mandated deadline.

Both the city and county utilize the services of Porter, Muirhead, Cornia and Howard (PMCH) — a certified public accountant based in Casper — for their audits. The firm works with the local governments to compile information for the audit throughout the year.

Holding up the audit this year, Duff said, is short-staffing at PMCH, as the firm competes with other accounting firms across the nation for employees. He also said the county’s audit has been delayed previously for the same reason.

PMCH’s hometown of Casper is 149 miles from Sheridan, a town with a population of 18,737 just south of the Montana border.

The late audit was due on the 31st of December. NBD on the county’s end though, Sheridan County Administrative Director Cameron Duff told the Press the lateness is fine as long as they have an engagement letter with a CPA firm which they do. “We have that on file with the state. So, we’re good on that aspect because we are not the ones holding up the audit,” Duff said. Burn.

On the billing side, the Press said Sheridan County will pay PMCH about $86,000 for the services; the city of Sheridan was billed $127,000. This is, of course, only a ballpark and could end up higher if a bunch of out of scope services get tacked on. The city of Sheridan is set to pay the firm about $127,000. The actual cost will be determined once the final audits are submitted. According to city of Sheridan treasurer Karen Burtis, they were billed an additional $20,000 by PMCH this year due to the city changing its accounting software and the firm updating its records.

Sheridan County will engage PMCH again next year, they said, but it’s not like they have much of a choice. According to the Press, there are only two firms in the entirety of Wyoming that can do government audits. The other appears to be ClingerHagerman, LLC of Laramie which offers “2080 hour contracts with paid overtime or the option to be used as paid time off” to staff according to LinkedIn.

PMCH has opening for audit manager listed on its website, there is no salary figure listed though they do say they offer “a competitive compensation package commensurate with qualifications and experience as well as significant opportunities for advancement.”

City, county audits delayed [The Sheridan Press]

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The PCAOB calls it “Inspection Enhancements,” what we want to call it isn’t appropriate for a PG-13 website.

Inspection Enhancements in 2024

Consistent with Goal 2 in the Board’s Strategic Plan 2022-2026, we will take steps to enhance the PCAOB’s inspection program in 2024. We are also continually improving our inspection program, using a data-driven and risk-based approach, with a focus on riskier engagements and audit areas as described further in the section “Selections and Prioritized Sectors/Industries.”

Oh goody. We look forward to the PCAOB fining more foreign audit firms performing audits of non-US companies then bragging about how many fines they levied for the year because somehow that protects our capital markets.

The first and most important thing auditors should be aware of ahead of the 2024 inspection season: the PCAOB will be inspecting more engagements.

Increasing the number of engagements reviewed – Each year, several factors influence the number of public company and brokerdealer audits that we select for inspection.

These include prior inspection results and the emerging risks pertaining to a particular audit firm or industry. During 2024, in our efforts to enhance investor protection, we plan to increase the number of engagements we select for review at our annually inspected firms in response to heightened risks in certain industry sectors.

Inspection reports helpfully include historical info on how many audits were selected for review, the below screenshots show these numbers from 2021 reports for Deloitte, EY, KPMG, and PwC (in alphabetical order and not arranged by who has the most prestige, most revenue, or hugest swinging dick which covers both categories).

OK so total audits selected for review are actually down from 2019, at least at Big 4 firms. Maybe this won’t be a big deal in 2024. Maybe they just mean they’ll inspect every single Marcum audit to be extra petty about that SPAC thing.

Next, the PCAOB will expand inspection procedures. In other words, get ready for that paper to be pushed even harder.

During 2023 we began, and in 2024 we will continue, to perform inspection procedures on every engagement selected to assess compliance with certain aspects of the auditing standards related to independence, fraud, audit findings, audit committee communications, Form AP reports, the auditor’s report, engagement quality review, and audit documentation.

These additional procedures enhance the robustness of inspections that assess audit firms’ compliance with applicable laws, rules, and standards.

TLDR “We will not be climbing down from your ass in 2024, if anything we’ll be burrowing further in Lemmiwinks style.” And God forbid you people not file a Form 3 in a timely manner or YOU WILL BE PUNISHED. You’ve been warned, auditors.

Next up, culture.

Increasing focus on a firm’s culture of integrity and audit quality – Audit firms continue to face challenges delivering quality audits as evidenced by (1) the increasing trend of audit deficiencies in recent years and (2) deficiencies identified that have recurred for numerous years. We are interested in why these deficiency trends are not improving and whether audit firms’ cultures are playing a role in this failure to improve. See the section “Review of Culture at Firms.”

I mean maybe you people are just being too nitpicky and that’s why trends aren’t improving? Sure we haven’t had an Enron in 21 years but what exactly has the PCAOB been doing these past 20 years other than finding new things to write-up auditors for? They snag a decent fish every now and then, sure. But so much of it feels pointless, especially if audit deficiencies (as defined by the PCAOB) remain high. Highlighting this comment from my recent post on the PCAOB requesting a budget increase and SEC contrarian Hester Peirce asking what for??

The PCAOB doesn’t have a clue how to improve audits.
For all we know, the audit deficiency rate has reached an irreducible minimum.
It writes new standards to have something to do.
It seems to follow Parkinson’s Law, “work expands to fill the time allotted to it”.

And this comment, too:

So with all these problems, how many restatements of financial statements have occurred as a result of a PCAOB inspection? Can they be counted on less than 2 hands, 1 hand?

Anyway, firm culture.

“Review of Culture at Firms.”

To consistently execute quality audits, a firm’s senior leadership needs to promote and embrace a culture of integrity and audit quality (sometimes referred to by audit firms as “tone at the top” or firm culture). Therefore, as described above, as an enhancement to our inspection program, we have created a small team to initially evaluate culture across the “U.S. Global Network Firms” category of firms inspected by the PCAOB. This initiative includes interviewing firm personnel and evaluating other documentation, as deemed necessary, as part of our QC procedures. We will use this information to inform our understanding of audit firms’ cultures and the impact on audit quality. Aggregated results will be included in a future publication.

Fab. Everyone be sure you have your employee surveys and code of conduct pledges properly filed.

The last two items on the 2024 to-do list are improvements the PCAOB is committing to on their end:

Performing quality inspections – Since 2019, the PCAOB has operated the Inspections Quality Group, an internal program aimed at applying best practices across inspection activities. In 2024, this group will continue to drive excellence across our inspection function by assessing the quality, consistency, and efficacy of our inspections.

Improving the timeliness of inspection reports – Considering the recommendation of the PCAOB’s Investor Advisory Group, we are taking additional steps to streamline our internal processes to enable timelier issuance of inspection reports. We are renewing our focus in this area and are committed to
delivering meaningful results.

Cool. They’ve done some good work in this area, like the tool they launched this summer that makes it much easier to search through inspection reports to find nitpicky nonsense you, and by you I mean me, can tangentially reference in mean articles about how useless the PCAOB is.

There’s some more stuff in the spotlight like what areas they’ll be focusing on in 2024 — M&A, business combinations, broker-dealers, blah blah — you can read it yourself if you care.

The post The PCAOB Will Be Further Up Auditors’ Asses in 2024 appeared first on Going Concern.

Look at you coming in third, KPMG. Good for you.

93 percent of audit fees paid by companies listed on regulated European exchanges to audit firms go to Big 4, Mazars takes three percent, BDO one, and “others” take any scraps left over.

Perhaps of note, and mostly because we’ve been binge-watching the BBC classic Red Dwarf here at GC HQ for the last few weeks, of all the European countries in the report, Bulgaria pays the least to Big 4 firms.

The report notes that France, along with Bulgaria and Croatia for certain entities, “have mandatory joint audit requirements, which may contribute to a more balanced market. Not only is there a dampened
dominance by the Big Four, but the split between mid-sized and small firms is also dramatically
different, with small firms exceeding the mid-size firms’ shares of the market in both Croatia and
Bulgaria, as well as Romania, Cyprus, and Poland.”

See below:

Mandatory auditor rotation is in effect in Europe but handled differently by the 30 countries subject to it, see this helpful PDF.

Anyway, something different from Ideagen Audit Analytics and therefore something unique for us to share. You can snag the report from them here.

The post PwC Is the Winner of the 2022 Auditor Rankings, European Edition appeared first on Going Concern.

Here’s what happened. 445 professional staff — 93 percent auditors and seven percent tax and advisory — participated in answer sharing during mandatory, open-book internal training assessments between 2016 and 2020. This included training on accounting and auditing standards, audit strategy, planning, procedures and documentation, professional integrity and independence matters, and specific issues that arise in audits. Despite all this widespread cheating, PwC Canada actually had a completely flawless PCAOB inspection report in 2020 [PDF] so at least some auditors over there must have known what they were doing.

Ever since KPMG was fined $50 million by the SEC for cheating in 2019 it’s been a free-for-all on the answer sharing punishments around the world. EY US got fined $100 million by the SEC for doing it in 2022 though theirs was a bit worse as they were also cheating on the ethics exams one must take to be licensed as a CPA and not just WBLs.

And just a few weeks ago, the PCAOB announced it was fining PwC China and PwC Hong Kong a total of $7 million USD for their own cheating: From 2018 until 2020, over 1,000 individuals from PwC Hong Kong, and hundreds of individuals from PwC China, engaged in improper answer sharing – by either providing or receiving access to answers through two unauthorized software applications – in connection with online tests for mandatory internal training courses related to the firms’ U.S. auditing curriculum.

When PwC Canada was fined for cheating by the PCAOB in 2022, it was revealed PwC Canada personnel maintained shared drives packed with answers to at least 46 of PwC’s audit tests. So we kinda already knew there was some cheating going on over there.

From at least 2016 to early 2020, more than 1,200 PwC Canada personnel were involved in improper answer sharing related to training tests. Firm personnel primarily shared answers through use of several shared drives that professionals had created on the Firm’s computer network (the “Shared Drives”), and on which professionals had posted the answers for others to view and provide supplemental answers. In addition, individuals shared answers by sending emails with attached documents containing answers to training test questions, by providing answers in hard copy documents, or by discussing answers when taking tests in the presence of others.

Instances of improper answer sharing primarily occurred in connection with tests that were a part of the Firm’s mandatory Assurance training. The Shared Drives contained answers for at least 46 of the Firm’s approximately 55 mandatory Assurance tests, as well as answers for some mandatory Firm-wide tests containing content concerning professional integrity and professional independence.

Improper sharing of training test answers occurred among junior staff, managers, directors, and partners at the Firm. After Firm leadership learned of the practice, it conducted an internal investigation. The Firm’s investigation revealed that the misconduct was widespread within the Firm’s audit practice, including among those who performed work on audits governed by PCAOB standards. At least 1,100 professionals in the Firm’s Assurance practice were involved in answer sharing.

And the CPA Ontario order says essentially the same thing:

Specifically, Answer-Sharing occurred in the following ways:

a. Repositories of Answer-Sharing Documents were created on Google Drives and generally accessible by invitation. Google Drives are electronic storage tools within the Google Workspace platform used by PwC that contain folders and documents;
b. Answer-Sharing Documents were created and shared by email documents;and
c. Professional Staff worked together at the end of in-person training sessions and referred
collectively to Answer-Sharing Documents.

The CPA Ontario order mentions that rather than seeing answer sharing as a bad thing, the attitude at PwC Canada was that answer sharing is part of a greater “collaborative culture” at the firm.

There was a consistent mindset among the participants that engaged in Answer-Sharing that it was both widely-known and appropriate. Many viewed sharing answers as part of a collaborative culture at PWC and because the assessments were open book, some did not view answer sharing as ethically improper.

That changed on November 21, 2019 when assurance staff were told via webinar to “complete assessments independently.”

The communication was motivated by the publication of press releases and news stories regarding a different firm’s manipulation of its training assessment system in another jurisdiction and was not related to any awareness by the Firm that its own Professional Staff had been actively engaging in Answer-Sharing to that point in the Relevant Period. Despite this instruction, Answer-Sharing amongst some Professional Staff continued following the webinar for over one month.

Said CPA Ontario:

PwC admits it failed to have appropriate policies and procedures and a system of quality control in place to ensure that mandatory internal training assessments were being completed independently. The firm failed to adequately communicate the requirement for independent completion and did not have appropriate procedures in place to prevent, detect or monitor for answer sharing. The mandatory assessment process was therefore not effective in demonstrating whether the substantive professional competencies being evaluated were in fact attained.

“PwC failed to create and foster a culture in which the high standards of ethics and integrity required of professional staff were conveyed and applied to internal training assessments,” said Janet Gillies, CPA, CA, executive vice-president, Regulatory and Standards, CPA Ontario. “This failure undermines the public’s confidence in the ethics and integrity of the participating staff and the profession as a whole.”

From now on, PwC Canada will engage in periodic monitoring of assessments to ensure they are completed independently. And PwC Canada’s junior auditors will learn to keep this thing everyone does on the down-low going forward.

We feel compelled to ask — does anyone other than regulators give a shit if some overworked auditors share answers on open book, checkbox assessments? Truly?

Related:

The post Cheaters at PwC Canada Thought Sharing Answers With Each Other Was “Collaborative Culture” appeared first on Going Concern.

SEC Chair Gary Gensler said in his Wednesday statement he supports this $385 million budget and its accompanying “modest two percent increase in headcount” because of “the important role the PCAOB plays in protecting investors and facilitating capital formation.”

Then came several hundred words about Sarbanes-Oxley (“A central goal of the Sarbanes-Oxley Act was to restore trust in our financial system by providing external regulation of auditors”) before he got to the point:

The PCAOB budget request is $385 million, up from the 2023 budget of $350 million. This supports 20 new positions, increasing the headcount to 946. Half of the new positions are for the Division of Registrations and Inspections, which would increase from 510 to 520, restoring the inspections division back to its 2017 headcount after which resources for audit inspections were reduced.

Thanks to PCAOB inspections, the quality of auditor oversight all over the world has improved, over time. More than 50 jurisdictions have complied with the requirements that the PCAOB inspect audit firms that audit or participate in the audit of U.S.-listed companies based in their borders.

[bunch of stuff about China and Hong Kong inspections]

In conclusion, I’m pleased to support the 2024 budget for the PCAOB.

You notice he said the quality of auditor oversight all over the world has improved, not the quality of audits.

In her statement, Commissioner Hester M. Peirce was not so complimentary.

The Public Company Accounting Oversight Board (PCAOB) opened its doors in 2003 to promote “informative, accurate, and independent audit reports.” We sit here, twenty years later, considering the PCAOB’s $385 million budget. We owe it to the public companies and broker-dealers that fund the PCAOB and the investors that rely on the PCAOB to ask how well it is doing its important job, which is why we are having an open meeting on this topic.

One troubling piece of evidence was cited by Chair Williams in an op-ed earlier this year, in which she wrote that: “PCAOB inspectors expect that approximately 40% of the audits they reviewed in 2022 will have had one or more deficiencies, in which the audit firm failed to obtain sufficient appropriate evidence to support its opinion.” What does that startling statistic tell us about how the PCAOB is doing its job? More money may not be the answer. Board member Christina Ho labeled the budget “[g]rowing and [u]nsustainable” and called for the PCAOB “to do a better job of “identify[ing] where inefficiencies exist.” Yet more money is just what the PCAOB is here requesting. After receiving a 13% budget increase last year, the PCAOB is back this year asking for another 10% increase. For perspective, if approved, the 2024 budget will be 41% higher than the 2019 budget. For further perspective, the recent federal debt limit deal would increase discretionary spending by about 4% compared to 2023 outlays.

Chair Williams’ op-ed:

Peirce goes on to question the PCAOB bragging about its record penalties (“Should enforcement stats be the measure by which we assess the PCAOB’s success as an audit regulator?”) and why 946 employees are needed to “assist the Board in achieving its mandates under the Sarbanes-Oxley Act of 2002″ when the PCAOB’s 2019 budget used that same justification for 838 employees (“What changed over five years for the PCAOB to justify 108 more employees?”).

But this bit is of special interest. Peirce questions the PCAOB’s ambitious standard-setting regime, something the Board has only recently decided is important after basically two decades of doing very little on the standard-setting front. Great idea on paper, terrible in actual application. Look no further than the controversial NOCLAR matter.

Peirce said:

Erica, the standard-setting regime is, in the words of the PCAOB’s strategic plan, “one of the most ambitious standard-setting agendas in the organization’s history.” [PCAOB Strategic Plan 2022-2026, PDF] While at first blush this may seem positive, an overly active standard-setter can lead to problems down the road as firms retool to comply with those new standards. Gradual standard-setting is the best way to ensure that standard-setters, the public, and firms can devote adequate attention to each standard. With all the new standards you are rolling out, we could see widespread audit deficiencies several years down the road when all these new standards first take effect. Audit quality could suffer if firms are forced to devote more resources to implement new standards and therefore fewer resources for basic quality control measures.

1. How are you thinking about that particular problem as you set and carry out the standard-setting agenda?
2. The strategic plan defends this aggressive agenda by arguing that many of the PCAOB’s standards have not been updated since 2003. How has the PCAOB identified the most consequential standards to update and avoided undergoing a lengthy process to update old standards that have been working well?
3. A former PCAOB staffer raised concerns “that the board and its economic analysis office don’t understand the impacts of its audit standards and whether the benefits outweigh any costs or serve the interests of the American public.” Has the Board ever made a change in a standard-setting project because of its economic analysis? If so, please provide me with an example.
4. A recent survey of institutional investors by the Center for Audit Quality found support for “modern regulations that balance the value of information with the cost of collecting the information.” These investors understand that more is not always better. How does the PCAOB achieve the right balance?

Ultimately the SEC did approve the PCAOB’s increased budget so guess we’ll see you next year for more delicious criticism, Hester.

The post The PCAOB Sucks, the PCAOB Is Doing Great appeared first on Going Concern.

Imposing $7.9 million in fines, the PCAOB has sanctioned three China-based firms and four individuals in historic settlements. https://t.co/5g54bBG7qp pic.twitter.com/g5oGPQU2mq

— PCAOB_News (@PCAOB_News) November 30, 2023

So here’s what the PCAOB is celebrating today:

• Two disciplinary orders imposing a total of $7 million in penalties against two registered public accounting firms within the PwC global network, Shanghai-based PricewaterhouseCoopers Zhong Tian, LLP (“PwC China”) and Hong Kong-based PricewaterhouseCoopers (“PwC Hong Kong”), for violating PCAOB quality control standards related to integrity and personnel management; and
• A disciplinary order imposing immediate practice limitations (including prohibitions on accepting new PCAOB audit clients), an independent monitor to improve practices and ensure compliance, $940,000 in fines, and bars against individuals at Shandong Haoxin Certified Public Accountants Co., Ltd. (“Haoxin”), a mainland China-based registered public accounting firm, and four of its associated persons for violations that include issuing a false audit report, failing to maintain independence from their issuer client, and improperly adopting the work of another accounting firm as their own.

The respective orders for your viewing pleasure PDF alert

• PricewaterhouseCoopers Zhong Tian, LLP (“PwC China”)
• Hong Kong-based PricewaterhouseCoopers (“PwC Hong Kong”)
• Shandong Haoxin Certified Public Accountants Co., Ltd. (“Haoxin”)

Both PwC China and PwC Hong Kong were engaging in “improper answer sharing” for several years, thus they’ve been sanctioned for violating PCAOB quality control standards related to integrity and personnel management.

Both firms failed to detect or prevent extensive, improper answer sharing on tests for mandatory internal training courses. From 2018 until 2020, over 1,000 individuals from PwC Hong Kong, and hundreds of individuals from PwC China, engaged in improper answer sharing – by either providing or receiving access to answers through two unauthorized software applications – in connection with online tests for mandatory internal training courses related to the firms’ U.S. auditing curriculum. The overwhelming majority of the professionals implicated in the answer sharing performed work for the firms’ Assurance practices.

Haoxin’s violations were a bit more serious and actually detrimental to the health of capital markets unlike a bunch of overworked auditors sharing answers on checkbox learning modules.

• Haoxin violated the U.S. securities laws by issuing an audit report falsely stating that the firm’s audits of the 2015-2017 financial statements of Gridsum had been performed in accordance with PCAOB standards and that Haoxin was independent of Gridsum, when Haoxin knew, or was reckless in not knowing, that its audits did not comply with PCAOB standards and that it was not independent of Gridsum.
• Liu, the engagement partner for the Gridsum audits, and Ma, the engagement quality reviewer, recklessly contributed to the firm’s violations of the U.S. securities laws and PCAOB rules and standards.
• Haoxin, Liu, Ma, Sun, and Zhu violated independence requirements and/or PCAOB auditing, ethics, and/or quality control rules and standards. Among other violations, Haoxin and the engagement team improperly relied on a predecessor auditor’s draft work papers, adopted those draft work papers as their own, and performed limited additional procedures before issuing an unqualified audit opinion on Gridsum’s 2015-2017 financial statements. In addition, Haoxin, Liu, and Ma violated relevant independence requirements by informing Gridsum that they expected to issue an unqualified opinion before Gridsum had actually engaged Haoxin as its external auditor.

Liu Kun is a partner of Haoxin and was engagement partner for the Gridsum Audits; Ma Yao is a director and was engagement quality reviewer, Sun Penghuan (great name) is a director and served as the manager for the audits in question, and Zhu Dawei is a partner and at all relevant times was the firm’s chief partner and legal representative.

The firm and Zhu provided false information to PCAOB enforcers and therefore were penalized for failing to cooperate with the investigation along with the audit work violations.

But wait! It gets worse. For these people anyway. Zhu and Ma’s financial situation is so bad the PCAOB decided to reduce their civil money penalties. Zhu’s would have been $120,000 and Ma’s $75,000, the Board lowered the penalties to $20,000 for Zhu and $50,000 for Ma. Wow, Zhu must really be broke. Total fines are thus $750,000 for the firm and $190,000 total for the four named individuals.

Let’s all give the PCAOB a round of unenthusiastic golf clapping for their hard work.

The post The PCAOB Is Stoked Congress Gave Them Permission to Pick On China Now appeared first on Going Concern.

Said the PCAOB:

The 2024 budget reflects the resources expected to be required in 2024 for the PCAOB to carry out its statutorily mandated responsibilities under the Sarbanes-Oxley Act and achieve the goals and objectives as set forth in its 2022-2026 Strategic Plan approved by the Board last year.

The strategic plan is built around four key goals to help the PCAOB fulfill its investor-protection mission:

• Modernizing Standards,
• Enhancing Inspections,
• Strengthening Enforcement, and
• Improving Organizational Effectiveness.

Before you get bent out of shape over the increase, know that as of November 14, 2023, total fines imposed by the PCAOB have reached $11.9 million for the year. That’s a new record for them (beating last year’s record of $11 million) and the year isn’t even over yet. “Penalties are already more than double the total penalties in each of the five years before the record-breaking year in 2022,” wrote the PCAOB in an overtly self-fellating news release.

They also bragged:

In 2023, the PCAOB has also notched several enforcement firsts, including requiring the first-ever changes to a firm’s supervisory structure, imposing the PCAOB’s largest-ever fine on an audit firm that is not a member of a global network, and imposing the PCAOB’s first-ever sanctions related to a firm’s membership in an accounting alliance.

The alliance one was kinda funny:

To be fair, many of those penalties they’re boasting about were the result of relentless, petty nitpicking and audit quality is in the toilet. Chair Williams wrote a venomous op-ed in Wall Street Journal over the summer that called a 40 percent deficiency rate “unacceptable” two if not three times throughout the piece. And here’s a good example of nitpicking: the PCAOB recently fined a Canadian audit firm $175,000 for using the work of two firms not registered with the PCAOB though neither the clients nor the firms involved were in the US (though the fined firm is registered with the PCAOB). But surely we all feel safer knowing the PCAOB is on the case.

Anyway, here are some more salary totals (in thousands, like it says right there in small print):

The PCAOB’s budget is subject to approval by the SEC and don’t expect resident SEC contrarian Hester Peirce to rubber stamp this increase without much griping. Here she is griping about the 12.6% budget increase for 2023 in a statement released just before Christmas last year:

The ongoing ballooning of the PCAOB’s budget and associated accounting support fee is not a trivial matter. The accounting support fee adds to the cost of being a public company or an SEC-registered broker-dealer. As former SEC Commissioner Michael Piwowar explained:

The accounting support fee is a tax . . . assessed by a non-profit corporation under authority granted by Congress. The Commission represents the only safeguard to an otherwise unilateral ability to impose the accounting support fee tax on companies and broker-dealers. Companies and broker dealers are required, under penalty of law, to pay money to the Board for the privilege of merely existing. These costs are not ultimately borne by companies and broker-dealers, but rather their shareholders and customers.[21]

The PCAOB budget process is a clunky accountability tool, one ill-suited to assess the appropriateness of a tax that now tops $300 million. As the PCAOB’s budget and the accounting support fee continue to creep higher, a structure that would afford Congress more direct oversight of the audit regulator could enhance its efficacy and accountability.

“PCAOB’s Ballooning Budget,” statement by SEC Commissioner Hester M. Peirce on December 23, 2022

“Our strategic plan has been instrumental as the PCAOB has renewed and strengthened its focus on protecting investors,” said PCAOB Chair Erica Y. Williams of the new budget. “With the approval of our 2024 budget, the PCAOB is poised to continue delivering results for investors and the U.S. capital markets.”

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Here’s what you need to know.

Average audit fees increased by 4.6 percent from 2021 to 2022

Of more than 6,200 clients, the average audit fee works out to $2.4 million (sauce).

Less than half — 47 percent — of member company respondents said they’ve had to increase their efforts to support the external audit, 51 percent said there’s been no change. Acquisitions are a big driver for increased effort, 21 percent of respondents credited it for the stepped up effort. That or changes to ICFR and divestitures.

Technology is doing a lot of heavy lifting in audit

Much like last year’s survey, 89 percent of preparers said their auditors are using advanced data and information analysis. Almost 80 percent of audit partners surveyed said they used data analytics and/or other emerging technologies in 2022 audits, that’s a five percent increase from prior year. On the client side, 64 percent of preparer respondents said they think the use of these technologies improved audit quality compared to 49 percent of them a year ago.

But AI Isn’t Big…Yet

36 percent of preparers surveyed said they plan to incorporate use of AI into their financial reporting within the next five years.

Musty audit rooms are back!

Better put that deodorant order on subscription, in-person auditing is definitely back.

More than 55 percent of audit partners surveyed say they expect their team will spend more than half of their time together, be that at the client site or at the firm’s office. The number of partners with this expectation has more than doubled from last year, less than 25 percent of audit partners surveyed for 2021 had this same expectation.

On the client side, 43 percent of preparer respondents expect their finance and accounting teams to spend 50 percent or more of their time together on-site supporting the audit during peak times. That’s an even bigger jump from less than 15 percent of them having this expectation last year.

More from CFO Magazine, including averages for large accelerated filers and much smaller filers, here: Audit Fees Rose Nearly 5% in 2022: Weekly Stat

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According to the news release, Komodromos and PwC Greece knew going into it the audit came with a parade of the reddest of red flags to rival that of a CCP parade. They understood that an executive at Aegean with significant control over the company had previously been criminally convicted for fuel smuggling involving “virtual invoicing” and been accused of a variety of other criminal activity. As such, because of concerns about the integrity and ethics of management, Komodromos and the engagement team assessed a significant risk of material misstatement due to fraud.

Did the engagement team proceed to check every box on this audit? Obviously not if we’re talking about a PCAOB order and penalty of $3,080,000.

Komodromos and the engagement team disregarded and did not resolve inconsistencies from certain contradictory audit evidence about the unusual transactions with the four customers, despite the heightened risks of fraud at Aegean and the engagement team’s initial concerns about the transactions. This contradictory evidence should have been viewed as red flags that raised substantial doubt about management’s assertions in Aegean’s financial statements related to the four customers’ transactions and balances.

Well how bad could it be…

For example, the firm engagement team encountered substantial difficulties obtaining street addresses for the four customers from Aegean to use in the firm’s accounts receivable confirmations to those customers. When the engagement team finally received the street addresses, the team requested that an affiliated PwC network firm visit the customers at those addresses to verify their existence. When the PwC network firm visited the first three addresses, it found that one address did not exist and two were residential apartment buildings with no businesses located there. Although the affiliate found no evidence that the customers were located at the addresses, Komodromos and the engagement team failed to respond appropriately to that and other contradictory audit evidence – or even document the attempted site visits in the workpapers. Instead, Komodromos instructed the team to cancel the remaining site visit and relied on other inadequate audit evidence to issue an audit report containing unqualified opinion.

In 2018, Aegean publicly disclosed that its audit committee and board of directors had concluded that the transactions with the four customers lacked economic substance, as the relevant customers were shell companies with no material assets or operations and were owned or controlled by former employees or affiliates of the company. In 2021, PwC Greece agreed to pay $14.9 million to settle a lawsuit brought on by Aegean Marine shareholders who accused the firm of failing to catch a $300 million fraud. Deloitte Greece also got tied up in Aegean Marine’s mess, having audited the company  from 2006 through 2015 before PwC dumbly took on this shitty client.

Without admitting or denying the Board’s findings, PwC Greece and Komodromos each consented to the PCAOB’s respective order against them. The PwC Greece order censures the firm, imposes a $3 million civil money penalty on the firm, and requires the firm to complete remedial undertakings. Those remedial undertakings require the following:

• The firm’s associated persons involved in PCAOB audits will complete additional hours of professional training related to certain PCAOB standards.
• For the next two years, the firm will obtain pre-issuance reviews by a third party for each issuer audit in which the firm prepares or issues an audit report or plays a substantial role in the preparation or issuance of an audit.

The Komodromos order censures him, imposes an $80,000 civil money penalty on him, and bars him from being an associated person of a registered public accounting firm for two years.

Further reading: Auditors’ Duty to Detect Related Party Transactions, to be Professionally Skeptical, and to Detect Fraud: A Case Study of Aegean Marine Petroleum Network, Inc. from Journal of Economics, Finance and Management Studies, Volume 4, Issue 06 June 2021 [PDF]

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CPA Ontario announced yesterday Deloitte will be paying $1.59 million ($1.15 million USD) in fines and costs for breaches of the CPA Ontario Code of Professional Conduct (Rule 501 and 502). 501 covers a firm’s maintenance of policies and procedures for compliance with professional standards and 502 a firm’s maintenance of policies and procedures: competence and conduct of firm members.

The press release says:

A number of Deloitte auditors in Ontario changed the date and time settings on their computer clocks to manually override controls in Deloitte’s audit software and backdate audit working paper signoffs between November 2016 and May 2018. During this period over 930 audit working papers were backdated in at least 39 audit engagements.

The settlement agreement [PDF] gives a bit more info:

Certain Deloitte audit practitioners identified the opportunity to bypass the new limits imposed by the November 7, 2016 EMS update and began adjusting the clock on their computers to Backdate the sign-off dates of audit working papers.

A number of students, staff, managers, engagement partners, and engagement quality control review partners in the audit practice changed their computer clocks to Backdate sign-offs in the course of performing assurance engagements for private and public entities. This conduct continued until March 2018.

During this period at least 35 Deloitte CPA Ontario members engaged in Backdating, and in some cases instructed others to do so, in over 930 audit working papers in 39 audit engagements.

Sign-off dates were changed from after the date of the audit report to a date prior to the audit report, or before the date of the audit report to an earlier date, or after the audit report date to another date after the audit report date.

According to the settlement agreement, it was the firm themselves that tipped off CPA Ontario that a number of its partners and professional staff had changed the sign-off dates in numerous audit working papers. The investigation began in September 2019 and concluded with the settlement reached in September. Prior to 2016, Deloitte Canada’s engagement management system allowed users to manually select a sign-off date for an audit working paper.

The settlement gives us the backstory on the change, explained below.

In response to findings by the Public Company Accounting Oversight Board of an incident where archived audit documentation had been improperly altered outside of Canada, DTTL required all its global members, including Deloitte, to conduct a mandatory conference call focused on audit quality and integrity with all audit partners before the end of October 2016.

Prior to debuting the new procedure that would default sign-offs to the date on a user’s computer, Deloitte National Office held a call with partners informing them off the change.

Leading with the script National Office was given by DTTL, the National Office first set out the regulatory context of the call, referencing:

• (a) the emphasis placed by the PCAOB on integrity, and PCAOB’s recent public statements about how integrity was “as important, if not more
  important, than audit quality issues;”
• (b) many discipline orders issued by PCAOB to date involving a failure to cooperate included the improper alteration of documents;
• (c) that PCAOB inspectors uncovered evidence of the creation of documents shortly before or during a PCAOB inspection which were then backdated and provided without disclosing when they were created, resulting in firm sanctions for improperly deleting, adding, or altering documentation in connection with an inspection.

The National Office then expressed Deloitte’s zero tolerance policy for the type of behavior found by PCAOB, focused on recently introduced DTTL quality processes for archiving and forensics, and informed call participants that:

“Going forward we are enhancing EMS such that the undocumented alteration of a previously archived engagement file will be identified as part of a process prior to the provision of a file for inspection.

Effective immediately, ‘back-dating’ of working papers is not allowed. DTTL is mandating that this function be discontinued at each DTTL member firm, so that it will no longer be available.”

The National Office script did not make it clear that backdating of all sign-off dates, and not just those that might be under scrutiny during a regulatory inspection, was not permitted and was conduct which violated professional standards and the Code. This omission led, at a minimum, to confusion, with some call participants understanding that the prohibited “back-dating” referred specifically to archived working papers, rather than the broader focus of the pending Engagement Management System change to disable the selection of working paper sign-off dates.

On October 26, 2016, Deloitte issued an audit practice alert to all audit staff, indicating, among other things, that the ability to choose a sign-off date in EMS was being removed.

The EMS update was released on November 7, 2016, disabling a user’s ability to use the software to both choose the date of their sign-off and the ability to sign-off on someone else’s behalf.

On November 7, 2016, a second audit alert email was issued indicating that the EMS changes would be pushed to users’ laptops that day to disable the “edit signoff date” and “sign-off on behalf” features.

Certain personnel in the Firm’s National Office were aware of a risk that the new software restrictions could potentially be bypassed by individuals manually changing the date and/or time on a user’s computer clock . They took steps to determine if it was possible to detect or prevent any effort to avoid the new EMS functionality, and they concluded that there was no solution available. LOL.

Having identified that the new EMS restrictions could potentially be bypassed by a user changing their computer clock, the National Office considered whether to expressly address this issue in its communications, and to be explicit that doing so was prohibited. Instead, the National Office decided not to communicate this message on the basis that such communication could instead “socialize” inappropriate conduct if it were made known that Clock Adjusting in order to Backdate sign-off dates remained possible.

No messages were conveyed by the National Office between November 2016 to February 2018 to communicate that: it was inappropriate for auditors to bypass the function of the audit software by changing the computer clock; highlighting why the EMS sign-off date edit function had been disabled; or that Backdating was unacceptable and contrary to the Code.

Deloitte incorrectly assumed that the two practice alerts sent October 26 and November 7, 2016, about the changes to EMS were sufficient communication to the audit practice, and that no additional communication was required about the changes to the ADG in November 2016.

In early 2017, two Ontario audit partners learned that audit practitioners were engaging in the practice of Backdating. Both partners communicated to members of their respective audit teams that the practice was not acceptable. Neither partner took steps to address the issue with other partners or with Firm leadership. Moreover, a number of audit partners took part in the practice themselves. LOL again.

So here we are. Per the settlement, Deloitte will pay a fine of $900,000 ($649k USD) and costs of $695,000 to CPA Ontario for its troubles.

The post Deloitte Auditors Got Caught Changing Their Computer Clocks to Backdate Workpapers appeared first on Going Concern.

A quick Google says Smythe has about 200 employees and $32.9 million in revenue.

What egregious sin did Smythe commit worthy of a $175,000 fine? The firm used the work of two firms not registered with the PCAOB — PKF Audisur of Argentina and PwC Malta of, duh, Malta — in “a substantial role capacity” on four issuer audits. Because Smythe is registered with the PCAOB, their rules require that a registered public accounting firm and its associated persons comply with the Board’s auditing and related professional practice standards.

The issuers were Scully Royalty, Ltd., a corporation incorporated under the laws of the Cayman Islands, with its principal office at all relevant times in Hong Kong, and Tower One Wireless Corp., a corporation incorporated under the laws of British Columbia, Canada, with its principal place of business at all relevant times in Vancouver, Canada.  The firm used the work of PwC Malta on the Scully audits, PKF Audisur on Tower One.

As described in the order, Smythe:

• Failed to adequately plan the audits,
• Failed to coordinate its activities with the unregistered firms,
• Failed in certain audits to perform an adequate analysis to determine whether it could serve as principal auditor, and
• Failed to establish and implement adequate quality control policies and procedures concerning the use of the work of other accounting firms.

PKF Audisur audited Tower One subsidiaries constituting between 88% and 97% of Tower One’s assets and between 80% and 90% of its revenues, and PwC Malta audited Scully subsidiaries constituting between 21% and 23% of Scully’s assets and between 17% and 24% of its revenues. The unregistered firms’ portion of the total audit hours ranged from 40% to 73%, and the unregistered firms’ portion of the total
audit fees ranged from 27% to 32%.

Smythe failed to evaluate the professional reputation of the unregistered firms with due professional care, despite knowing that the unregistered firms performed more than 20% of total audit hours or incurred more than 20% of the total audit fees (the material services threshold for substantial role participation requiring Board registration). In certain audits, participation by one of the unregistered firms far exceeded the material services threshold of 20%.

In the order, the PCAOB shares that Smythe acknowledged the unregistered firms’ substantial contributions to the audits however wrongly assumed that additional audit work on their end would make up for it:

Smythe concluded and documented its expectation that an unregistered firm would be playing a substantial role in each of the audits and its understanding that a component auditor that plays a substantial role in the preparation or furnishing of an audit report by Smythe was required to be registered with the PCAOB.

Smythe reasoned, however, without adequate basis, that Smythe’s performance of additional audit procedures would somehow serve to “overcome” the Unregistered Firms’ substantial role participation.

The PCAOB also took issue with Smythe telling the unregistered firms to perform their work in accordance with International Standards on Auditing (“ISA”), not PCAOB standards.

Expect more of these fines to come, the PCAOB made use of other auditors one of its many nitpicking pet issues last year. See: Planning and Supervision of Audits Involving Other Auditors and Dividing Responsibility for the Audit with Another Accounting Firm, PCAOB Release No. 2022-002 on June 21, 2022 [PDF]

PCAOB Sanctions Smythe LLP for Improper Use of Unregistered Firms in Four Audits [PCAOB]

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The Australians are having the same staffing problems we are and the chair of the Australian Securities and Investments Commission said in the most libertarian way possible it’s because of all the regulation. While that may be a factor, and certainly one contributing to why audit partner is not the attractive career path it once was, one senator called bullshit on his claim.

AFR:

Auditing firms are struggling to attract people into the profession because the role is demanding and the work unpleasant, the head of the corporate regulator says.

ASIC chairman Joe Longo told a parliamentary inquiry into the regulator on Friday that the auditing profession also had “long-term staffing challenges”, partly because being an auditor was a “high-risk” occupation because of heavy regulation of the sector.

However, Labor committee chairman Deborah O’Neill said the key reason firms had a staffing problem was the low pay of junior auditors compared with the oversized pay packets of partners at the large auditing firms.

AFR goes on to share the actual quotes:

“The audit professionals globally and nationally, [it’s] a challenge for them to attract people into that profession,” he told the joint committee. “It’s a very demanding role. It’s heavily regulated. It’s high risk. So I think that’s an issue that I know that big firms are thinking about; how they’re going to address moving people around the network, giving them exposure, making it a more attractive role.”

Senator O’Neill responded: “Or they could pay their junior staff a bit better, Mr Longo.”

Let’s find out what Aussie grads make in audit these days:

Graduate salaries at the Big 4 can vary depending on the service line you work in and the job you’re doing. In a broad sense, you could expect to be earning anywhere between $45,000 and $75,000, but this can even be different from city to city.

If you’re working in specialised departments like economics, digital services, financial advisory and consulting you’ll often have a starting salary between $60,000 and $70,000, and this is the higher end of the pay scale for graduates at the Big 4. At the lower end, graduates working in audit and assurance departments have reported salaries between $45,000 and $60,000. Most of these packages include superannuation.

$45,000 AUD = $28,560 USD.

On the topic of regulators and auditor pay, Financial Reporting Council chair Jan du Plessis responded directly to a similar complaint from UK Big 4 firms last summer with his own burn. FT:

Senior partners at the Big Four — Deloitte, EY, KPMG and PwC — have claimed that criticism from politicians and regulators, including high-profile fines for poor work, is making it more difficult to recruit and retain auditors.

But Sir Jan du Plessis, chair of the Financial Reporting Council, hit back, denying that the watchdog’s tough approach had made the profession unappealing.

Asked whether increasing pay was a solution to attracting people to work as auditors, du Plessis told the Financial Times: “Blunt answer: yes . . . There has been a significant increase in profitability at all the audit firms. They have the resources available to increase the pay levels of more junior people that they want to attract into their firms and it’s up to them whether they want to do so.”

Audit may be thankless work but the firms might be surprised what people are willing to endure if paid well enough to do it.

Unpleasant work or low pay? What’s behind the auditor shortage [Australian Financial Review]

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When Carillion collapsed in 2018, 3,000 people lost their jobs and 450 public sector projects including hospitals, schools and prisons were plunged into crisis. Here’s a detailed breakdown of what happened in the years leading up to its spectacular implosion.

The jist of the audit failures, in a wide range of areas, and in respect of a wide variety of items, as described by the FRC:

KPMG failed to gather sufficient appropriate audit evidence to enable it to conclude that the financial statements were true and fair, and failed to consider (adequately or at all) the implications for the audit of evidence suggesting that Carillion’s accounting might have been incorrect or unreliable.

KPMG failed to conduct its audit work with an adequate degree of professional scepticism. Instead of consistently challenging and scrutinising such audit evidence as it gathered, KPMG failed to subject Carillion’s management’s judgements and estimates to effective scrutiny, even where those judgements and estimates appeared unreasonable and/or appeared to be inconsistent with accounting standards and might suggest potential management bias.

Peter Meehan, the engagement partner for financial years ended 31 December 2014, 2015, and 2016, and additional audit work in 2017, got a £500,000 fine — reduced by 30% to £350,000 — for his blatant lack of supervision on Carillion.

Additionally, in the 2016 audit Mr Meehan and KPMG failed in their duties to ensure that the audit engagement was properly managed and supervised. Audit procedures in a range of areas were not completed until more than six weeks after the date of the audit report was signed and records of the preparation and review of working papers were unreliable and, in some cases, misleading. Overall, no effective process was implemented to ensure that all the audit procedures underpinning the 2016 audit report had been completed, documented, and reviewed satisfactorily before the audit report was issued. In light of these deficiencies, Mr Meehan did not have a proper basis to be satisfied that the opinion given in the 2016 audit report was appropriate.

The breaches found in [relation to Meehan’s audit supervision] were not dishonest and in the majority of cases were not intentional, deliberate or reckless. However, there is a finding of a lack of integrity in respect of Mr Meehan’s record of his review of the 2016 audit and four findings of a lack of objectivity. There is one finding of a failure to assess a threat to independence. These breaches are particularly serious because of threir impact on the credibility of the opinions and reports issued by the auditor.

Said KPMG UK chief executive and senior partner Jon Holt on the FRC announcement today: “I am very sorry that these failings happened in our firm. It is clear to me that our audit work on Carillion was very bad, over an extended period … Since this audit work was undertaken, we have done an enormous amount to improve controls and oversight across our firm, to ensure that these failings could not take place today.” This is quite the departure from the words of former chair Bill Michael who said in 2018 that parliamentary accusations of complacency in the Carillion work “does not reflect the hard work and commitment of the Carillion audit team.”

Like its counterpart here in the US, the FRC has been accused for years of being toothless and too soft on audit failures. Seems they’ve taken a page from the PCAOB and aren’t gonna take it anymore.

Sanctions against KPMG LLP, KPMG Audit plc and two former partners [FRC]

The post As KPMG UK Gets Hit With a Record Fine, the Boss Admits the Auditing Was “Very Bad” appeared first on Going Concern.

Here’s what happened: Ontario public accounting licensing body CPA Ontario reached an out-of-court settlement with Marcum LLP resolving allegations of multiple instances of US Marcum partners performing work in Ontario — including issuer audits — without said partners being licensed to practice in the province. Thus concludes CPA Ontario’s investigation and prosecution of offences under the Chartered Professional Accountants of Ontario Act, 2017, and the Public Accounting Act, 2004.

A Public Accounting License (PAL as in “Who you calling PAL, friend?!“) is required by CPA Ontario if you:

• practice public accounting as described in section 2 of the Public Accounting Act and are the lead engagement person responsible for signing reports or statements regarding:
  • assurance engagement (including an audit or review engagement) relating to a financial statement or any part of a financial statement or any statement attached to a financial statement
  • any compilation engagement in respect of which it can be reasonably expected that the services will be relied upon or used by a third party and the prescribed wording for the Compilation Engagement Report is not used

You do NOT need a PAL if:

• are not the lead engagement person responsible for signing the report or statement (members of the engagement team who are not the lead engagement person, including the quality control review partner, are not required to be licensed)
• do not provide any assurance services (including audit or review engagements) but do provide other services including:
  • compilations in which the services may be relied upon or used by a third party and the prescribed wording for the Compilation Engagement Report is used
  • taxation
  • accounting
  • internal audit
  • controllership
  • insolvency services
  • business advisory services

The settlement cost Marcum $1.2 million CDN (approx. $877,300 USD) of which $1 million went to the Ontario Government and $200,000 went to CPA Ontario to cover costs of investigation and prosecution.

This wasn’t the first time Marcum got reprimanded by the Canucks this year. The Canadian Public Accountability Board (their version of the PCAOB) censured Marcum earlier this year, prohibiting the firm from taking on new “high risk” clients in Canada, including those clients resulting from initial public offerings, reverse takeovers, or other transactions. Canadian Accountant on the March 2023 enforcement action, the CPAB’s first of 2023:

CPAB inspected two of Marcum’s audit files in 2022 and identified nine significant inspection findings. Each of the deficiencies represents a breach of one or more professional standards and constitutes a “violation event.” CPAB does not specify the findings, only the breaches of nine Canadian auditing standards, and the Canadian Standard on Quality Control 1 (CSQM 1), which is adapted from International Standards on Auditing. Also, the firm was not registered or licensed by the relevant provincial CPA body to perform audits of the financial statements in the respective jurisdiction.

It is an unusual and rare censure by CPAB. Unusual because the limited information provided may lead some to speculate that the accounting firm was not using Canadian audit standards at all in the engagements inspected by CPAB. Rare because CPAB has averaged just one public censure per year in the last two years.

The CPAB violations [PDF] involved breaches of the following Canadian Auditing Standards (CAS):

i. CAS 230, Audit Documentation.
ii. CAS 250, Consideration of Laws and Regulations in an Audit of Financial Statements.
iii. CAS 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment.
iv. CAS 330, The Auditor’s Responses to Assessed Risks.
v. CAS 402, Audit Considerations Relating to an Entity using a Service Organization.
vi. CAS 500, Audit Evidence.
vii. CAS 520, Analytical Procedures.
viii. CAS 530, Audit Sampling.
ix. CAS 701, Communicating Key Audit Matters in the Independent Auditor’s Report.
x. Canadian Standard on Quality Control 1 – quality control for firms that perform audits and reviews of financial statements, and other assurance engagements.

“CPA Ontario’s mandate is to protect the public and uphold the high standards of the CPA profession in the province. Unregistered and unlicensed foreign accounting firms operating in Ontario do so without the critical regulatory oversight that ensures public protection and confidence in public accounting,” said Janet Gillies, CPA, CA, executive vice-president, Regulatory and Standards, CPA Ontario. “This settlement underscores that foreign accounting firms must comply with CPA Ontario’s regulatory requirements if they wish to practice in the province.”

Don’t mess with Canada!

The post Marcum Didn’t Let a Little License to Practice Stand in the Way of Providing Professional Services in Ontario appeared first on Going Concern.

From the SEC:

The Securities and Exchange Commission today announced charges against accounting firm Prager Metis CPAs, LLC and its California professional services firm, Prager Metis CPAs LLP, (together, Prager) for violating auditor independence rules and for aiding and abetting their clients’ violations of federal securities laws.

According to the SEC’s complaint, between approximately December 2017 and October 2020, Prager improperly included indemnification provisions in engagement letters for more than 200 audits, reviews, and exams. As a result, the complaint alleges, Prager was not independent from its clients for those engagements, as required under the federal securities laws. The SEC alleges that Prager continued to sign engagement letters containing indemnification provisions and also issued “accountant’s reports” in which it purported to be independent in connection with its audits and exams, even after Prager’s senior partners repeatedly were notified that inclusion of indemnification provisions in engagement letters rendered Prager not independent. Many of Prager’s clients included those “accountant’s reports” in their filings with the SEC. Prager allegedly also failed to advise its clients of its violations, even after the Public Company Accounting Oversight Board informed Prager that the indemnification provisions violated the independence requirements of the federal securities laws.

Alleges the SEC:

Prager Metis CPAs, LLC and its California professional services firm, Prager Metis CPAs LLP, failed to comply with the Commission’s auditor independence rule in connection with 62 audits, 11 examinations, and 144 reviews, conducted pursuant to 87 engagement letters dated from in or around December 11, 2017 to in or around October 28, 2020. Prager’s auditor independence violations in connection with these engagements affected 62 “SEC Registrant Clients,” comprised of 54 public issuers, 4 registered broker-dealers, and 4 registered investment advisers, from which Defendants collectively earned more than $3,000,000 in fees.

Defendants had been on notice of their independence impairment since at least early January 2019 when a new partner who recently had joined Prager raised the issue with senior Prager partners.

The complaint is brutal which is why I’m embedding it here for your reading pleasure. God speed to them.

SEC complaint against Prager Metis by Adrienne Gonzalez on Scribd

Related (?): If There Was a PCAOB In the Metaverse, It Would Probably Find a Bunch of Errors In Prager Metis’s Audits Too
Not related but funny: Prager Metis Just Spent $35k So They Can Service Clients In the Metaverse

The post Prager Metis Just Got Thoroughly Boned By the SEC For Hundreds of Independence Violations appeared first on Going Concern.

At that same conference he also expressed the importance of skepticism, something average citizens might call “paranoia” if you applied it to basic life transactions like checking your bank balance at the ATM but in auditors’ case it’s just part of the job. “The most important thing an auditor can bring to an audit is an attitude that includes a questioning mind for a critical assessment of evidence,” he said. “It is important to stress this with less-experienced staff who may have been working entirely remotely since they joined the firm. I encourage firm leadership to embrace and promote a culture of ‘I’ve got your back’ to ensure that engagement teams feel empowered to maintain a questioning mind and push back when warranted.” Relevant GIF.

“A questioning mind” also appears in this April 2023 PCAOB Spotlight entitled Professional Competence and Skepticism Are Essential to Quality Audits [PDF]:

The application of professional skepticism – an attitude that includes a questioning mind – is critical to planning and performing high quality audits and ensuring investors are protected.

And of course the most important reference of all, AS 1015: Due Professional Care in the Performance of Work:

.07 Due professional care requires the auditor to exercise professional skepticism. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. The auditor uses the knowledge, skill, and ability called for by the profession of public accounting to diligently perform, in good faith and with integrity, the gathering and objective evaluation of evidence.

So, with George’s enthusiasm for skepticism and the PCAOB’s recent hard-ass stance on audit quality in mind, let’s see what the SEC announced yesterday:

The Securities and Exchange Commission today announced the appointment of George Botic, CPA to a term as a Board Member of the Public Company Accounting Oversight Board (PCAOB).

“I am pleased that George will serve on the PCAOB Board,” said SEC Chair Gary Gensler. “George will advance the PCAOB’s mission to build trust in the financial information that public companies disclose to investors. I also would like to thank Duane for his five years with the Board, including his service as Acting Chair.”

“I am honored to be selected to serve on the Board and look forward to working with Chair Williams, the other Board members, and the SEC in my new role to help advance investor protection and improve audit quality through improvements to our standards and rules and continuing our rigorous inspection and investigation programs,” said Mr. Botic.

His CV is no joke:

Botic was most recently the Director of the PCAOB’s Division of Registration and Inspections, which includes the Global Network Firm Inspection Program, the Non-Affiliate Firm Inspection Program, the Broker-Dealer Auditor Interim Inspection Program, and the registration program. He oversaw the registration and inspection of all domestic and foreign accounting firms that audit public companies whose securities trade in the U.S., as well as all broker-dealer audits. He previously served in various roles at the PCAOB, including as its Director of the Office of International Affairs, special advisor to former Chair James R. Doty, and Deputy Director of the Registration and Inspections Division. Earlier in his career, Mr. Botic was a senior manager with PricewaterhouseCoopers.

He was at PwC from September 1990 – August 2003 and has been at the PCAOB since, so from day one of its existence. He’s been Director of the Division of Registration and Inspections since 2018. Botic is replacing current Board member Duane DesParte, CPA whose second term ends October 24, 2023.

In their own news release about the blessed event, the PCAOB said Chair Erica Y. Williams applauded the appointment. Of course she did, she’s long been sick of auditors’ shit and George is just the guy to put the fear of God in them:

“George’s decades-long commitment to the PCAOB’s mission of protecting investors makes him a uniquely qualified addition to the Board. I applaud George’s appointment and look forward to working with him in his new role as we continue to pursue our shared goal of improving audit quality to protect investors,” said Chair Williams. “I want to thank Duane for his service to the PCAOB. I look forward to continuing our work together over the coming weeks and wish him well in his next chapter.”

As we’ve excessively pointed out before, the PCAOB isn’t playing around. All those years of comments about how useless and weak they are (Project On Government Oversight accused our dear audit regulator of “doing a feeble job” in this thorough 2019 deep dive into what the PCAOB has — and has not — been doing since it was born in 2002) must have finally got to them.

No wonder certain non-Big 4 firms are starting to wind down their audit practices completely, an already thankless job is only going to get more annoying going forward. Relevant GIF again.

The post Longtime PCAOB Veteran and Skepticism Enthusiast George Botic to Sit on the Actual Board appeared first on Going Concern.

PCAOB:

These failures occurred despite BDO, Olvera, and Musick encountering several red flags that called into question the reasonableness of the estimates. For example, BDO, Olvera, and Musick were aware that PCAOB inspectors had found deficiencies in the procedures performed to test one of the same estimates during BDO’s audit of AAC for 2015, yet the procedures performed during BDO’s 2017 audit of AAC failed to adequately address those deficiencies.

The involved parties did not admit or deny the PCAOB’s findings but graciously consented to the PCAOB’s order. Said order censured the firm (side note: why does the PCAOB insist on capitalizing “Firm” in news releases) and imposed a $2,000,000 civil money penalty. That’s a biggun, almost 20% as much as ALL PCAOB monetary penalties combined in 2022.

Olvera scored himself a $35,000 civil penalty and will be limited on the kind of audit work he can do for the next year while Musick received a penalty of $25,000. Both are required to complete 20 hours of CPE in addition to the hours required to maintain any professional licenses.

“PCAOB standards call for auditors to evaluate and respond appropriately to the significant risks they encounter during an audit,” said Robert E. Rice, Director of the PCAOB’s Division of Enforcement and Investigations. “The Respondents here repeatedly failed to meet these and other obligations, to the detriment of the investing public.”

Full PCAOB order here (PDF)

PCAOB Sanctions BDO USA, P.C. and Two of Its Partners for Violations of PCAOB Rules and Audit Standards [PCAOB].

The post BDO USA and Two of Its Audit Partners Got in Trouble and It’s Gonna Cost Them $2 Million and Change appeared first on Going Concern.

Inspection reports

• De Visser Gray LLP (Canada)
• Ernst & Young Limited Corp. (Panama)
• Frost, PLLC
• Harbourside CPA LLP (Canada)
• Keith K Zhen CPA
• Maggart & Associates, P.C
• Miller Wachman LLP
• PBMares, LLP
• PKF O’Connor Davies, LLP
• PricewaterhouseCoopers LLP (Canada)
• Rehmann Robson LLC
• Schneider Downs & Co., Inc
• UHY LLP
• Warren Averett, LLC
• Zwick CPA, PLLC

Expanded reports

• Baker Tilly US, LLP (12/21/2020 Report)
• Ernst & Young, S.L. (Spain) (9/9/2021 Report)
• MaloneBailey, LLP (12/17/2020 Report)

Today we’re going to talk about PwC Canada, if you want to check out the others head over to the PCAOB’s inspection report lookup.

The 2022 inspection of PwC Canada [PDF] is not great. Some might even say bad. Compared to prior year inspections and some of the catastrophic issues the PCAOB has uncovered in audit firms of all sizes over the last several years, it’s not terrible. In a time of deteriorating audit quality, an inspection report of this caliber might not stand out as bad compared to other firms but PwC US had a deficiency rate of 1.9% in its most recent inspection thereby making their cousins in the North look incompetent by comparison. Worse, PwC Canada’s last inspection was flawless, making this tumble from their own perfection more pronounced.

Of the eight audits selected by the PCAOB for inspection for the 2022 inspection of PwC Canada, 63% had Part I.A deficiencies. For one of these lucky audits, PwC Canada was not the primary auditor. The PCAOB did not ding the firm for issuing incorrect opinions on the financial statements and/or internal control over financial reporting but mostly for a lack of substantive procedures.

For 2022, the PCAOB was especially interested in reviewing revenue and business combinations; last time around it was use of other auditors that they put the magnifying glass on which makes it extra funny that PwC Canada got dinged for this very issue this time around.

Part I.A focuses on audits with unsupported opinions. For one energy issuer, the firm selected for testing a control that consisted of management’s review of the impairment analysis of long-lived assets. The firm did not identify and test any controls over the accuracy and completeness of a report, which included discounted cash flows, used in the operation of this control. (AS 2201.39)

In the same issuer, the issuer engaged an independent qualified reserve engineer to estimate its oil and gas reserves, which were then used in the (1) calculation of depreciation, depletion, and amortization; (2) impairment analysis of long-lived assets; and (3) valuation of a business combination. The reserve estimates were also used in the operation of certain controls over the above activities that the firm selected for testing. The firm did not identify and test any controls over the (1) accuracy and completeness of information prepared by the issuer, (2) relevance and reliability of data from external sources, and (3) methods and assumptions; all of which were used by the company’s specialist to
develop the reserve estimates. (AS 2201.39)

Nor did the firm:

• Test the accuracy and completeness of information prepared by the issuer and used by the company’s specialist to develop the reserve estimates; (AS 1105.A8a)
• Evaluate the relevance and reliability of external data used by the company’s specialist to develop the reserve estimates; (AS 1105.A8a)
• Evaluate the reasonableness of the assumptions developed by the company’s specialist and used to develop the reserve estimates; (AS 1105.A8b) and
• Evaluate whether the methods used by the company’s specialist to develop the reserve estimates were appropriate under the circumstances, taking into account the requirements of the applicable financial reporting framework, beyond inquiry of the methods used with the company’s specialist. (AS 1105.A8c)

In another issuer, the PCAOB identified deficiencies in the financial statement audit related to revenue, unbilled receivables, and deferred revenue. In this case, the PCAOB found the firm did not perform substantive procedures outside of the selected contracts, unbilled receivables and deferred revenue the firm selected for testing. This was a new client and therefore PwC Canada’s first audit of said issuer.

The PCAOB dinged them again for deferred revenue in the audit of an information technology issuer:

To test the existence of deferred revenue, the firm selected a sample of items for testing. The sample size the firm used in its substantive test of details was too small to provide sufficient appropriate audit evidence because the firm did not take into account the characteristics of the population in determining its sample size. (AS 2315.16, .23, and .23A)

AND they got them on the audit on which PwC was not the primary auditor. The firm’s report on Form AP omitted information related to the
participation in the audit by an other accounting firm meaning the firm was non-compliant with PCAOB Rule 3211, Auditor Reporting of Certain Audit Participants. *clutches pearls*

In its response to the report, PwC gave the usual canned speech. Apologies for the deep-fried jpg, this is how it looks in the inspection report.

2022 PCAOB Inspection of PwC Canada [PDF]

The post PwC Canada Totally Blew Their Perfect Score on PCAOB Inspections This Time Around appeared first on Going Concern.

PwC is planning to give up tens of millions of dollars of consulting work for its US audit clients to reduce the risk of conflicts of interest, challenging its rival Big Four firms to follow suit.

The accounting firm has begun to tell clients it will stop offering them some advisory services, even though they are permitted under US rules, as part of a wider revamp of its audit work.

Knowing what we know about Big 4 firms, not a single one of them would voluntarily give up millions of dollars unless they had to. So what’s up? “Sarbanes-Oxley was not proactive,” PwC US chairman Tim Ryan told FT. “It happened as a result of a breakdown in our capital markets. The reality is there’s room for improvement in our profession, both in substance and in appearance, and there’s things that we need to think about proactively.”

“There was a perception that we do a lot of consulting work for our audit clients,” he said. “We have no desire to be close to the line.”

Could it have something to do with the heat on their counterparts in Australia? Because consulting firms over there are getting proctologically inspected by all manner of politician and media professional about everything from salaries to clients.

Apparently PwC tried to get other behemoth audit firms on board with cleaning up perceptions, the others weren’t down:

PwC first floated the idea of all the large accounting firms acting together via an industry group called the Center for Audit Quality, according to three people familiar with the discussions, but it did not get cross-industry backing for its ideas.

“We have really good competitors but what they do is up to them,” said Tim Ryan, senior partner of PwC US.

Wall Street Journal‘s take on the situation says PwC is planning several new initiatives through 2026 “in areas such as auditor independence and transparency to meet growing expectations for auditors.” One of these initiatives will mean clawing back pay for high-level leadership in the event of an ethics scandal which should have been a thing all along.

The firm moved forward with the 12 policies after conversations with investors, audit committees and businesses and a review of 15 years’ worth of academic studies conducted on the profession, said Tim Ryan, senior partner at PwC’s U.S. unit. “We saw a number of stakeholders just demanding more transparency of businesses and those in the business ecosystem,” Ryan said. “As we see needs changing, we have a desire and a commitment to be more proactive going forward.”

Under PwC’s plan, it would cease providing certain consulting services by 2025 to SEC-registered audit clients such as advising a client on implementing a supply chain or other operational system. PwC also will stop helping audit clients migrate their operational data to the cloud, because these data are increasingly used in financial reporting and could pose a conflict, the firm said.

Services that are core to accountants’ skill sets will still be provided to audit clients, PwC said. For example, PwC still will sell a nonaudit-related product known as a disclosure checklist, which helps audit clients prepare for financial disclosures.

You’ll note that PwC is the trust-iest Big 4 firm, spitting out the word “trust” a whopping 202 times in its 17-page 2022 Global Annual Review. It isn’t just a word, it’s a way of life.

In its last revenue cycle, advisory’s take of $20.7 billion grew PwC’s global revenue by 23.5% compared to 7.6% growth in audit and 6.8% in tax & legal. We don’t have exact numbers on PwC US’s part of that but we do know that the US business grew 17% in fiscal 2022. So that’s a lot of money to leave on the table for the sake of perception, specifically between $50 million and $100 million in annual revenue by PwC’s estimate.

PwC to curtail consulting work for US audit clients to reduce conflict risk [Financial Times]

The post PwC Is Suddenly Scared of Making Money appeared first on Going Concern.

From today’s news release:

The Securities and Exchange Commission today charged Alfonse Gregory Giugliano, CPA, the former National Assurance Services Leader at Marcum LLP, a public accounting firm, with failing to sufficiently address and remediate numerous deficiencies in Marcum’s quality control system. The SEC previously charged Marcum for these quality control deficiencies and other violations, many of which were in connection with Marcum’s audit work for hundreds of special purpose acquisition companies (SPACs).

See: Marcum Took On Too Many Clients and Totally Wrecked Their Quality Control, Says the PCAOB in Disciplinary Order

Anyway:

According to the SEC’s order, Giugliano oversaw quality control for Marcum’s public company practice, including the firm’s relevant quality control policies, procedures, and monitoring, and directly or indirectly supervised all personnel working within Marcum’s quality control functions. The SEC’s order finds that exponential growth in Marcum’s public company practice exposed substantial deficiencies in these functions.

Moreover, according to the SEC’s order, Giugliano was aware that inspections by the Public Company Accounting Oversight Board (PCAOB) and by Marcum itself revealed numerous deficiencies in Marcum’s quality control system. The SEC’s order finds that Giugliano did not sufficiently address and remediate these deficiencies, leading to quality control and audit standard violations throughout Marcum’s audit work, such as client acceptance, engagement partner supervision and review, audit documentation, and technical consultations. In addition, under Giugliano’s leadership of Marcum’s quality control system, the firm did not sufficiently monitor the effectiveness of many policies and procedures and, in many areas, did not adequately communicate those policies and procedures to relevant personnel.

The SEC order has specifics:

In 2020 and 2021, over 860 SPACs completed initial public offerings (“IPOs”) in the United States. Over 400 of these SPAC IPOs were audited by Marcum. In 2019, Marcum had served as the auditor for only 185 public company issuers; by 2022, Marcum was responsible for auditing over three times that number—a total of 575 issuers, the majority of which were SPACs.

The strain of this exponential growth in Marcum’s public company practice exposed substantial, widespread, and pre-existing deficiencies in the Firm’s underlying quality control policies, procedures, and monitoring that Giugliano oversaw. Giugliano was aware that, in the period immediately preceding the SPAC market’s explosion, Marcum’s annual inspections by the PCAOB had revealed an increasing number of deficiencies.

Through his oversight, Giugliano was also aware that Marcum’s own internal inspections—starting at least in 2018 and continuing through 2021—also revealed deficiencies. Over several years, these inspections identified numerous deficiencies in audit documentation. The 2020 internal inspection also concluded that such deficiencies were caused by insufficient time spent on engagements and audit documentation. Despite inspection findings, Giugliano did not sufficiently address and timely remediate deficiencies in the Firm’s policies, procedures, and monitoring.

As king of assurance, he was aware that Marcum had insufficient policies and procedures related to the evaluation of personnel capacity. And he knew that the firm was having difficulty staffing engagements and making deadlines because of this. How did he know? The more appropriate question would be “how could he not?” At least as early as 2019, Giugliano was on notice that Marcum personnel frequently failed to sign off on certain work papers prior to the release of audit reports.

These difficulties and delays became especially apparent in the summer and fall of 2020, as Marcum’s monthly SPAC client acceptance figures increased from single-digit figures in June, to the mid-teens in July, to 29 clients per month, for three consecutive months in August, September, and October.

From as early as October 2020, Giugliano was aware of widespread failures in the timely completion, assembly, and retention of audit documentation. For example, Giugliano received weekly emails reflecting that the number of work paper binders that were not finalized and assembled for retention within the PCAOB-required 45-day period increased from 23 to 687 between October 2020 and June 2021.

Moreover, Giugliano was repeatedly notified of capacity constraints throughout the SPAC practice. At the beginning of February 2021, for example, a national office partner alerted Giugliano that managers in the SPAC practice were overworked and lacking resources. Nonetheless, over the course of February 2021, Marcum accepted a record 114 new SPAC clients. The same pattern of notifications and high client acceptances continued into March 2021, as the Firm accepted a record 159 new SPAC clients.

Greg: ¯\_(ツ)_/¯

He was previously sanctioned by the PCAOB in 2019 for substantially contributing to the firm’s independence violations, an event that marked the first time the PCAOB sanctioned an annually inspected firm’s head of independence for said substantial contributions. He is ironically a former member of the AICPA SEC Regulations Committee and his LinkedIn profile says he “has developed considerable expertise encompassing SEC regulations, accounting, auditing, business forecasting, international operations, mergers and acquisitions, due diligence, management consulting, and quality control.” And regulatory fines, apparently.

The SEC order finds that Giugliano engaged in improper professional conduct within the meaning of Section 4C(a)(2) of the Securities Exchange Act of 1934 and Rule 102(e) of the SEC’s Rules of Practice and that Giugliano caused Marcum to violate Rule 2-02(b)(1) of Regulation S-X. Without admitting or denying the SEC’s findings, Giugliano consented to cease and desist from committing or causing any violations and any future violations of Rule 2-02(b) of Regulation S-X and to pay a civil penalty of $75,000. Giugliano further agreed to a censure and to comply with certain undertakings for a period of three years, including having no leadership, management, oversight, or supervisory position at any registered public accounting firm.

The post The SEC Has Charged Marcum’s Former National Assurance Services Leader With Being Ass at His One Job appeared first on Going Concern.

We’ve received this tip a few times now from a few different people, time to throw it to dogs and see if anyone knows more. Here’s the original, slightly edited to protect anonymity:

Plante Moran, CBIZ, Marcum, Armanino, and a couple of other large public firms will no longer be serving public clients. It does look like CBIZ has left or is leaving the space. If the others are true, that’s a lot of free agent clients and probably a fair amount of pain for whoever picks them up.

Another tipster said CBIZ was trimming staff in audit “in connection with that” though we didn’t get any numbers because no one ever talks about CBIZ, you probably forgot they existed until just now. A couple others have confirmed they’ve heard about CBIZ pulling out but nothing solid. FWIW CBIZ was posting audit senior associate job openings on its website as recently as yesterday and an audit intern job posted today says interns will “assist in planning multiple audit assignments in Real Estate, Construction, Nonprofit, Manufacturing and many more industries.”

Per Ideagen Audit Analytics’ “Who Audits Public Companies” published in June, as of May 14, 2023 there were 258 firms conducting audits for 6,950 Securities and Exchange Commission registrants. As we already know, Big 4 dominates the large accelerated filers category.

The top ten firms collectively audit 68% of the total population. In comparison to our 2020, 2021, and 2022 analyses, this is the first year where the top ten audit firms remained static in terms of market concentration for SEC registrants. While the majority of the top ten firms managed to increase their clientele from 2022, Withum decreased in rank. They fell from sixth to ninth, auditing 177 clients in 2023 compared to 296 clients in 2022.

Of the firms mentioned in the tip above, only Marcum made the list of top ten audit firms (excluding SPACs, that’s a sore subject for Marcum anyway):

Given the PCAOB’s sudden enthusiasm for enforcement, and given that audit isn’t exactly a license to print money, maybe there’s something to this. Who needs the headache?

If you’ve heard about this or just want to speculate wildly, have at it in the comments or shoot me an email. I’ll do some digging in the meantime. It’s the Friday after Labor Day, there’s nothing else going on.

Small update: I spoke to someone this afternoon who digs through 8-Ks for fun (or work, whatever), they said what they’ve noticed lately would confirm this to be true. Definitely warrants further digging.

Update: On Friday night we received an email from Jeff Weiner himself: “Marcum is not getting out of the SEC audit business.”

Update #2: We’ve received what appears to be an internal email from Matt Armanino to all Armaninians announcing the firm’s decision to exit the SEC audit practice. Armanino will continue to provide services to these companies, just not audits.

Update: We were pointed to a recently filed annual report from a soon-to-be-former audit client of CliftonLarsonAllen (CLA) that confirms CLA is getting out of SEC audits. The annual report is pretty clear:

[Client’s] independent registered public accountant informed the Company that CLA would decline to stand for re-appointment after completion of the audit for the year ended December 31, 2022 as a result of CLA’s determination to cease providing certain audit services to SEC registrants upon completion of the 2022 audit cycle.

We confirmed this with a second source, CLA is 100% out.

Our first tipster also said RSM hired an outside consultant to help them figure out if they too should dip out, the consultants ultimately determined the reputational damage from doing so would be too great to justify exiting the SEC audit space. So RSM is still in unless we hear otherwise.

Apparently no one cares about CBIZ as we’ve gotten no further tips on whether they’re in or out.

The post CONFIRMED: Mid-Tier Firms Are Getting Out of the Public Company Audit Game (UPDATE) appeared first on Going Concern.

The PCAOB found that Warren Averett violated independence requirements during its 2019 and 2020 audits of an issuer, because the firm audited valuations performed for the issuer by another accounting firm that sponsored an alliance of which Warren Averett was a member. Given its alliance membership and association with the other accounting firm, Warren Averett had a disincentive to question the reasonableness of the other accounting firm’s valuation work. Thus, both Warren Averett and the issuer shared a mutual interest in the reasonableness of the valuations.

Warren Averett LLP is a member of the BDO Alliance, a wholly-owned subsidiary of BDO USA, LLP (technically BDO USA, LLP no longer exists after the firm switched from a partnership to a corporation as of July 1 and is now BDO USA P.A but this happened a while ago). According to BDO’s website, there are more than 800 independent Alliance firm locations across the country.

Here’s what happened. Warren Averett audited a biotech company called CytoDyn, their former CEO was charged with insider trading and fraud by the SEC last year but that’s neither here nor there. BDO performed some services for CytoDyn, Warren Averett audited CytoDyn, Warren Averett is in the alliance named after and wholly-owned by BDO, therefore the PCAOB said it’s reasonable to say that Warren Averett was not independent in auditing BDO’s work.

Explains the PCAOB in the order:

During the 2019 fiscal year, BDO performed certain purchase price allocation valuation services for CytoDyn with respect to acquired intangible assets. During the 2020 fiscal year, BDO performed certain derivative valuation services for CytoDyn. Warren Averett audited the BDO valuation work as part of its 2019 and 2020 audits of CytoDyn.

CytoDyn had an interest in the accuracy of its financial statements, including with respect to the valuation work performed by BDO. Warren Averett likewise had an interest in the quality of BDO’s valuation work because Warren Averett marketed itself based on its association with the BDO Alliance and the quality denoted by the BDO brand name. Based on this mutual interest, a reasonable, knowledgeable investor would conclude that Warren Averett was not capable of exercising objective and impartial judgment in auditing BDO’s valuation work.

One example of this touting of the alliance is a brochure aimed at nonprofits talking about how membership in the BDO Alliance offers Warren Averett the opportunity to “further enhance our client services and broaden capabilities overall.”

Says that brochure [PDF]:

BDO Alliance USA membership offers Warren Averett access to the resources of BDO USA, LLP, one of the nation’s leading professional services firms, as well as other Alliance members. Warren Averett also has access to an international network of people and firms through our membership in the BDO Alliance USA.

Warren Averett has been a member of the BDO Alliance since 2015. In return for paying an annual license fee, Warren Averett received a number of BDO Alliance membership benefits, including the right to use the BDO Alliance brand name and logo “[s]o that [member] firms may fully benefit from BDO USA’s domestic presence” and so that “clients and business contacts . . . know that they have access to these resources.” Warren Averett also received the right to distribute and co-brand BDO marketing materials, and access to certain other BDO resources.

Another marketing brochure advertised that Warren Averett “offers clients the unique resources of both an international and regional firm by utilizing the combined, vast resources made possible by our membership in the BDO Alliance USA.” Warren Averett also rebranded BDO marketing publications under the firm’s name and published BDO marketing materials with both BDO and Warren Averett branding.

We feel compelled to note here that as far as accounting firm website news sections go, the Warren Averett website has a ton of news and unlike many firms, it is regularly updated with a few articles a month. Nice to see. Unfortunately Warren Averett also posted many articles authored by BDO personnel with a note on them that said “Warren Averett is an independent member of the BDO Alliance USA. This article was borrowed with permission from BDO USA, LLP,” the PCAOB interpreted this as further advertising the firm’s connection to BDO. Example: “How to Retain, Recruit and Engage Great Board Members,” a piece that originally appeared in BDO’s “Nonprofit Standard” newsletter in summer 2016.

Thus, says the PCAOB, Warren Averett violated PCAOB rules and standards requiring an auditor to maintain independence from its audit client. In addition, Warren Averett violated PCAOB quality control standards by failing to implement quality control policies and procedures sufficient to provide reasonable assurance that the independence implications of its BDO Alliance membership would be given appropriate consideration. Without admitting or denying the findings, Warren Averett settled with the PCAOB and consented to a disciplinary order that censures the firm, imposes a $200,000 civil money penalty, and requires the firm to review and certify its auditor independence policies and procedures.

There’s a bunch more in the PCAOB order if you care to read it, this article is already way too long.

PCAOB Sanctions Warren Averett, LLC for Auditor Independence and Quality Control Violations [PCAOB]

The post The PCAOB Was Not Pleased With This Audit Firm’s Alliance to the Alliance of Which the Firm Is a Member appeared first on Going Concern.

The client, Greece-based Akazoo S.A, settled with the SEC for $38.8 million back in 2021 “for allegedly defrauding investors out of tens of millions of dollars in connection with a 2019 special purpose acquisition company (SPAC) business combination.” In that news release, the SEC described Akazoo as a purported music streaming business, using the word five more times in its complaint against [PDF].

Dated October 21, 2021 via the SEC:

According to the SEC’s complaint, Akazoo represented to investors that it was a rapidly growing music streaming company focused on emerging markets with more than 38.2 million registered users, 4.6 million paying subscribers, and over $120 million in annual revenue. In actuality, the complaint alleged that the company had no paying users and, at most, negligible revenue. Akazoo allegedly leveraged these misrepresentations to enter into a SPAC business combination in 2019, in which the company received nearly $55 million from the SPAC and other investors. According to the complaint, after the business combination, Akazoo became listed on Nasdaq and proceeded to defraud retail investors by misrepresenting, among other things, that it had earned tens of millions of dollars in revenue during 2019 and increased its paying subscriber base by 28% year-over-year. In reality, the company allegedly continued to have limited operations, no subscribers, and marginal revenue, all while depleting more than $20 million of investor funds.

Cue the public exclaiming “where were the auditors!?” Right here. From the SEC’s August 14 release on the Crowe charges:

According to the SEC’s order, Crowe U.K. issued a clean audit report of Akazoo’s 2018 financial statements. However, as the order finds, after Akazoo went public in September 2019 via merger with a special purpose acquisition company, also known as a De-SPAC transaction, it was revealed that the company’s 2018 financial statements falsely claimed $120 million in revenue when Akazoo had only negligible amounts of revenue. The order finds that Crowe U.K. claimed that it conducted its 2018 audit in accordance with Public Company Accounting Oversight Board (PCAOB) standards when, in fact, its Akazoo audit team had almost no experience or training in PCAOB standards. Further, the order finds that the audit team overlooked red flags when, for instance, they failed to exercise an appropriate level of due professional care or professional skepticism when Akazoo presented fabricated agreements and inauthentic confirmation letters to the audit team. The order also finds that Crowe U.K. made false statements in its audit report when it claimed that Akazoo fairly presented its financial statements in all material respects for 2018. The order finds that, by violating PCAOB standards in connection with the 2018 Akazoo audit, Crowe U.K., Bostock, and Stallabrass engaged in improper professional conduct.

Additionally, the SEC order finds that Bostock, as the engagement partner for the Akazoo audit, among other things, failed to appropriately supervise the engagement, maintain adequate documentation, and exercise due professional care. The SEC order also finds that Stallabrass, the engagement quality reviewer for the audit, failed to conduct a sufficient engagement quality review.

Quintessential Capital Management pointed to Akazoo’s many alleged problems back in early 2020. “Looks like an accounting scheme,” “users, subscribers, revenue and profit may be profoundly overstated,” “suspicious signs of accounting manipulation,” and “” are just a few of the accusations laid out in their investigative report [PDF].

“Crowe U.K.’s failure to properly audit Akazoo contributed to the air of legitimacy that allowed Akazoo to become a publicly traded company,” said Eric Werner, the Regional Director of the Fort Worth Regional Office. “We will continue holding gatekeepers accountable, especially those whose professional failings allow financial frauds to enter our public markets.”

The post The SEC Did Not Appreciate Crowe UK Putting Total Noobs on the Audit of a Shady Company appeared first on Going Concern.

82,217 Banco Popular customers may be affected and all of them will be getting this letter which specifically mentions “compromised personal information” being provided to PwC as part of the firm’s audit work on the bank:

Dear [person]:

We write to inform you that one of our vendors, PricewaterhouseCoopers (PwC), has been a victim of a cybersecurity breach that included certain personal information of our customers. The breach involved the compromise of a software, MOVEit, used by PwC to transfer files for a small number of its clients, including Banco Popular de Puerto Rico (Popular).

As a public corporation that trades in the stock market, Popular is required to use the services of an auditing and accounting firm such as PwC. The job of auditing Popular requires, due to its nature, that Popular share client information so that PwC can perform certain independent validations necessary for Popular to issue financial statements.

Upon learning of the incident, PwC immediately launched an investigation and ceased using the impacted software. As a result of this investigation, it was determined on July 24th, 2023, that certain of the files compromised in the incident included personal information of our customers. The compromised personal information includes your name, Social Security number, mortgage loan number ending in , and mortgage-related fields.

The remainder of the letter explains to customers several ways they can protect their credit and offers two years of free monitoring from Equifax.

PwC has audited Popular for at least two decades, 2003 was the earliest annual report we could dig up in several minutes of searching. The bank is one of the 50 largest U.S. banks by assets and has operated in Puerto Rico for more than 125 years (more than 52 years in the mainland United States).

Story spotted on Cybernews: PwC breach spills into Banco Popular de Puerto Rico

The post PwC Audit Client Gets Added to the List of Companies That Have to Send Out Letters to Customers About a Data Breach appeared first on Going Concern.

AFR wrote about EY Australia audit salaries this morning (their morning):

The starting pay for most auditing staff in parts of EY’s financial services division will not increase this year, at the same time the firm has told clients that “significant wage inflation” had forced it to increase its audit fees.

Only graduate pay will increase for auditing staff in the division, with new starters set to earn $66,500, including superannuation, an increase of less than 1 per cent from last year’s starting pay of $66,000.

All other ranks in the area will earn the same starting pay as last financial year, despite inflation running at 6 per cent, according to data seen by The Australian Financial Review.

The firm has told clients the cost of salaries in its audit division is up 11.1 per cent for 2023. This figure takes into account average pay increases and promotions, and is separate to base pay for most EY auditing staff not increasing in 2023.

Here’s a handy chart AFR put together. $66,000 AUD is about $42,700 in US dollars so this year’s incoming auditors are getting base pay of about $43k USD and seniors $56.3k.

Australian inflation has been between 6-8% in the past year.

EY pointed to salary increases in a letter to clients earlier this year when they raised fees. “Demand for our services and the competencies of our people is driving significant wage inflation across the industry,” the firm said. “This is driving significant increases to our cost base to remain competitive and assist with retention of our people. We understand [client name] is experiencing the same challenges.” Clients were told EY’s audit salaries increased by 11.1 percent for 2023, a number based not only on base pay. Unlike the other three firms, EY does not publicly share its salaries.

Said an EYer to AFR, the lack of raises this year was due in some part to leadership betting on low turnover again this year. Firms across the world are experiencing lower-than-expected attrition and the market for professional services is no longer the boom it was just a year or two ago (sorry). “I don’t think it is inflation that is driving salaries,” said the staffer to AFR. “It’s more retention. They see the outlook and it will be less of any issue,” they said. “Where I think it is hard is particularly graduates, they’re essentially making 6 per cent less, which is headline inflation, than the previous group.” Essentially, people are sticking around so the firm isn’t as worried that disappointing salary news will force them out onto the market.

EY audit pay rates stay the same despite inflation [AFR]

Related:

Word Hits TikTok That Big 4 Firms Are Cheap Bastards, “It’s Modern Day Slavery”

The post Sorry EY Australia Auditors, No Raise For You This Year appeared first on Going Concern.

If you want a serious read on this topic, check out FT’s article. God forbid we be serious here, instead we are going to call attention to this:

It’s the “Sent from my iPhone” for me.

Also entertaining, FORVIS bitched about the short comment period again. It’s a fair criticism, it’s just funny they pulled “per my last email” passive aggression in a comment letter.

Alright, those are the highlights.

The post The PCAOB Got a Ton of Comment Letters on the NOCLAR Proposal, This is the Best One appeared first on Going Concern.

In FY2003, average audit fees were $681,000; in FY2022, this number was $2,243,000.

A few more factoids:

• The average audit fees paid by SEC registrants reached an all-time high in FY2022 at $2,242,980—representing an 11% increase from FY2021
• Average total fees paid grew nearly 10% in FY2022 to $2,702,922, the highest amount seen over the 20-year period.
• Total audit fees reached nearly $16.8 billion in FY 2022, increasing 0.6% from FY2021
• Audit fees paid to Big 4 firms account for 92% of all audit fees for SEC registrants paid in FY2022
• Together, the average amount that SEC registrants paid for non-audit services increased in FY2022, reaching $459,942—representing a 3% increase
  from FY2021

Says the intro, audit fees paid to external auditors can be an indicator of audit complexity.

The intro also says:

Over the past 20 years, significant activity in the regulatory markets, both in the US and internationally, has affected audit fee and nonaudit fee trends. Accounting standards ASC 606 Revenue from Contracts with Customers, ASC 842 Leases, and ASC 326 Financial Instruments – Credit Losses required companies to change existing accounting and financial reporting standards. These new regulations likely contributed to rising audit fees in prior years. Accounting standards that became effective for entities post-FY2021 are refinements, with some new guidance for specific sub-topics under Business Combinations, Leases, and Earnings per Share. In response to these changes, auditors are required to implement new procedures to determine if the companies’ new policies adequately meet the standards.

Increases in audit complexity resulted in additional effort from external auditors. Higher-risk audits require more auditor resources (hours, personnel, specialists, etc.) to reduce audit risk to an acceptable level.

Ah, so now we begin to understand why there’s less “busy season” and more “just busy.”

Fewer companies disclose audit fees paid to external auditors compared to the peak in 2006 when 10,912 companies did so. In 2022, only 7,279 companies disclosed how much they’re paying for audits. God bless Ideagen Audit Analytics.

Who took home the most in audit fees in 2022? That’s what we’re all here for right? PwC. Followed by EY, Deloitte, and then KPMG predictably coming in fourth.

There’s a bunch of other stuff in the report like a breakdown of audit fees by industry (Transportation & Communication is highest, Agriculture lowest), quite a bit on Marcum’s favorite topic SPACs, US versus foreign filers, and even auditor ranking by audit fees per million of client revenue (EisnerAmper takes #1 there). You can snag the full report from IAA here.

The post Here’s How Much Audit Fees Have Increased in the Last Twenty Years Making Us Wonder Why Salaries Didn’t Do the Same appeared first on Going Concern.

To get her point across she had to write a whole-ass op-ed in the Wall Street Journal:

High-quality audits are essential to the integrity of U.S. capital markets and the protection of investors. As President George W. Bush said when signing the law creating the Public Company Accounting Oversight Board to oversee audits of public companies: “The fundamentals of a free market—buying and selling, saving and investing—require clear rules and confidence in basic fairness. The only risks—the only fair risks—are based on honest information.”

It is therefore unacceptable that audit quality is trending down for the second year in a row. A PCAOB report released Monday finds that when inspection reports are finalized later this year, PCAOB inspectors expect that approximately 40% of the audits they reviewed in 2022 will have had one or more deficiencies, in which the audit firm failed to obtain sufficient appropriate evidence to support its opinion. That is up 6 percentage points from 2021, which was 5 points higher than the deficiency rate in 2020.

This means audit opinions were signed without completing the audit work required to verify the financial statements. That is a serious problem at any rate, and 40% is completely unacceptable

The “Staff Update and Preview of 2022 Inspection Observations” Spotlight released this month [PDF] explains:

Audit deficiencies rose in 2022. In a concerning trend, the percentage of audit engagements reviewed that are expected to be included in Part I.A of an inspection report is higher in 2022, in nearly all firm categories, than in 2021. PCAOB staff expects approximately 40% of the audits reviewed will have one or more Part I.A deficiencies, up from 34% in 2021 and 29% in 2020. The most significant increase in 2022 was observed within the Global Network Firms (GNF) category of firms inspected by the PCAOB (including both U.S. and non-U.S. GNF). The following table illustrates this unsettling trend in the issuer program by firm category.

Cool. Firms are probably going to blame the decline in audit quality on the after-effects of the pandemic and staff shortages again to which Williams already has a snippy retort, expressed in prepared remarks given at the AICPA & CIMA Conference on Current SEC and PCAOB Developments in December:

[S]ome firms have told us that the combination of the COVID-19 pandemic, remote auditing, the Great Resignation, and the war for talent have made it difficult to maintain stable audit teams and provide training to newer hires.

As we near the end of 2022, these factors are no longer new, and no one should be caught off guard by the challenges they present.

And again in this WSJ op-ed:

Some firms point to the continuing effects of Covid-19, including the great resignation and heightened competition for talent. Three years after the pandemic began, these challenges are no longer new and firms should have a strategy to meet them.

At the same time, Covid-19 can’t simply explain away a 40% deficiency rate. Many of the deficiencies PCAOB inspectors identified have recurred for years, well before the pandemic.

Because threats, fines, and strongly worded prepared remarks don’t seem to be working to incentivize firms to get better at doing the thing they’re supposed to be doing, the PCAOB is now going to try public shaming. For this to effective they need the cooperation of the public and clients–both current and prospective. She says:

Transparency is one of the most powerful tools the PCAOB has to improve audit quality. Sharing our inspection results empowers audit committees and boards of directors—which are responsible for hiring auditors of public companies—to hold audit firms accountable directly.

As part of its efforts to improve transparency, earlier this year the PCAOB began including more information in our public inspection reports than ever before, including information about auditor independence violations. Last week we added more tools on our website to make it easier to compare deficiency rates across audit firms.

The tool she’s talking about makes the public portion of every inspection report easily searchable on the PCAOB’s website. And this data has been compiled in a data set available for download in CSV, XML, and JSON formats. It’s a bit awkward to use but as an example, say you want to search for inspection reports with a part I.A deficiency rate of 80 percent or higher. Gotchu:

Or, because the PCAOB has kindly provided a special search box, you can search the 3780 total results by firm for six global networks. Of those 3780 total results here’s the scoreboard for how many times each firm appears (note this is for all inspection reports, not only the terrible ones):

• BDO International Limited (68 results)
• Deloitte Touche Tohmatsu Limited (144 results)
• Ernst & Young Global Limited (165 results)
• Grant Thornton International Limited (70 results)
• KPMG International Cooperative (147 results)
• PricewaterhouseCoopers International Limited (166 results)

Writes Williams:

We hope boards of directors and audit committees will use PCAOB inspection reports to hold audit firms accountable for high-quality results and ask tough questions on behalf of their investors.

Audit committees should know the deficiency rate of the audit firm they hire and how it compares with other options. They should ask audit firms if the audits of their company have been inspected and, if so, for the results. They should find out whether the specific auditors who are assigned to work with their company have had their audits for other clients inspected and what the results were.

Similarly, investors should engage with investor relations and the audit committees of the companies in which they invest and encourage them to seek out audit firms with quality records.

In other words, she is straight up telling clients to avoid firms with terrible inspections. RIP Marcum.

If clients heed this advice, PwC will have its pick of the best clients and KPMG will be banished to the audit leper colony. That’s assuming upcoming inspections follow historical trends. EY hasn’t been doing so great in recent years, coming in at a 21.4 percent deficiency rate in its 2021 inspection — their worst since 2018 — and allegedly bracing themselves for bad grades this year so who knows where they’ll end up. Deloitte came in better than them at 13 percent but compared to themselves that’s the worst deficiency rate Deloitte has had since 2017 when they scored 20 percent.

For now we have to wait for the actual inspection reports but it’s not looking good for firms. Thus Williams ends her op-ed:

Ultimately, the responsibility falls on auditors to correct the problems that led to deficiencies in their audits. But accountability from their clients offers a powerful incentive to find solutions. The root causes of increased deficiencies vary from firm to firm, and there is no one-size-fits-all explanation for deteriorating audit quality.

Now is the time for solutions, not excuses.

Investors trust audits to verify the financial reporting that underpins our capital markets. Auditors must deliver quality results worthy of that trust.

Let’s circle back when inspection reports start coming out later this year.

The post Upcoming Inspection Report Deficiencies Are ‘Completely Unacceptable,’ Writes PCAOB Chair in Venomous Op-Ed appeared first on Going Concern.

The article is all about analytics so of course it starts with some data: The global networks of Deloitte, EY, KPMG, and PwC made a combined $189.6 billion in revenue in 2022 and employed 1.37 million people. That means of the more than 8 billion people on Earth, approximately 0.017% work for Big 4 firms (F). By service line, that $189.6 billion in revenue breaks down to:

• Tax and Legal 21%
• Audit and Assurance 29%
• Consulting 50%

Off the top of my head I can think of several pundits who will have something to say about that consulting number and it will not be complimentary.

LSM then links to a 2019 Quartz article about US audit quality, you don’t need to read it but you definitely need to see this caption:

When that article was written in 2019, the PCAOB had levied just $6.5 million in fines against Big 4 accounting firms total in the 16 years since it rose up from the ashes of Enron like a bureaucratic phoenix. In 2022 alone, the PCAOB disclosed 29 disciplinary actions, up 61% from the prior year, and levied penalties of almost $10.5 million, an increase of nearly 10x from 2021 [Cornerstone Research report]. Why did we go off on that tangent? No idea, the article started it.

So here’s what Law Street Media found when they dug into Big 4 federal litigation numbers. Cases have been fairly consistent since 2019, they said, noting there is some evidence that cases peaked in 2020. Of the total cases, Deloitte came in at 105 while their competitors had about 40 each. The table below shows a case breakdown by type and number across the four firms.

So about those cases:

Regarding the nature of these suits, the most common types have been 442 Civil Rights – Jobs and 850 Securities, Commodities, Exchange with 28 cases each, though 14 of the former have been appealed to the circuit courts, while only 5 of the latter have been so appealed. The Civil Rights Jobs cases are the fairly usual mix of plaintiffs alleging wrongful treatment based on their gender, age, or race. Half of these 442 cases targeted Deloitte.

The Securities, Commodities, Exchange cases, on the other hand, do not directly target the big four. Instead, with one notable exception, these cases allege various companies committed securities fraud and that the big four were ostensibly complicit in that they provided supposedly false or misleading audits.

The one notable exception is Securities and Exchange Commission v. MintBroker International, Ltd. et al. In this case, the Securities and Exchange Commission shut down and forced into receivership MintBroker for being an unregistered broker-dealer. As part of the litigation, Guy Gentile, the owner of MintBroker, sued EY and others for allegedly intentionally driving his company into bankruptcy.

The third most common Nature of Suit code is 791 Employee Retirement Income Security Act. These cases concern individuals suing primarily Deloitte, alleging their retirement fund is not properly handling their savings.

Let’s all congratulate Deloitte for taking home yet another #1.

Analytics Reveal Litigation Trends for Big Four Accounting Firms [Law Street]

The post Which Big 4 Firm Gets Sued the Most in Federal Court? Deloitte By a Long Shot appeared first on Going Concern.

Here’s what FT said:

EY’s auditors outside the US are failing a higher number of quality inspections by American regulators, according to the firm’s internal estimates, as US authorities push to improve global standards they fear were hit by the coronavirus pandemic.

Inspections of EY’s work for US-listed companies uncovered deficiencies in up to 38 per cent of the audits carried out by the firm’s overseas businesses last year, according to estimates described to the Financial Times.

That would be a big jump from 2021, when 21 per cent of audits sampled by the Public Company Accounting Oversight Board contained deficiencies.

The figures do not include inspections of audits carried out by EY’s US business — the largest in its global network — and could be lower if the firm successfully pushes back against concerns raised by the PCAOB before inspection reports are finalised. However, they hint at a trend since the pandemic that has alarmed the regulator.

The PCAOB inspected 37 audits carried out by EY’s non-US businesses last year, and EY estimated that the increase in deficiencies would be largely consistent across the Americas, Europe and Asia-Pacific.

Said EY to FT, “[The firm] actively reviews audit quality results from both internal and external monitoring. The figures reported by the Financial Times are from a preliminary stage of that process, during which areas for additional focus are identified. The figures do not reflect the ultimate conclusions drawn from that process.”

EY expects more failing grades from US audit inspectors [FT]

The post EY’s Getting Ready For Bad Grades From the PCAOB For Overseas Colleagues’ Work (Allegedly) appeared first on Going Concern.

SCMP:

The Hong Kong Association of Registered Public Interest Entity Auditors (PIEAA) said on Wednesday that a survey it had conducted between October 2022 and February 2023 of 313 Hong Kong-based accounting firms and students found that one in three accounting firms currently lacks 20 per cent of the needed manpower, and more than half are actively recruiting.

The association’s members employ a combined 16,000 people that handle the audit of all of Hong Kong’s more than 2,600 listed companies.
“The survey has made it clear that Hong Kong is facing a serious talent shortage in the accounting industry,” said Clement Chan Kam-wing, PIEAA’s chairman. “If the problem is not solved, it will mean some firms might not have enough manpower to do complex audit work, and this will affect Hong Kong’s position as a fundraising centre for listed companies.”

“The shortage of professional accountants in Hong Kong poses a significant challenge for both the industry, the audit profession and the overall economic landscape,” said Clement Chan Kam-wing, chairman of the PIEAA.

Because the shortage is greatest at the three-to-five years’ experience level, he also suggests that firms should maybe consider paying people better to attract talent. What a novel idea! We should try that here in the US. “It is time for accounting firms to review their remuneration package, for example giving young practitioners a realistic expectation of accounting work, flexible employment models such as part time or project-based employment contract,” he said. Auditors in Hong Kong often work all night during busy season and have to deal with psychotic managers like this.

Interestingly, student respondents to the PIEAA survey did not rank high pay as the most important factor to them (firms are so gonna run with that). 61 percent of them said work-life balance is very important, career development and reasonable work hours came in next at 58 percent each. Only a little more than half of respondents said pay and bonuses are very important.

And now for the offshore part. “The Hong Kong government should recruit talent from overseas markets to help solve [the shortage],” Chan said. “It is disappointing that the government has not added accountants to its list of imported labour recently.”

Deloitte and EY have already started doing this in Australia where the talent shortage was exacerbated by the country closing its borders in the early days of the pandemic. The US, UK, and Australia called dibs on talent in India (and they’re expanding) and the Philippines is beginning to experience their own accountant shortage. So I feel compelled to ask once more: where are they going to get this talent from??

Shortage of audit professionals will ‘affect Hong Kong’s position as a fundraising centre’, industry body says, asks government to recruit overseas auditors [South China Morning Post]

The post Someone Tell Hong Kong There Is Not an Unlimited Supply of Offshore Accountants and Auditors appeared first on Going Concern.

The diligent paper-pushers at the PCAOB (the “P” stands for both paper and pushing) have sanctioned CohnReznick for failing to report key information on PCAOB Form 3 within the required timeframe. PCAOB Rule 2203, Special Reports requires any registered public accounting firm to file a special report on Form 3 to report information to the Board no later than thirty days after the occurrence of the event. In this case, the event was actually four reportable events regarding two disciplinary proceedings brought by the SEC against the firm and partners Stephen M. Wyss (engagement partner), Stephen H. Jackson (engagement quality review partner), and Robert G. Hilbert (Managing Partner of Assurance and National Director of Accounting). You can read about that here.

TL;DR the firm was sanctioned for deficiencies in its system of quality controls that led to audit failures in connection with a quarterly review and year-end audit of one client and a year-end audit of another client, resulting in a $1.9 million penalty for the firm. In one case, Wyss, Jackson, and Hilbert were confronted with indications that the client’s goodwill impairment test was not supported by sufficient evidence, but they still accepted the company’s conclusion that goodwill was not impaired even though appropriate additional audit procedures had not been performed. Separately but related, the two clients were charged by the SEC for filing fraudulent financial statements prior to their bankruptcies.

The SEC order was issued on June 8, 2022, CohnReznick did not file a Form 3 until December 12, 2022.

Tuesday’s press release makes it crystal clear that the PCAOB is sick of this shit. “As part of the Board’s efforts to strengthen enforcement, it has increased its vigilance concerning firms’ failures to disclose required events on Form 3, or to do so by the applicable deadline,” it reads.

“Registered firms must report qualifying events on Form 3 on a timely basis so that such information is available to investors and can be used as part of the Board’s oversight of those firms,” said Robert E. Rice, PCAOB Director of Enforcement and Investigations.

CohnReznick, without admitting or denying the findings, settled with the PCAOB and consented to a disciplinary order that censures the firm and imposes a $20,000 civil money penalty. The order also requires the firm to comply with its PCAOB reporting policies and procedures, including those pertaining to providing reasonable assurance that reportable events are reported on the applicable PCAOB form in a timely and complete manner.

The penalties will continue until compliance improves!

The post CohnReznick Gets Fined For Not Reporting an Earlier Fine to the PCAOB in a Timely Fashion appeared first on Going Concern.

In July 2019, ESL announced that a review had been conducted into its prior year financial statements. Following this review, ESL disclosed significant prior year accounting adjustments to the 2017 financial year. Said the FRC, KPMG and engagement partner Nicola Quayle breached Relevant Requirements in some of the areas which were subject to prior year adjustments.

The audit went bad around the following:

• property transactions entered into by ESL, and the disclosure in the financial statements regarding those transactions. These transactions had a
• significant effect on ESL’s financial performance, and without the profit generated from them, ESL would have been in a loss-making position;
• dilapidations; and
• accounting for a subsidiary company.

Regarding the property transactions, auditors failed to obtain sufficient appropriate evidence of services provided by ESL in those transactions to allow revenue to be ascribed to the provision of those services and recognized up-front in the financial year. On top of that, the disclosures in the financial statements relating to the property transactions did not adequately explain the impact of those transactions on ESL’s financial performance.

The failings were serious but not pervasive, said the FRC.

And here’s the pound of flesh:

Against KPMG:

• A financial sanction of £1.35 million, discounted for admissions and early disposal to £877,500. KPMG’s poor disciplinary record was noted as an aggravating factor;
• Non-financial sanctions, comprising:
  • a Severe Reprimand;
  • a declaration that the 2017 audit report did not satisfy the Relevant Requirements; and
  • an order requiring KPMG to take specified actions to prevent the re-occurrence of the contravention.

Against Ms Quayle:

• A financial sanction of £70,000 discounted for admissions and early disposal to £45,500. Notable aggravating factors were Ms Quayle’s seniority at the point of signing the audit report and past disciplinary record;
• Non-financial sanctions, comprising:
  • a Severe Reprimand; and
  • a declaration that the 2017 audit report did not satisfy the Relevant Requirements.

Engagement partner Nicola Quayle quit performing statutory audits in 2020 and no longer holds a practicing certificate. She has pledged not to carry out statutory audits or sign their reports going forward.

“There were some serious failings admitted in this case; although they were not pervasive throughout the audit,” said FRC Deputy Executive Counsel Claudia Mortimore. “The case highlights the importance of, firstly, the auditor’s work in ensuring that disclosures in financial statements enable users to understand the impact of particular transactions on the entity’s financial performance; and secondly, ensuring that advice received in technical consultations is effectively implemented.”

PwC’s reprimand for their 2018 audit of ESL was a bit less harsh. Both the firm and the engagement partner received sanctions, neither got mentions of poor disciplinary records.

Against PwC:

• A financial sanction of £3.5 million adjusted for the mitigating factor of exceptional cooperation and further discounted for admissions and early disposal to £1,990,625.
• Non-financial sanctions, comprising:
  • a Severe Reprimand;
  • a declaration that the 2018 audit report did not satisfy the Relevant Requirements; and
  • an order requiring PwC to take specified actions to prevent the occurrence of the contravention.

Against Mr Storer:

• A financial sanction of £90,000 adjusted for the mitigating factor of exceptional cooperation and further discounted for admissions and early disposal to £51,187.50.
• Non-financial sanctions, comprising:
  • a Severe Reprimand; and
  • a declaration that the 2018 audit report did not satisfy the Relevant Requirements.

There were numerous serious failures in relation to PwC’s audit work on ESL’s property transactions, including a failure to identify revenue recognition on those transactions as a significant risk of material misstatement; failing to carry out a formal consultation on the technical aspects of accounting for these transactions; a lack of challenge of management’s selection of accounting policy; and a lack of professional judgement in their work on the transactions. Furthermore, the disclosures in the financial statements failed to adequately explain the impact of the property transactions on ESL’s financial performance.

PwC and Storer assisted in the investigation by making comprehensive early admissions (including admissions relating to matters which were not in the communicated scope of the investigation) for which the FRC gave a discount to the financial sanction of 12.5% (in addition to the 35% reduction for early settlement) to reflect what the FRC describes as exceptional cooperation as a mitigating factor.

ESL almost imploded in December 2019 until saved by an investment of £55 million from shareholder and financier DBay Advisers. A couple months before getting rescued by DBay, ESL’s terrible revenue recognition led to a £2 million accounting error, thus leading the FRC to open inquiries into its two most recent auditors.

Sanctions against KPMG LLP and former audit partner [FRC]
Sanctions against PricewaterhouseCoopers LLP and audit partner [FRC]

The post KPMG Got Extra Roasted By the FRC Thanks to the Firm’s “Poor Disciplinary Record” appeared first on Going Concern.

Reports Financial Times:

The firm’s junior auditors were told on a webcast last week that the pay band for one cohort would be frozen while others would increase by 3 or 6 per cent, resulting in real-terms pay cuts, firm insiders told the Financial Times. UK inflation stood at 8.7 per cent in May.

The presentation followed a memo to employees in which PwC’s chief people officer Ian Elliott said pay rises would be smaller than last year when it gave out record increases to retain staff in the face of a hot labour market and soaring inflation.

One junior auditor told the FT they were “shocked” that pay was being frozen for many senior associates in the audit division and that they and others might quit as a result. PwC’s most junior auditors are paid between £26,000 and £34,000 a year depending on location, an insider said.

Quick recap on PwC UK partner pay the past few years:

• 2019: £765,000
• 2020: £685,000 (fuck you, Rona)
• 2021: £868,000
• 2022: £1,000,000 thanks in part to the £1.83 billion ($2.2 billion USD) sale of a business providing tax advice for companies moving staff overseas to US private equity firm Clayton, Dubilier & Rice

Two weeks ago, Financial Reporting Council chair Jan du Plessis told FT audit firms should — and can — pay their junior auditors more. “There has been a significant increase in profitability at all the audit firms. They have the resources available to increase the pay levels of more junior people that they want to attract into their firms and it’s up to them whether they want to do so,” he said. Guess PwC UK leadership didn’t see that article. Suck it, du Plessis.

The rest of the FT article lines up with what we’re seeing here on our side of the world: too many folks on the bench and firms being too generous with performance reviews, the latter being a result of firms intentionally taking it easy on people last year to hang onto talent and historically low attrition preventing the usual churn baked into firms’ business models.

While parts of the business were growing strongly, Elliott said in his memo that “the market has been challenging”.

There would be a similar number of promotions to last year (which are typically accompanied by big automatic pay rises attached to seniority), he said. But while the bonus pool would be bigger this year, average individual awards would be smaller because staff numbers had grown, he added.

Some PwC divisions have also significantly increased the number of staff being placed on “performance improvement” programmes, according to people at the firm. These programmes are typically used by consulting firms as a prelude to removing a proportion of employees each year.

They were less prevalent as the sector battled to hire and retain staff to keep pace with post-pandemic demand for advice on deals and ways to adapt business models to the rise of online commerce.

A PwC insider told the FT that one team had gone from having only a small fraction of staff whose performance was under review last year to as many as 15 or 20 per cent this year.

“Following record pay increases last year, we have again invested in salary uplifts across our business,” said PwC to FT. “Our decisions are informed by the firm’s performance, external market conditions and the investments we make in response to client demand.”

The post Already Underpaid PwC UKers Get Told Bonuses Will Suck This Year appeared first on Going Concern.

TL;DR Marcum violated PCAOB rules related to the firm taking on “a substantial number” of audit clients, more work than they could handle which led to serious quality control deficiencies. They got fined big and now the PCAOB is requiring significant changes at the firm.

The news release — that uses the word competence four times — has the gory details:

Several of Marcum LLP’s violations of PCAOB rules and quality control standards were the result of the firm accepting a substantial number of audit clients, including hundreds of special purpose acquisition company (SPAC) audits, resulting in a dramatic increase in its issuer audit practice between January 2020 through October 2021. Marcum’s quality control system did not provide reasonable assurance that it could execute these audits with competence.

“If firms put profits ahead of PCAOB standards that protect investors, there will be consequences,” said PCAOB Chair Erica Y. Williams. “Today’s order makes clear, the PCAOB will use every tool at our disposal, including requiring a firm to change its supervisory structure, in order to ensure compliance with PCAOB standards.”

The Division of Enforcement and Investigations closely coordinated its investigation of Marcum LLP with the SEC Division of Enforcement.

“Firms have a responsibility to undertake only those engagements that they can reasonably expect to be completed with professional competence,” said Robert E. Rice, Director of the PCAOB’s Division of Enforcement and Investigations. “When they fail to do so, and fall short of PCAOB standards, they will be held accountable. We at the PCAOB thank the SEC for its significant assistance in this matter, which reflects the strong working relationship between the PCAOB and SEC enforcement staff.”

The PCAOB found that Marcum LLP’s system of quality control failed to provide reasonable assurance that the firm would:

• Undertake only those issuer engagements that the firm could reasonably expect to be completed with professional competence and appropriately consider the risks associated with providing professional services in the particular circumstances;
• Ensure that partner workloads were manageable to allow sufficient time for engagement partners and engagement quality review partners to discharge their responsibilities with professional competence and due care;
• Timely assemble complete and final sets of audit documentation;
• Timely and accurately file Form APs;
• Perform procedures to identify and assess the risks of material misstatement at the assertion level with respect to SPAC audits;
• Ensure that engagement teams were consulting with individuals within or outside the Firm, when appropriate, when dealing with complex issues;
• Perform sufficient procedures to determine whether certain matters were critical audit matters; and
• Make all required communications to issuer audit committees.

Marcum did not admit or deny the findings, the firm settled with the PCAOB and consented to a disciplinary order. In addition to the civil money penalty on the firm and a censure, the order requires the firm to engage an independent consultant to review and make recommendations concerning its quality control policies and procedures, after which the firm is required to implement said recommendations. This is the first time a PCAOB settled disciplinary order has ever required functional changes to the quality control supervisory structure of a registered firm.

Beyond requiring certain training for all audit staff, the order, among other things, requires Marcum LLP to make functional changes to its supervisory structure related to the firm’s system of quality control. These changes – requiring the firm to create a new role and hire an individual to serve as head of the firm’s quality control system (“Chief Quality Officer”) and to create a committee responsible for the oversight function for the audit practice (“Audit Oversight Committee”) – were important and necessary measures to address the significant quality control violations identified in the PCAOB’s investigation.

The related SEC order: SEC Charges Audit Firm Marcum LLP for Widespread Quality Control Deficiencies and PDF of the SEC order.

PCAOB settled disciplinary order against Marcum LLP by Adrienne Gonzalez on Scribd

The post Marcum Took On Too Many Clients and Totally Wrecked Their Quality Control, Says the PCAOB in Disciplinary Order appeared first on Going Concern.

CFOs at the UK’s largest companies complained about rising audit fees in a letter to Big 4 leadership last year. And we have all heard the complaints from junior auditors.

FT:

Senior partners at the Big Four — Deloitte, EY, KPMG and PwC — have claimed that criticism from politicians and regulators, including high-profile fines for poor work, is making it more difficult to recruit and retain auditors.

But Sir Jan du Plessis, chair of the Financial Reporting Council, hit back, denying that the watchdog’s tough approach had made the profession unappealing.

It isn’t just Big 4 firms complaining about the FRC’s heavy hand. Earlier this year, auditors at the mid-tiers said that increased scrutiny from the FRC is only “cementing the oligopoly” of Big 4. “The regulatory pressure is becoming unbearable,” griped a senior auditor. Meanwhile, FRC CEO Sir Jon Thompson has told firms to knock it off with all the complaining and focus on improving their work. “It’s no good complaining about the fines,” he said in an interview with FT. “The solution is entirely in [firms’] hands. Do a good audit and you don’t get in trouble with us.” Haha git gud, scrubs.

Back to FT:

Average partner pay at the Big Four has soared in recent years, passing £1mn a year at two of the firms [Ed. note: Deloitte and PwC passed £1 million in partner pay, KPMG came in lowest at £757,000 ($954k USD)]. But with the exception of big increases last year as inflation soared, pay rises for junior auditors have been small over the past decade, and have failed to keep pace with salary growth in law and consulting.

PwC raised average pay for its London-based audit graduates to £32,000 last year, roughly half the salary of the City’s best-paid legal trainees.

Du Plessis, former chair of BT and Rio Tinto, said the difficulty auditors faced recruiting the right people was no different to that in many other sectors. Accounting bosses fear that staff shortages will be exacerbated by increasing demand from companies for external validation of their climate disclosures in addition to traditional financial statements.

“If you’re a young person today looking to join a profession, I’d have thought you’d want to join a profession that sets very high standards,” he said of the FRC’s aggressive enthusiasm for audit quality.

Big Four accounting firms urged to pay junior auditors more [FT]

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He starts the piece summoning the ghost of Enron, as all writers do when discussing what happens when audit goes wrong. Bringing things back to this decade, he then talks about what’s going on at PwC Australia even though auditors weren’t the ones using confidential government data to bill clients for tax avoidance plans. It doesn’t actually matter whether it was auditors or literally anyone else at the firm, he says, because the entire industry is broken.

The affair underscores a key criticism leveled at the industry, especially the “Big Four” firms — Deloitte, KPMG, Ernst and Young, and PwC — that it’s a business in which conflicts of interest are inherent. For starters, auditors are paid by the companies they’re auditing. If they find a problem, they risk losing a client. There’s plenty of incentive to look the other way.

The Big Four also run massive consulting arms, which generate billions of dollars in fees by providing advice to clients on technology, taxation, accounting and more. Often, audits are a loss-leader that firms use to secure more lucrative consulting contracts. At EY, a recent effort to split the business in two — ostensibly into an audit firm and a consulting one — failed in part because nobody wanted to be in the less profitable audit firm. EY’s top brass recognize the conflict, but they simply can’t wean themselves off it.

To quickly confirm what he’s saying, let’s look at the biggest of the Big 4: Deloitte. In 2022, Deloitte brought in a record $59.3 billion in global revenue. Of that, consulting had the largest piece of the pie at $25.8 billion (up 24.4% from the year prior), with audit coming in at $11.4 billion. $27.9 billion of that came from Deloitte US and more than half of that $27.9 billion came from consulting (54.0%). And that’s with our sticky independence requirements. In seven years, Deloitte’s global revenue grew by $24 billion, or 69% (nice).

Remember the entire foundation of Project Everest was the idea that if only consulting were free from independence requirements, somehow EY would score the biggest and best clients and convert those relationships into revenue. Carmine Di Sibio famously said the firm was leaving $10 billion in consulting fees on the table if it didn’t split, an amount that would effectively double what consulting is bringing in now. Well, what it was bringing in before Everest crashed and burned. Different topic.

OK, so we know there are conflicts. What’s this guy’s solution?

Many alternatives have been discussed over the years. One is having the government or stock exchange employ its own inspectors, the same way that government inspectors certify the food or transportation sectors? This could work, in theory, but the concept probably hasn’t gotten off the ground because it would require an enormous number of staff being added to government payrolls.

A similar suggestion is that stock exchanges or governments could hire the audit firms, so they would no longer be paid by the companies they assess. But how would governments decide which firm to hire? And would this really improve the quality of the auditors’ work?

Here’s FloQast CEO (and former Big 4 senior auditor) Mike Whitmire talking about that idea in 2019. He too suggests we kill the audit industry but says to hand the job over to the PCAOB.

Well here’s Duncan’s even crazier idea:

The solution I favor is to scrap the mandatory audit requirement altogether. Big, influential investors — pension funds and so on — could still demand their own auditors trawl through the books of companies they invest in. Some professional investors might even have to do more of their own due diligence!

This radical solution comes with some potential problems, of course. The most obvious is that absent mandated audits, corporations would get away with bad behavior. But isn’t this happening anyway? Also, yes, more smaller investors — regular people — would be a little more in the dark. But history tells us they probably shouldn’t rely too much on audits that are fundamentally flawed.

He goes on to say that emerging technology will at some point in the near future be cheap and easy enough that if investors really wanted to comb through hoards of company data, they can deploy AI to do it in a fraction of the time it would take a human or a team of overworked auditors.

A machine could do just as much digging as a 20-something CPA without any of the potential conflicts. Once this becomes a widely available option, surely it will be time to end the audit charade once and for all. In the meantime, doing away with audit requirements would be a step in the right direction.

I can hear the 20-something auditors cheering right now.

The post Kill the Audit Industry, Says Ex-Auditor appeared first on Going Concern.

Along with KPMG CEO Paul Knopp and KPMG Global Chairman and CEO Bill Thomas, the suit names Global Head of Audit Larry Bradley, Deputy Chair and Chief Operating Officer Laura Newinski, Global Head of Clients and Markets Regina Mayor, and the long-exited former Global Chairman John B. Veihmeyer who hasn’t been mentioned on this website in at least four years.

The suit also names Brian Sweet, the former PCAOB director and KPMG partner who made up one fifth of the five ex-KPMG executives indicted in January 2018 (“The KPMG 5”) for their roles in the infamous scheme to get steal confidential PCAOB information with the intent of using that info to improve KPMG’s inspection results. With him on the shit list is the rest of KPMG’s PCAOB cheating scandal team: Scott Marcello, David Middendorf, Thomas Whittle, David Britt, former PCAOB inspections leader and also former KPMG executive director Cynthia Holder along with former PCAOB inspector and fellow cheating conspirator Jeffrey Wada.

This is Stevenson’s gripe from Bloomberg Law:

KPMG knew that Credit Suisse lacked sufficient internal controls for more than 15 years, while certifying its financial statements as accurate, Stevenson alleges. It did so “because the New York KPMG operation wanted the huge fees from Credit Suisse, upon which KPMG had become dependent, and which were very important to the individual top partners in New York,” he says.

“Credit Suisse insiders, with the help and acquiescence of the KPMG Defendants, plundered Credit Suisse, and personally profited from their misconduct to the tune of many billions of dollars, including secret illegal bonus pools,” said Stevenson’s complaint. He also refers to the PCAOB cheating scandal as Credit Suisse was among the clients the KPMG conspirators found out were up for PCAOB inspection (along with Citigroup, Deutsche Bank, Banc of California, BBVA, Ambac, Phoenix Life, and NewStar Financial, plus some other non-financials). “Upon learning that the Credit Suisse audits were on the list, KPMG destroyed and altered the workpapers in New York to deceive regulators,” he said. He goes on to say that had KPMG audit leaders not conspired to lift PCAOB information they were not entitled to with the goal of improving inspection results “the discovery would have disrupted the ongoing conspiracy and ameliorated the damage to be suffered by the Credit Suisse shareholders,” he says.

KPMG has not audited Credit Suisse since PwC took their place in 2020. PwC’s audit report prior to the bank’s failure in March included an adverse opinion and management identified material weaknesses in internal controls as of December 31, 2022 and December 31, 2021 per the bank’s 2022 annual report.

We’ll keep you posted on any developments.

KPMG, Credit Suisse Leaders Sued for ‘Reckless’ Bank Management [Bloomberg Law]

The post KPMG Gets Sued, Accused of Allowing Pirate-Like Activity at Credit Suisse appeared first on Going Concern.

Last year, the PCAOB gained historic VIP access to Chinese audit work — granted to inspectors thanks to a legislative threat by Congress to delist Chinese companies if they didn’t allow inspectors to go digging around in there — and as far as we heard these inspections went well. Actually, the PCAOB was pretty quiet on exactly how it went and most of the detailed information about their visits came through the media by way of anonymous sources. The PCAOB did however issue a statement on December 15, 2022 announcing that inspectors gained complete access to inspect and investigate Chinese firms for the first time in history. “Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong,” the news release read. “It is a recognition that, for the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them.”

After the release of the two inspection reports for KPMG Huazhen and PwC Hong Kong today, Chair Williams issued a statement outlining the deficiencies found and reminding auditors for the 1,001st time that the PCAOB is sick of their bullshit. From her statement:

Both reports show unacceptable rates of Part I.A deficiencies, which are deficiencies of such significance that PCAOB staff believe the audit firm failed to obtain sufficient appropriate audit evidence to support its work on the public company’s financial statements or internal control over financial reporting.

The PCAOB inspected a total of eight engagements in 2022 – four at each of the two firms – including the types of engagements to which People’s Republic of China (PRC) authorities had previously denied access, such as large state-owned enterprises and issuers in sensitive industries.

PCAOB inspectors found Part I.A deficiencies in 100% (four of four) of the audit engagements reviewed at KPMG Huazhen and 75% (three of four) of the audit engagements reviewed for PwC Hong Kong.

As I have said before, any deficiencies are unacceptable. At the same time, it is not unexpected to find such high rates of deficiencies in jurisdictions that are being inspected for the first time. And the deficiencies identified by PCAOB staff at the firms in mainland China and Hong Kong are consistent with the types and number of findings the PCAOB has encountered in other first-time inspections around the world.

Last year’s historic inspections of Chinese audit work are only the beginning, she said.

Our enforcement teams continue to pursue investigations, and inspectors have begun fieldwork for 2023’s inspections. We anticipate fieldwork will continue off and on throughout most of the year, which is common practice for inspections such as these in jurisdictions around the world.

She goes on to give a shoutout to Congress for passing the Holding Foreign Companies Accountable Act (HFCAA), without which these thorough inspections would not have happened. That legislation was said to send China a clear signal that access to U.S. capital markets is a privilege and not a right, contingent on allowing inspections of the audit work performed on Chinese companies listed in these markets.

“Should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access – in any way and at any time – the Board will act immediately to consider the need to issue a new determination,” she said.

She wraps the statement up thanking “the hardworking inspectors, investigators, and PCAOB staff who continue this important work on behalf of investors every day.”

PCAOB Releases 2022 Inspection Reports for Mainland China, Hong Kong Audit Firms [PCAOB]

The post The PCAOB Finally Releases China Inspection Results for KPMG and PwC, It Ain’t Good appeared first on Going Concern.

Reports The Sun, council members received the out of scope services bills dated January 18 and February 15, on top of the agreed upon $69,500 for 450 hours worked in the original contract with Marcum. The contract included a breakdown of billable hours from partners down to staff, whereas the surprise out of scope bills had none. The contract stated that fees “will be rendered as the work progresses, and are due and payable upon presentation.” The bill dated February 15 arrived after the town’s audit was submitted to the state, said Council President Deborah Carney.

Marcum was slow to respond to inquiries about the additional fees, say officials, and the firm reportedly told the town they’d have to wait until busy season ends to work out the billing issue.

Charlestown Town Solicitor Peter Ruggiero tried to negotiate a reduced fee, and on March 15 acting Town Administrator Jeffrey Allen and Treasurer Irina Gorman had a Zoom meeting with Marcum partners. At that meeting, Marcum promised to send over an itemized bill within a couple days. It seems that didn’t arrive.

They could have gone to court to resolve the issue but the contract required any litigation to take place in Marcum’s hometown of New York, where the town lawyer is not licensed to practice. After a couple meetings among themselves, the council voted to make a $18,000 payment to Marcum on April 24 and obviously severed their relationship with the firm at the same time. The Sun article doesn’t explain where that figure came from but it seems the issue is resolved.

As for the town finances, Charlestown is in good shape. Total revenues were about $406k above budget, the town brought in $268k more in taxes than expected, and it has a total fund balance of about $10.9 million. Marcum’s report included several recommendations for improvement.

The post Tiny Rhode Island Town Settles Its Billing Beef With Marcum Over Out of Scope Services appeared first on Going Concern.

On Wednesday, the FRC announced sanctions against KPMG and lead engagement partner Anthony Sykes in relation to the audit The Works for the financial year ended April 26, 2020.

What did they do? Inventory got ’em. KPMG and Sykes admitted to breaches (the word FRC uses for “fuck ups”) relating to the audit of inventory existence including the requirements to plan and perform an audit with professional skepticism, to prepare sufficient audit documentation and to design and perform audit procedures in order to obtain sufficient appropriate audit evidence.

KPMG’s approach to the audit of inventory existence was flawed by a succession of failings, such as, in particular:

• Failure to respond appropriately to variances in stock counts identified during controls testing, including by not investigating management’s explanations for those variances and by omitting the test results from the audit file such that the audit file documentation provided a false degree of assurance;

• The adoption of a substantive testing approach (once the controls testing had failed), without adequate consideration or consultation, based on a subset of the same stock count results, from which the stock counts with variances had been removed, as part of a selection process described on the audit file as “random”; and

• Failure to perform appropriate roll-forward and roll-back procedures.

The FRC gives naughty auditors a discount on fines if they cooperate and admit fault so both parties got a bit of a break. Of the £1,750,000 financial sanction, KPMG will pay £1,023,750 (approx. $1.3 million USD) and lead engagement partner Sykes will pay £43,875 of the original £75,000 sanction to to reflect his cooperation and admissions.

Both Sykes and the firm are required to provide a signed declaration that the audit report did not satisfy relevant requirements and the firm is expected to take actions with the intent of preventing this from happening again.

“The admitted failings, which critically undermined KPMG’s approach to the audit of inventory at a retail entity, were rudimentary and should not have occurred,” said Claudia Mortimore, Deputy Executive Counsel at the FRC. “The financial and non-financial sanctions, which include measures intended to enhance KPMG’s second line of defense function, are aimed at preventing a repetition of such failings in the future.”

The post The King’s KPMG Gets Fined for Rookie Mistakes appeared first on Going Concern.

Similar to previous suits, a complaint filed Friday in the federal court in San Francisco names Silicon Valley Bank Chief Executive Officer Greg Becker and other bank directors and officers as defendants. The complaint appears to be the first to target the bank’s auditors and underwriters.

Collectively, the defendants “misrepresented the strength of the company’s balance sheet, liquidity, and position in the market,” according to the lawsuit. The executives, auditor and underwriters “understated and concealed the magnitude of the risks” facing the bank, which undermined the value of its own securities portfolio, it said.

As you may recall, KPMG issued an unqualified audit opinion two weeks before SVB went down in flames. There was a really good explainer on what exactly happened at SVB written by a CPA and posted on Medium.com shortly after SVB collapsed but looks like OP deleted their account and took the explainer with them. No worries though, here’s an excerpt:

Just like in 2008, there were events which preceded the crisis and events which preceded the failure of SVB. Most of these events were the result of the Covid-19 Pandemic and included but are not limited to:

1. Historically low levels of interest rates (a result of 2008)
2. A rapid increase in the money supply to stabilize markets and the economy during and after the pandemic lockdowns
3. Historically high levels of savings and high asset valuation
4. Inflation caused by both supply and demand fallout from the pandemic
5. The invasion of Ukraine by Russia
6. The rise in interest rates by the Federal Reserve (“The Fed”) in order to combat higher levels of inflation
7. The failure and fallout of several large cryptocurrency companies due to both decreasing prices of cryptocurrencies and alleged fraud of FTX

As interest rates rise prices and thus value of securities decline. So like many other banks SVB was holding these longer dates fixed income assets, while the FED was increasing rates over the past year. The price and ultimately the value of these assets, which are Available-For-Sale (“AFS”), declined causing what is known an unrealized losses. AFS securities are subject to fair value or mark to market (“MTM”). This is in contrast to Held-To-Maturity (“HTM”) securities which are marked at amortized cost. In the case of SVB, the losses are unrealized until the securities are sold and become realized.

Just like other banks SVB had these fixed income assets incur unrealized losses but what SVB failed to do was manage their risk and portfolio duration (duration can be thought of as time). As a publicly traded company, SVB would be required to provide a 10-Q, which is an unaudited and condensed version of a 10-K, which are audited financial statements. Over the last year or so, you could read SVB’s, 10-Qs which would provide insight on a quarterly basis through unaudited financial statements and disclosures. SVB kept holding these assets with unrealized losses, but finally their clients realized that the bank had a liquidity issue, which meant the bank had to sell these fixed income assets to meet their customers withdrawal requests to get their deposits out for payroll, day to day expenses, etc. However, in the wake of FTX, which was first a liquidity crisis and ultimately turned out to be an alleged fraud, with assets which could not make their customers whole, customers of SVB began to worry and that worry turned into panic.

Speaking of panic, banks in the United States are holding onto about $620 billion of unrealized losses. Good read about that with some pretty graphics here.

On March 8, two days before the bank went under, SVB sold a bond portfolio consisting mostly of U.S. Treasuries with a book value of $23.97 billion to Goldman Sachs, leading to a $1.8 billion loss for SVB. And you know what happened after that.

“Even though SVB’s deposits began to decline in 2022, falling $25 billion during the final nine months of 2022 and reducing SVB’s liquidity, KPMG did not identify risks associated with SVB’s declining deposits or SVB’s ability to hold debt securities to maturity in its report,” reads the lawsuit. It adds that KPMG “was silent” on whether there is substantial doubt about the entity’s ability to continue as a going concern. KPMG did communicate a critical audit issue — allowance for credit losses for loans and unfunded loan commitments for certain portfolio segments evaluated on a collective basis — otherwise the audit report is pretty standard. 10-K can be found here, you’re looking for Part II, Item 8 “Report of Independent Registered Public Accounting Firm”

KPMG stands behind the SVB audit and told us last month that “any unanticipated events or actions taken by management after the date of an opinion could not be contemplated as part of the audit.”

The post KPMG Gets Sued Because Their Longtime Client Went Down in Flames appeared first on Going Concern.

As the remains of FTX are picked through to find scraps to throw at its many debtors, we have now learned from a debtors report filed in bankruptcy court yesterday (embedded in its entirety below) that it’s a wonder FTX could find any auditors at all.

From the Yahoo! Finance story:

In an internal communication cited in the report, Bankman-Fried once said FTX’s sister company Alameda Research was “hilariously beyond any threshold of any auditor being able to even get partially through an audit.”

He said: “Alameda is unauditable. I don’t mean this in the sense of ‘a major accounting firm will have reservations about auditing it’; I mean this in the sense of ‘we are only able to ballpark what its balances are, let alone something like a comprehensive transaction history’.

“We sometimes find $50m of assets lying around that we lost track of; such is life.”

According to the report, Alameda struggled to understand what its own positions were, “let alone hedging or accounting for them.” In one example referenced in the report, employees were told by an unidentified manager in June 2022 to just “come up with some numbers? Idk.”

Let’s see what else is in this report, shall we?

[T]he Debtors have had to overcome unusual obstacles due to the FTX Group’s lack of appropriate record keeping and controls in critical areas, including, among others, management and governance, finance and accounting, as well as digital asset management, information security and cybersecurity. Normally, in a bankruptcy involving a business of the size and complexity of the FTX Group, particularly a business that handles customer and investor funds, there are readily identifiable records, data sources, and processes that can be used to identify and safeguard assets of the estate. Not so with the FTX Group.

Upon assuming control, the Debtors found a pervasive lack of records and other evidence at the FTX Group of where or how fiat currency and digital assets could be found or accessed, and extensive commingling of assets. This required the Debtors to start from scratch, in many cases, simply to identify the assets and liabilities of the estate, much less to protect and recover the assets to maximize the estate’s value. This challenge was magnified by the fact that the Debtors took over amidst a massive cyberattack, itself a product of the FTX Group’s lack of controls, that drained approximately $432 million worth of assets on the date of the bankruptcy petition, and threatened far larger losses absent measures the Debtors immediately implemented to secure the computing environment.

Despite the public image it sought to create of a responsible business, the FTX Group was tightly controlled by a small group of individuals who showed little interest in instituting an appropriate oversight or control framework. These individuals stifled dissent, commingled and misused corporate and customer funds, lied to third parties about their business, joked internally about their tendency to lose track of millions of dollars in assets, and thereby caused the FTX Group to collapse as swiftly as it had grown. In this regard, while the FTX Group’s failure is novel in the unprecedented scale of harm it caused in a nascent industry, many of its root causes are familiar: hubris, incompetence, and greed.

The debtors came to this conclusion after reviewing over one million communications (including those made on Slack, Signal, and over email) and Excel sheets, along with FTX’s various QuickBooks entries (yes, a multi-billion entity like FTX used QuickBooks).

The conclusion is not that FTX had poor controls but no controls. “The FTX Group’s control failures created an environment in which a handful of employees had, among them, virtually limitless power to direct transfers of fiat currency and crypto assets and to hire and fire employees, with no effective oversight or controls to act as checks on how they exercised those powers,” said the report. “The FTX Group lacked appropriate management, governance, and organizational structure.”

Three people — Sam Bankman-Fried, Gary Wang, and Nishad Singh — made virtually all decisions. “Among them, Bankman-Fried was viewed as having the final voice in all significant decisions, and Singh and Wang largely deferred to him,” says the report. “If Nishad [Singh] got hit by a bus, the whole company would be done. Same issue with Gary [Wang],” said an unnamed FTX Group executive quoted in the report. Former Director of Engineering Nishad Singh pleaded guilty to U.S. criminal charges in February and is cooperating with the investigation. FTX’s quiet, spotlight-shunning co-founder Gary Wang has also pleaded guilty — to wire fraud, conspiracy to commit wire fraud, conspiracy to commit commodities fraud, and conspiracy to commit securities fraud — and is helping authorities to get to the bottom of the dumpster fire that is FTX. There’s a good read about Wang on Bloomberg here (notable quote: “He was viewed by colleagues as the quiet genius of FTX, a solitary magician who worked strange hours and ignored social cues and Slack messages.”)

At its peak, the FTX Group operated in 250 jurisdictions, controlled tens of billions of dollars of assets across its various companies, engaged in as many as 26 million transactions per day, and had millions of users. And yet…

Although the FTX Group consisted of many, separate entities, transfers of funds among those entities were not properly documented, rendering tracing of funds extremely challenging. To make matters worse, Slack, Signal, and other informal methods of communication were frequently used to document approvals. Signal and Telegram were at times utilized in communications with both internal and external parties with “disappearing messages” enabled, rendering any historical review impossible. Expenses and invoices of the FTX Group were submitted on Slack and were approved by “emoji.” These informal, ephemeral messaging systems were used to procure approvals for transfers in the tens of millions of dollars, leaving only informal records of such transfers, or no records at all.

In short, a mess. Knock yourself out and read the whole report if you are so inclined.

FTX debtor report filed April 9, 2023 by Adrienne Gonzalez on Scribd

The post Just Be Glad You Didn’t Have FTX As a Client appeared first on Going Concern.

As you may recall, last June the SEC levied its largest fine against an audit firm ever — $100 million — and the lucky recipient of this record-breaking punishment was EY. The crime? Cheating. Specifically, a significant number of EY audit professionals cheated on the ethics exams one takes to become a CPA and various CPE courses required to maintain CPA licenses. (Related: here’s someone who says they were fired for sharing answers to a module entitled “Introduction: Microsoft Word” so it wasn’t just critical ethics learning but also stupid and pointless elective WBLs caught up in EY’s sweep of answer sharing prior to completion of the SEC investigation)

Additionally, EY essentially told the SEC they didn’t have a cheating problem knowing full well they did. Because of course they did, everyone does if we’re counting sharing answers to WBLs as cheating. “EY further admits that during the Enforcement Division’s investigation of potential cheating at the firm, EY made a submission conveying to the Division that EY did not have current issues with cheating when, in fact, the firm had been informed of potential cheating on a CPA ethics exam,” read the SEC order. “EY also admits that it did not correct its submission even after it launched an internal investigation into cheating on CPA ethics and other exams and confirmed there had been cheating, and even after its senior lawyers discussed the matter with members of the firm’s senior management. And as the Order finds, EY did not cooperate in the SEC’s investigation regarding its materially misleading submission.” If you care, here’s a more detailed explanation of the EY cheating scandal timeline.

How Exactly Did EY Auditors Cheat on CPE Exams? Details From the SEC Order

In its June 28, 2022 news release, Director of the SEC Enforcement Division Gurbir S. Grewal expressed shock that a protector of capital markets would engage in such unethical behavior. “This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies. It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” he said. “And it’s equally shocking that Ernst & Young hindered our investigation of this misconduct. This action should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors who choose the easier wrong over the harder right.”

Although we didn’t know it at the time, it seems obvious in hindsight that an April 2021 all-hands call in which then-EY US Chair Kelly Grier informed staff they would be required to sign a pledge that “reinforces the commitment” to EY values may have been related to the digging around to get to the bottom of the widespread cheating at EY. The firm even produced a video that literally spells out in simple language: “We don’t cheat. On anything. Ever.” Notice how the “ever” is in bigger text, that’s how you know it’s serious.

EVER.

In its order [PDF], the SEC required EY to “engage in extensive undertakings, including retaining two separate independent consultants to help remediate its deficiencies. One consultant will review the firm’s policies and procedures relating to ethics and integrity. The other will review EY’s conduct regarding its disclosure failures, including whether any EY employees contributed to the firm’s failure to correct its misleading submission.” The order is embedded at the bottom of this post if you would like to see all actions EY was supposed to undertake, the mammoth list begins on page 9.

Anyway, it seems EY missed the deadline. Reports FT:

[The SEC] originally set a January deadline for the completion of the investigation and for EY to begin implementing any recommendations, such as disciplinary action against those involved.

The SEC settlement also ordered an independent consultants’ review of EY’s testing procedures, to be submitted by the end of March.

But the work has not been concluded, and the SEC has given the independent consultants more time to complete their review, according to people familiar with the matter.

Props to people familiar with the matter for feeding FT that information because honestly everyone totally forgot about that cheating thing.

The independent consultants are supposed to review EY’s policies and procedures to make sure cheating doesn’t happen in the future and examine “whether any members of EY’s executive team, general counsel’s office, compliance staff or other EY employees contributed to the firm’s failure to correct its misleading submission.”

“We have met every deadline required of us, with the agreement of the SEC staff, and extensions are not uncommon,” EY told FT.

EY has been understandably focused on Project Everest this past year, currently bickering amongst themselves about how to fund $7.5 billion in pensions and allocate tax professionals among the separated audit and consulting businesses. Last we heard, leadership is “making progress on the key elements needed to move forward on Project Everest” per a statement sent to the firm’s 13,000 partners a week ago.

So now you’re caught up on where we’re at with the cheating thing. Some say the spirit of answer sheets haunts overwhelmed EYers who ain’t got time for WBLs to this day.

SEC Order against EY for cheating on ethics exams and CPE by Adrienne Gonzalez on Scribd

The post EY Hasn’t Finished That Independent Review Into Procedures to Prevent Another Cheating Scandal appeared first on Going Concern.

Auditors who think robust regulation of their sector is disproportionate deserve “the world’s smallest violin”, the head of the UK accounting watchdog has said.

Sir Jon Thompson, chief executive of the Financial Reporting Council, told a private industry meeting earlier this year that close scrutiny was appropriate for auditors who earn hundreds of thousands of pounds a year and “can buy a Ferrari”, people who were in the room or were later briefed on his comments told the Financial Times.

Thompson said that if auditors did not want to face such pressure, they should do a better job, these people added. Attendees were “taken aback” by Thompson’s comments, said one person present.

No one should be taken aback by that last comment, he’s said it before. “It’s no good complaining about the fines,” he said in an interview with the Financial Times. “The solution is entirely in [the audit firms’] hands. Do a good audit and you don’t get in trouble with us.” It’s only recently that FRC has taken a heavier hand in picking on supervising the mid-tiers which may be why some are horrified by his comments. It’s only at Big 4 firms that partners take home more than a £1 million  and only at Deloitte and PwC; KPMG partners received £757,000, an increase of 10% from prior year. Meanwhile, partner pay at BDO was more like £647,000 (USD $803,400) and £579,000 at Grant Thornton (USD $719,000).

The crackdown on shoddy auditing is profession-wide, meaning it includes partners at far less lucrative firms than Big 4, and it is something Thompson seems personally committed to. He likens firms complaining about poor inspections to “blaming the doctor for saying you’re ill.”

People on the receiving end of FRC scrutiny suggest the regulator borders on bully:

Meanwhile, FRC deputy chief executive Sarah Rapson was asked by a senior PwC partner at a separate meeting last week whether the regulator was reviewing its approach, in light of reports that a headteacher had taken her own life after an inspection by education regulator Ofsted, attendees told the FT.

“I’ve seen people suffer genuine health problems,” said one audit partner, who felt that Rapson “didn’t really answer” the question. FRC inspections, whose results are published on an aggregate basis without identifying individual auditors, have become “an emotional drain”, said an audit partner at another large firm.

A senior accountant from a smaller firm in attendance at the above meeting said comparing auditors to teachers was “self-serving” on the part of Big 4 firms and comparing Ofsted (Office for Standards in Education, Children’s Services and Skills) to the FRC was “quite a clever way of trying to get the [FRC’s] language toned down.” The senior accountant then added that audit partners are paid better than headteachers.

Headteachers, being of advanced senior status, receive the highest teaching salaries. Here are some averages:

• England (excluding London) and Wales – £50,122 to £123,057
• London – £51,347 to £131,353
• Scotland – £52,350 to £99,609
• Northern Ireland – £47,381 to £117,497.

Yeah, that checks out.

The FRC handed down record fines for the 2021/2022 fiscal year: £46.5 million (USD$58.7 million) before settlement discounts, up from £16.7 million the year before. More than half of these were to KPMG alone. The huge increase in fines “reflects the seriousness and high number of cases concluded,” said the FRC. “It also reflects the FRC’s growing capability to take on the large and complex cases which are an increasingly prominent feature of its work, supported by a 23% growth in the Enforcement Division’s headcount.” The majority of FRC enforcements were due to lack of audit evidence and a lack of professional skepticism.

“When deciding sanctions, and whether they will be made public, the FRC does take into account representations about an individual’s personal circumstances, including their mental health,” said Thompson in a statement about his harsh words.

“The FRC has always applied a proportionate approach when discharging its duties and statutory responsibilities as a regulator acting in the public interest and has taken action to not publish when there are significant concerns about the impact on an individual,” he added.

UK watchdog chief shows little sympathy for auditors who ‘can buy a Ferrari’ [FT]

The post Head Regulator Said He’ll Break Out the World’s Smallest Violin For Auditors Crying About Tougher Regulation appeared first on Going Concern.

The Globe and Mail reports:

Problematic audits are on the rise at Canada’s accounting firms, according to the industry’s national regulator, which found issues in a third of the audits it examined last year, up from 28 per cent in 2021.

The Canadian Public Accountability Board, which oversees firms that audit publicly traded companies, said the increase came largely from problems at small firms with few listed clients, but there were issues all the way up the food chain. CPAB said one unnamed member of the Big Four accounting firms – Deloitte LLP, Ernst & Young LLP, KPMG LLP and PwC LLP – had issues with 29 per cent of its inspected audits and has been directed to develop a “quality action plan.”

In 2022, 13 audit firms were operating under CPAB enforcement actions for most of the year, up from nine in 2021.

Seven companies have restated their financials since CPAB’s 2021 annual report: one client of the Big Four, three clients of other annually inspected audit firms and three of non-annually inspected firms. CPAB said three are in the cannabis industry, two are tech companies, one is a psychedelics company and one is in real estate.

A psychedelics company? Man, we are in the wrong country.

Of the seven restatements required since CPAB’s 2021 annual report, three were cannabis companies, an industry that accounted for one restatement the prior year.

The following inspected audit areas resulted in several restatements:
business combinations (mergers and acquisitions), revenue and long-lived assets.

Examples include:

• The reasonableness of deferred taxes not recorded by management in connection with business acquisitions was not evaluated.
• Insufficient understanding of the arrangements with customers to evaluate whether revenue should have been recognized.
• Insufficient evidence to support significant assumptions used in an asset impairment analysis.

In October, the CPAB — which does not put specific firms on blast as a rule — said that audit quality at three of the Big 4 was acceptable (“significant findings” in fewer than 10 percent of audits inspected) and just one firm had significant findings (we call those deficiencies down here in Burgerland) in more than 20 percent of audits inspected. CPAB has a target of no more than 10 percent.

From the press release issued today:

“This inconsistency is an unacceptable trend,” said Carol Paradine, CPAB’s chief executive officer. “CPAB is taking regulatory action to deal with specific concerns on a firm-by-firm basis.”

Consistent with the inspection insights it published last fall, CPAB continues to observe that firms with strong systems of quality management are more likely to meet the target of fewer than 10 per cent of files with significant inspection findings. Audit firms and their leadership are expected to implement systems of quality management to foster a quality-driven culture.

“High-profile ethical breaches in Canada and internationally underscore the importance of ensuring audit firms have a culture that prioritizes and supports ethical behaviour and decision-making at all levels,” said Paradine.

Over the past five years, audit quality at the Big 4 improved from 2018 to 2020, with a gradual rise in significant findings since.

TSX = Toronto Stock Exchange.

Here’s another interesting bit of info from CPAB’s annual report: while the rest of the entire industry struggles with talent acquisition and retention, employee retention at CPAB remains high at 94 percent. So that’s nice.

GET IT TOGETHER, CANADA.

The post Canadian Audit Quality Is Getting Suckier and CPAB Is Concerned appeared first on Going Concern.

Last spring, administrators for collapsed healthcare group NMC Health filed a big ole negligence lawsuit in London against EY, who audited NMC for 14 years and missed a billion and a half dollars that were inappropriately transferred into NMC founder Dr. Bavaguthu Raghuram Shetty’s bank account before NMC went bust. Shetty, who is in his own legal trouble, is himself suing Bank of Baroda, EY and Credit Europe Bank of the Netherlands in a New York court for $8 billion in damages.

But we’re not here to talk about him, we’re talking about NMC administrators and how they want their couple billion dollars should the court agree with them that EY was negligent in its professional duties. This is from Law.com in May 2022:

Administrators for NMC Health, the one-time London Stock Exchange-listed entity that emerged from a UAE-based restructuring deal last month, have filed a $2.5 billion claim against Big Four auditor EY for alleged negligence.

The claim, which relates to a seven-year period in which EY was engaged to oversee the hospital operator’s accounts, was filed at the High Court in London on Thursday, according to press reports.

“The issues that we found at NMC Healthcare following our appointment were broad, complex and multi-layered,” a spokesperson for Alvarez & Marsal, the joint administrators, told Law.com International.

“As part of our wide ranging investigation into the situation, we have looked at the role of the auditors and have now launched formal legal proceedings against EY in the U.K. for audit negligence with regards to its work with the company between 2012 and 2018. As administrators, we have an obligation to maximise returns for creditors and this action is part of those wider efforts.”

EY naturally does not agree with any of this and has said that “reasonable assurance” does not cover the falsification and concealment of accounting records and other documents.

Obviously these court battles take time and NMC administrators at Alvarez & Marsal want to be sure there will be a cool $2.whatever billion for them to be awarded should the eventual ruling work out in their favor. EY has been understandably quiet about split specifics, though a few weeks ago Global Managing Partner Andy Baldwin did tell Bloomberg Radio that legal liabilities — as in, how to spread around liability currently neatly handled by the partnership structure — and the firm’s unfunded $7.5 billion pension liability were the two big things standing in the way of the partner vote. This was before we found out about internal tensions (“a shitshow”) and fighting over tax people that led to the split being put on pause.

Now on top of their own drama, EY has the Ghost of Clients Past gumming things up.

FT reports:

The administrators asked a judge on Monday to force EY to disclose details of its finances or insurance cover, which would indicate its ability to pay any potential penalty, before going ahead with the planned global split.

The legal claim is not due to reach a full trial until next year at the earliest but lawyers for the administrators on Monday asked the High Court in London to order EY to disclose details of the planned spin-off of its global consulting arm, including in the UK, at least 28 days before it calls a vote on the transaction or, if there is no vote, 28 days before the separation goes ahead.

“NMC harboured concerns that the effect of EY’s planned separation would be to reduce EY’s assets and future income such that EY would be unable to meet the substantial judgment debt (more than $2.7bn) that would arise if NMC prevails,” the administrators said in a written submission to the court during Monday’s preliminary hearing.

“EY has provided nothing in the way of confirmation or comfort that following the separation, it will be in a position to meet the damages award in these proceedings, including by reference to EY’s insurance cover,” they added.

Basically they just want to know that they’ll get their money, just like everyone else in this situation (including former partners).

Lawyers for the NMC administrators said they had asked EY to confirm that it had insurance to cover the amount claimed by NMC’s administrator. If EY could not give this confirmation, the administrators said it should disclose its net asset position in the UK, which stood at £248mn in July 2021.

The administrators said that if EY’s UK net assets were less than the $2.7bn claimed, it should confirm that it would not diminish or dissipate its assets by transferring its audit operations “for less than full market value” or make distributions to its partners. The final request would in effect prevent EY from paying its partners in the UK, who are remunerated out of the firm’s profits.

EY lawyers — who unsurprisingly think this lawsuit is a joke — said that the firm would provide “relevant information” to administrators “in good time.” The lawyers added that this move by NMC adminstrators was “premature and unnecessary” because planning for the separation “is paused”, and said the administrators’ request for information should be dismissed or adjourned, said FT. Take that how you will.

Those comically oversized bags of money partners were dreaming about when the split was first announced last year seem to be getting further and further from their reach…

The post Former Client Cockblocks the EY Split to Make Sure They Get the $2.7 Billion They’re Suing EY For appeared first on Going Concern.

(Auditors and people who scored a 71 or above on AUD may ignore this next part, you know this already) An audit isn’t the financial equivalent of a doctor running every blood test available and feeling around in your butthole with a gloved finger to figure out everything wrong with you. It’s more like a trip to your general practitioner, checking vitals, getting a routine complete blood count and basic metabolic panel, giving the patient a thorough look over, and determining that the patient is not in immediate medical danger. (Anyone with a better analogy that doesn’t involve rooting around in butts is welcome to message the editor, thank you) Auditors don’t provide absolute assurance but reasonable; stated another way: audits are not perfect, they are good enough. This of course opens the floor for a discussion about why even bother with audits then, a topic best left to people who know better than we do (Francine McKenna and Jim Peterson are two such people I can think of off the top of my head).

Back to the auditors. KPMG Chair and CEO Paul Knopp talked about his firm’s work on the failed banks at an event at the NYU Stern Center for Sustainable Business on Tuesday and made it clear that the firm stands behind their opinions, per an article in Financial Times yesterday. “As we take into account everything we know today . . . we stand behind the reports we issued and we think we followed all professional standards,” he said.

“You have a responsibility until the day you issue the audit report to consider all facts that you know, so we absolutely did do that. But what you can’t know with certainty is what might happen after that audit report is issued.”

“There were actions taken in the month of March that set off another set of reactions that led to those two institutions being closed,” he said.

12 days after KPMG said it is their opinion that the consolidated financial statements present fairly, in all material respects, the financial position of the Company in conformity with U.S. generally accepted accounting principles, SVB parent company SVB Financial Group disclosed it sold $21 billion of bonds and booked an after-tax loss of $1.8 billion.

Former Federal Reserve bank examiner Mark T. Williams told Fortune‘s Sheryl Estrada he thought the actions taken by SVB Financial Group in March were a risk nightmare and “a colossal failure in asset-liability risk management.”

“To prevent a crisis of confidence, SVB’s CEO and CFO should have relied more on an old-fashioned banking approach of diversification of its lending and deposit customers,” says Williams, a master lecturer in the finance department at Boston University’s Questrom School of Business. “Venture capital is a highly risky business. So not only did the bank expose its asset side of the balance sheet but also its liability side.”

“The CFO and, I would argue, the board failed to adequately protect shareholder value,” Williams says. “The board-appointed risk management committee, which works closely with the CFO, should have done adequate scenario analysis to examine the deposit withdrawal risk. That, in fact, was the bank’s downfall.”

During this time, Y Combinator CEO Garry Tan warned his organization’s startups to be wary of the developing situation as it could mean life and death for them. “We have no specific knowledge of what’s happening at SVB,” he wrote in an internal message seen by Bloomberg News. “But anytime you hear problems of solvency in any bank, and it can be deemed credible, you should take it seriously and prioritize the interests of your startup by not exposing yourself to more than $250K of exposure there. As always, your startup dies when you run out of money for whatever reason.” Let’s be real, he wasn’t saying “be wary.” He was saying “GTFO while you can.”

Meanwhile, there was a storm brewing online from the time KPMG issued their opinion on February 24 and Silicon Valley Bank’s collapse two weeks later, an event that would require a kind of clairvoyance not currently required by PCAOB standards to foresee. A day before regulators seized the bank, investors and depositors attempted to pull $42 billion from SVB. Precipitating that, an influential person said some things and people who value this person’s opinion reacted in swift and extreme fashion.

First reported on Fortune, Evan Armstrong of Napkin Math pinned the whole thing (“potentially“) on Byrne Hobart and his newsletter The Diff so expect lawmakers to say we should regulate newsletters any day now. Armstrong tweeted:

Kinda insane that this entire debacle was potentially caused by @ByrneHobart‘s newsletter. Here’s how the butterfly effect happened.

1) Byrne posts this article/Tweet calling out SVB’s risk.
2) Pretty much every VC I know reads this newsletter
3) They all start to pay very,… https://t.co/zUSKF1ZW4J

— Evan Armstrong (@itsurboyevan) March 11, 2023

Full text:

Kinda insane that this entire debacle was potentially caused by @ByrneHobart’s newsletter. Here’s how the butterfly effect happened.

1) Byrne posts this article/Tweet calling out SVB’s risk.
2) Pretty much every VC I know reads this newsletter
3) They all start to pay very, very close attention to SVB earnings
4) Absolutely massive earnings miss by SVB
5) Peter Thiel, USV, and Coatue are first to send out messages/mass emails to portfolio co’s to pull out funds
6) Tech Twitter catches word of this
7) Bank Run
8) Collapse
9) If FDIC/Buyer doesn’t come in, in the next 7 days, potential 20%+ collapse of entire startup industry.

All started by one overly prolific dude in Austin. Amazing.

He then links to the one overly prolific dude in Austin who tweeted this on February 23:

Also in today’s newsletter: Silicon Valley Bank was, based on the market value of their assets, technically insolvent last quarter and is now levered 185:1.

One thing to add—there was viral thread that talked about it earlier. I’ve also heard reports of 1 or 2 firms warning their portcos late last year. But my estimation is that this tweet/newsletter was the one that truly entered the vc hive consciousness https://t.co/ZXnUZmMLM8

— Evan Armstrong (@itsurboyevan) March 11, 2023

“I think Byrne helped tipped the industry into a frenzy, but the speed and ferocity of this was beyond anything I thought possible,” wrote Armstrong.

House Financial Services Committee Chairman Patrick McHenry (R-NC) called the events of the past few days “the first Twitter fueled bank run” and The Atlantic said earlier this week that the world’s first online-inspired bank run doesn’t bode well for the next major crisis. Finger-pointing at the internet aside, these incidents have once again put audit front and center as a checkbox exercise that even when performed perfectly is anything but perfect. And that’s when audits are done right, which they so often are not. So again the public has to ask: what is the point then? And who do we blame for this? 

Of these questions, ex-Freddie Mac CFO, former PwC partner, and former PCAOB chief auditor Marty Baumann said: “I suspect that may cause some people to question the value of an audit, but I believe the audit is incredibly valuable to investors. But I do question whether accounting disclosures of asset and liability duration mismatch is adequate.” Expect the PCAOB to start digging around in the SVB workpapers post haste.

A KPMG spokesperson provided the following statement to Going Concern regarding the SVB and Signature Bank audits: “Due to client confidentiality, we have no specific comment. We conduct our audits in accordance with professional standards. Any unanticipated events or actions taken by management after the date of an opinion could not be contemplated as part of the audit. It’s important to recognize that audit opinions, which only address the financial statements and internal controls of the business, are based on audit evidence available up to and at the date of the opinion.”

Whatever happened and how much of it should have been called out by auditors, I think we all agree that this is a bad look for a profession already struggling with optics.

Related:
This SVB Securities Exec’s Resume Reads Like a Wikipedia Page For 21st Century Accounting Trash Fires

The post WTF Happened at SVB and Should KPMG Auditors Have Seen It Coming? appeared first on Going Concern.

The FRC identified numerous, serious breaches — which were admitted to by PwC and former engagement partners Nicholas Campbell Lambert and Heather Ancient — including:

• Repeated failures to challenge management and obtain sufficient appropriate evidence, reflecting a general reluctance to challenge management across these parts of the audits; and
• Failure to follow basic audit requirements, evidencing a lack of competence, care or diligence. For example, there was no evidence that the audit team had, whether in FY2018 or before, obtained and read a 30-year Public Private Partnership contract with FY2018 revenue of c.£77m and lifetime revenue of £3bn, and one contract – with an initial value of c.€640m – was written in French, but the audit team neither possessed French language skills nor obtained a translation of the contract.
• For Babcock subsidiary Devonport Royal Dockyard Limited (DRDL), the FRC also discovered a false record of the audit evidence actually obtained in one workpaper relating to a sensitive government contract for FY2018.

The FRC says many of the matters to which the breaches relate were qualitatively material to users of the financial statements. In aggregate, the breaches ran the risk that a material misstatement in the FY2017 and/or FY2018 Babcock group Financial Statements may have gone undetected. In particular, had the auditor appropriately applied the audit standards in FY2018, they should have required clear disclosures in Babcock’s FY2018 Financial Statements explaining the positive impact on operating profit of significant one-off items.

As often happens in the UK, the FRC gave PwC and the partners a break on fines in exchange for admission of naughtiness. PwC has been fined £7,500,000, adjusted for aggravating and mitigating factors and discounted for admissions and early disposal by 25%, so that the financial sanction payable is £5,625,000. Mr Campbell Lambert has been fined £200,000, of which he will pay £150,000. DRDL engagement partner Ms. Ancient was fined £65,000 and will pay £48,750. Everyone involved is required to sign declarations stating, in essence, that they screwed up.

The FRC’s investigation into PwC’s work on the FY2019 and FY2020 Babcock audits is ongoing.

Said FRC Deputy Executive Counsel Claudia Mortimore: “The quality of these audits fell far short of the standards expected of statutory auditors. Of particular concern is the lack of scepticism applied and the failures to follow some basic audit requirements. This robust package of sanctions seeks to deter future breaches and encourage improvement by the firm., in circumstances where PwC has now been sanctioned four times since 2019. The financial sanctions have been reduced by 25% to reflect the admissions made and the settlement reached. PwC conducted effective self-reviews into four of the areas under investigation, and in this respect exhibited exceptional cooperation. However, this has not attracted a further discount to sanctions, as it was countered by examples of errors, omissions and delays in providing material to the investigation, as well as the provision of some unclear or inaccurate responses.”

Full Final Settlement Decision Notice here (PDF)

Sanctions against PwC and two former audit partners [Financial Reporting Council]

The post PwC UK Fined £7.5 Million For Faking Evidence and Other Such Terrible Auditing of a Government Contractor appeared first on Going Concern.

Armanino is ending its crypto audit practice and dropping clients, two sources familiar with the matter say.

The unit may be folding under pressure from Armanino’s non-crypto clients, concerned that reputational risk to the firm will throw their audits into question, according to a source with knowledge of the firm’s crypto offerings. Last month, Armanino was named in a class-action lawsuit for failing to catch irregularities at FTX.US after performing the exchange’s audit last year. The suit was filed by Stephen Pierce, an FTX customer who allegedly lost $20,000.

CoinDesk is now reporting that Armanino’s crypto team — including its leader — have struck out on their own and plan to offer a suite of services to crypto clients who haven’t been able to get these services from their former employer.

Members of the accounting firm Armanino’s digital-asset practice have departed and formed a new startup – The Network Firm – to carry on the business of providing audits, attestations and related work for crypto clients.

The move, confirmed to CoinDesk this week by people with knowledge of the matter, came after Armanino late last year decided to stop performing crypto audits, amid heightened scrutiny of its past work for a U.S. affiliate of Sam Bankman-Fried’s FTX exchange. Armanino has said it stands by its 2020 and 2021 audits of FTX US.

The official separation of the digital-asset team, led by Noah Buxton, took effect on Wednesday, the people said. According to the company’s LinkedIn page, The Network Firm was founded this year and is based in Miami.

The Network Firm website lists the following folks as the team (“CBP” = “Certified Bitcoin Professional,” a certificate issued by the CryptoCurrency Certification Consortium):

Noah Buxton
JD
Co-Founder & CEO

Jeremy Nau
CPA, CMA, CBP
Co-Founder & COO

Clayton Lowery
Co-Founder &
Chief Strategy Officer

Nick Ward
CPA, CBP
Co-Founder & Assurance Director

Ilya Okhotnikov
Lead Engineer

Wesley Barton
CBP
Manager, Digital Asset
Business Services

Thomas Ma
CBP
Supervising Senior Associate, Assurance

Jesse Fink
CPA, CBP, CEP
Manager, Assurance

Noah Buxton is (was?) partner and leader of Armanino’s Blockchain & Digital Assets practice and contributing writer and member of the AICPA Blockchain for SOC Working Group. He is still listed on Armanino’s site and there he is asked “What was it that drew you to Armanino?” His answer:

I was drawn to Armanino because it values the entrepreneurial spirit that I was searching for. When I came here in 2016, it was to build a risk assurance and advisory function, and it really resonated with me that you could build a business within a business here. We started with one staff member and a couple gifted clients, and it grew into the large department that it is today. Armanino’s platform for innovation and growth allowed my career to flourish in ways I never could have imagined.

It makes sense then that he would forge a different path now that Armanino has pulled back on all that innovation.

Former Accounting Team of FTX US Auditor Armanino Sets Up Shop as The Network Firm [CoinDesk]

The post Armanino’s Former Crypto Team Has Left and Formed Their Own Shop, Allegedly appeared first on Going Concern.

1. the PCAOB must have sole discretion to select the firms, audit engagements, and potential violations it inspects and investigates – without consultation with, nor input from, PRC authorities;
2. PCAOB inspectors and investigators must be able to view complete audit work papers with all information included and to retain information as needed;
3. the PCAOB must have direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.

Working off of a fact sheet released in December by the PCAOB, we find out that the PCAOB selected two firms for inspection — KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers in Hong Kong — and inspected eight audits between them. To test the “complete access” of HFCAA, PCAOB staff were especially interested in audit engagements to which PRC authorities had previously denied access, including issuer engagements that PRC authorities historically categorized as sensitive.

To test compliance with the agreement, the PCAOB requested that the transfer of documents take place on two occasions, with one batch transferred at the mid-point of inspection field work and a second batch transferred at the end of field work. PRC authorities met both deadlines and transferred to the PCAOB all documents, which were substantial in volume, as requested by the PCAOB to support the inspection work performed over the selected audit engagements.

While most people were too cautious to say that the successful inspection of Chinese firms could mean a new era of cooperation between China and the PCAOB, this week we have learned that any of those people who thought that would happen are probably going to be disappointed.

Bloomberg reports:

Chinese authorities have urged state-owned firms to phase out using the four biggest international accounting firms, signaling continued concerns about data security even after Beijing reached a landmark deal to allow US audit inspections on hundreds of Chinese firms listed in New York.

China’s Ministry of Finance is among government entities that gave the so-called window guidance to some state-owned enterprises as recently as last month, urging them to let contracts with the Big Four auditing firms expire, according to people familiar with the matter. While offshore subsidiaries can still use US auditors, the parent firms were urged to hire local Chinese or Hong Kong accountants when contracts come up, one of the people said, asking not to be identified discussing private information.

China is seeking to rein in the influence of the US-linked global audit firms and ensure the nation’s data security, as well as to bolster the local accounting industry, the people said. Beijing has been giving the same suggestion to state-backed firms for years, but recently re-emphasized that companies should use other auditors than the Big Four, the people added. No deadline has been set for the changes and replacements may happen gradually as contracts expire.

In making the decision which audits to inspect, the PCAOB specifically sought out those engagements that were previously considered sensitive in order to measure compliance with the complete access required under U.S. law. It seems China did not take too kindly to that.

Sorry to anyone who thought we were on the brink of a new age of cooperation and compliance between Beijing and Washington.

The post China Tells Its State-Owned Orgs Don’t Use Big 4 Audit Firms appeared first on Going Concern.

The FRC’s aggressive stance on audit quality and the increased attention that comes with it are not going over well at the mid-tiers according to an opinion piece by Michael O’Dwyer published in Financial Times yesterday.

If the audit market was once a wild west, rife with cosy relationships and low standards, some in the profession feel the regulatory pendulum has swung too far in the other direction, potentially discouraging smaller players from stepping up.

For firms like BDO and Mazars, tighter regulation makes their aim of auditing more large listed companies costly and painful ahead of reforms that would require FTSE 350 companies to have part of their audits done by a non-Big Four firm.

“The regulatory pressure is becoming unbearable,” says a senior auditor at one mid-tier firm of the demands from FRC supervisors.

The increased regulatory burden means the FRC is “cementing the oligopoly” of the Big Four, says a senior partner at another firm, lamenting the resources required to respond to constant requests from the watchdog.

This sudden heavy hand on the part of audit regulators couldn’t possibly be more ill-timed. Why couldn’t they get tough on audit quality back in 2010 when firms had a surplus of warm bodies to throw at audits? Now, with audits staffed by cardboard cutouts of seniors, they want to get extra tough on firms huh?

Writes O’Dwyer, the FRC isn’t stopping at mid-tiers. Of the 14 publicly announced audit investigations launched by the FRC in the past two years, nine have been against firms outside the Big 4, he says. Some of them you’ve never even heard of.

No article about mid-tier and lower firms would be complete without a totally unnecessary but hilarious dig at them. O’Dwyer did not let us down.

The firms also fear fines and reputational damage if things go wrong. Their concerns are well-founded given that FRC inspections have found work by auditors outside the top seven are of lower quality.

So any firm that isn’t BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars, or PwC sucks. Not that those seven are exactly killing it in the audit game either. Last July, the FRC called out Mazars and BDO specifically for “unacceptable” inspection results. Four of the eight audits reviewed at Mazars, and five of the 12 audits reviewed at BDO required more than limited improvements. This has brought increased scrutiny — “specific supervisory plans” — at these firms.

O’Dwyer says regulators cracking down on audit firms and their sloppy work was “overdue after years of bad practice” but coming down too hard on them could potentially push the smaller firms right off the map. Growth ambitions must also be tempered by a focus on quality first and foremost, said the FRC in its 2022 audit quality review. Meaning audit quality comes first, sub-Big 4 firms needing to upgrade their technology and push paper to keep the FRC off their backs is not really their problem.

The post Getting Tough on Mid-Tier Firms Will Only Cement the Big 4 Oligopoly, Says Audit Partner Whose Firm Needs to Git Gud appeared first on Going Concern.

Earlier this month, short seller Hindenburg Research dropped a report called Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History (report here) full of bullet points outlining the findings of Hindenburg’s two-year investigation into the Indian conglomerate. Among the various accusations: shoddy controls, nepotism, questionable shell company relations, and poor transparency (we’re being mild here).

A limited number of bullets from the report (yes this is “limited”):

• Many of the Vinod Adani-associated entities have no obvious signs of operations, including no reported employees, no independent addresses or phone numbers and no meaningful online presence. Despite this, they have collectively moved billions of dollars into Indian Adani publicly listed and private entities, often without required disclosure of the related party nature of the deals.
• We have also uncovered rudimentary efforts seemingly designed to mask the nature of some of the shell entities. For example, 13 websites were created for Vinod Adani-associated entities; many were suspiciously formed on the same days, featuring only stock photos, naming no actual employees and listing the same set of nonsensical services, such as “consumption abroad” and “commercial presence”.
• Our research indicates that offshore shells and funds tied to the Adani Group comprise many of the largest “public” (i.e., non-promoter) holders of Adani stock, an issue that would subject the Adani companies to delisting, were Indian securities regulator SEBI’s rules enforced.
• Adani Group’s obvious accounting irregularities and sketchy dealings seem to be enabled by virtually non-existent financial controls. Listed Adani companies have seen sustained turnover in the Chief Financial Officer role. For example, Adani Enterprises has had 5 chief financial officers over the course of 8 years, a key red flag indicating potential accounting issues.
• The independent auditor for Adani Enterprises and Adani Total Gas is a tiny firm called Shah Dhandharia. Shah Dhandharia seems to have no current website. Historical archives of its website show that it had only 4 partners and 11 employees. Records show it pays INR 32,000 (U.S. $435 in 2021) in monthly office rent. The only other listed entity we found that it audits has a market capitalization of about INR 640 million (U.S. $7.8 million).
• Shah Dhandharia hardly seems capable of complex audit work. Adani Enterprises alone has 156 subsidiaries and many more joint ventures and affiliates, for example. Further, Adani’s 7 key listed entities collectively have 578 subsidiaries and have engaged in a total of 6,025 separate related-party transactions in fiscal year 2022 alone, per BSE disclosures.
• The audit partners at Shah Dhandharia who respectively signed off on Adani Enterprises and Adani Total Gas’ annual audits were as young as 24 and 23 years old when they began approving the audits. They were essentially fresh out of school, hardly in a position to scrutinize and hold to account the financials of some of the largest companies in the country, run by one of its most powerful individuals.

The last auditors to touch Adani were the prodigy partners mentioned above. At the time that story dropped, there was mention of getting a Big 4 firm to give Adani a look and an Adani investor with $3 billion in exposure said it “welcomes the announcement by Adani to mandate one of the ‘big four’ accounting firms to carry out a general audit,” though no such arrangement was announced. We here at GC wondered out loud if Big 4 firms would even touch this mess, a report in Reuters yesterday answers in the negative that no, no they won’t.

India’s Adani Group has appointed accountancy firm Grant Thornton for independent audits of some of its companies in a bid to discredit claims by short-seller Hindenburg Research that have battered its stocks and bonds, two people familiar with the matter said on Monday.

The appointment marks the first major effort by Adani Group to defend itself in the wake of a Jan. 24 report by Hindenburg that accused it of improper use of offshore tax havens and stock manipulation.

The conglomerate, led by billionaire Gautam Adani, has strongly denied the allegations but investors remain concerned. Shares in the group’s seven listed subsidiaries have cumulatively lost about $120 billion in market value in the last three weeks.

The source told Reuters Grant Thornton has been hired to conduct independent audits of some Adani Group companies, and that GT would look at whether related-party transactions at Adani Group complied with corporate governance standards. We are eager to hear what Grant Thornton finds.

Update: Adani Group denies the Reuters report.

The post Grant Thornton Scores Coveted ‘Hot Garbage’ Audit (UPDATE) appeared first on Going Concern.

Adani Group Chairman and founder Gautam Adani is the third richest man in the world; at one point he was second, just behind Elon Musk. Wait scratch that, he was the third richest man in the world up until recently. He lost $36 billion of his net worth in January, the most of any billionaire tracked by Bloomberg.

We are not here to discuss the entire Hindenburg report and its accusations. We are here to talk about how Hindenburg sniffed out Adani’s audit firm and what it found.

From the report:

The independent auditor for Adani Enterprises and Adani Total Gas is a tiny firm called Shah Dhandharia. Shah Dhandharia seems to have no current website. Historical archives of its website show that it had only 4 partners and 11 employees. Records show it pays INR 32,000 (U.S. $435 in 2021) in monthly office rent. The only other listed entity we found that it audits has a market capitalization of about INR 640 million (U.S. $7.8 million).

Shah Dhandharia hardly seems capable of complex audit work. Adani Enterprises alone has 156 subsidiaries and many more joint ventures and affiliates, for example. Further, Adani’s 7 key listed entities collectively have 578 subsidiaries and have engaged in a total of 6,025 separate related-party transactions in fiscal year 2022 alone, per BSE disclosures.

The audit partners at Shah Dhandharia who respectively signed off on Adani Enterprises and Adani Total Gas’ annual audits were as young as 24 and 23 years old when they began approving the audits. They were essentially fresh out of school, hardly in a position to scrutinize and hold to account the financials of some of the largest companies in the country, run by one of its most powerful individuals.

Hindenburg backs up these claims with copies of the auditors’ IDs, Adani Group said publishing this information showed a “brazen disregard of personal privacy and safety.”

We won’t publish the IDs but we will show you this photo of what appears to be Shah Dhandharia offices.

At some point during Hindenburg’s two-year investigation into Adani Group, Shah Dhandharia’s website disappeared. Archived versions of the website as of February 2020 show that the firm was comprised of only four audit partners and seven support staff. Hindenburg found only one other client audited by Shah Dhandharia, a penny stock called Globe Textiles with a market cap of approximately INR 640 million (U.S. $7.8 million).

Said Adani Group in its 413 page response to the Hindenburg Research report [PDF]: “All these auditors who have been engaged by us have been duly certified and qualified by the relevant statutory bodies who are responsible to determine these benchmarks. All our auditors have been appointed in compliance with applicable laws.”

“The financials and public documents of the Adani portfolio entities clearly disclose Shah Dhandharia & Co as our auditor to all regulators and stakeholders and hence, it is unclear what new findings are being brought to light by Hindenburg,” said Adani.

“The truth of the matter is that Hindenburg is an unethical short seller. A short seller in the securities market books gain from the subsequent reduction in prices of shares. Hindenburg took “short positions” and then, to effect a downward spiral of share price and make a wrongful gain, Hindenburg published a document to manipulate and depress the price of stock, and create a false market,” Adani said. “Thus, the report is neither ‘independent’ nor ‘objective’ nor ‘well researched’.”

Hindenburg disclosed short positions through U.S.-traded bonds and non-Indian-traded derivative instruments in the opening of the report.

TotalEnergies, a large multinational energy company headquartered in France and investor in Adani Group entities since 2018, issued a statement earlier today saying it “welcomes the announcement by Adani to mandate one of the ‘big four’ accounting firms to carry out a general audit.” You’ll note that language is not the same as “a Big 4 firm has been engaged by Adani to perform an audit” but you knew that.

That news release:

TotalEnergies’ investments in Adani’s entities were undertaken in full compliance with applicable – namely Indian – laws, and with TotalEnergies’ own internal governance processes. The due diligence, which were carried out to TotalEnergies’ satisfaction, were consistent with best practices, and all relevant material in the public domain was reviewed, including the detailed disclosures to regulators required under applicable laws.

The entities TotalEnergies has invested in with Adani are managed in accordance with applicable regulations. The day-to-day operations of the entities listed in India, Adani Total Gas Limited (ATGL) and Adani Green Energy Limited (AGEL), are managed by independent teams of professional managers, and their boards are composed of at least 50% independent and non-executive directors (5/9 for ATGL and 5/10 for AGEL). S. R. Batliboi & Co. LLP, a member company of the international financial audit firm EY is AGEL’s statutory auditor.

The following table lists TotalEnergies’ current stakes in ventures with Adani:

Adani Total Private Limited	50%
Adani Total Gas Limited (cotée)	37.4%
Adani Green Energy Limited (cotée)	19.75%
AGEL23	50%

TotalEnergies’ exposure resulting from these stakes is limited, as it represents 2.4% ($3.1 billion at December 31, 2022) of the Company’s capital employed and only $180 million of net operating income in 2022. These investments being accounted for under the equity method, TotalEnergies has not performed any re-evaluation in its accounts of its stakes in the listed entities ATGL and AGEL in relation to the increase in their stock values.

CNN said Adani Group declined to comment on whether it was planning to appoint one of the Big 4 accounting firms as auditor. CNN also contacted all four firms, none responded immediately to a request for comment. Would firms even touch this?

Read the full Hindenburg Research report here.

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In total, the Nasdaq and NYSE exchanges saw only 191 IPOs in 2022, according to Audit Analytics. Together, these companies raised a little more than $21.5 billion, an average of $112.9 million per offering. Total IPOs reached a five-year low in 2022, dropping 81.9% from the previous year, and gross proceeds also dropped by 93.6% from 2021—the lowest seen over the five-year period.

The fourth quarter continued the trend in 2022 of traditional IPOs outnumbering those done via a special-purpose acquisition company (11 vs. nine). Of the 191 IPOs in 2022, 104 were traditional listings while 87 were SPACs. Audit Analytics said:

The number of SPAC IPOs has spiked significantly over the past two years. The fiscal year (FY) 2020 saw a 320% increase in SPAC IPOs, followed by another 147% increase in FY 2021. However, in 2022 SPAC IPOs decreased for the first time over the five-year period, dropping 85.8% from FY 2021.

Skadden, a law firm that specializes in mergers and acquisitions law, said the slowdown in SPACs last year can be attributed to several factors, including disappointing performance by newly de-SPACed companies, rising inflation, macroeconomic uncertainty, and increased regulatory scrutiny.

So which firms audited the 20 IPOs in Q4? UHY led the market share with four IPO clients, raising $230 million in total, Audit Analytics said. Marcum and PwC followed with two clients each. PwC’s clients raised the most with $269 million in gross proceeds.

PwC led the traditional IPO market share with two clients, followed by nine firms with one each. The firm that was involved in the most IPO audits in 2022 was Marcum with 43 clients, representing 22.5% of the market share. Friedman was second with 18 clients at just over 9% of the market share. Following Friedman’s merger with Marcum in September, 15 of Friedman’s IPO clients are currently being audited by Marcum. In total, the top 10 audit firms made up 67.5% of the IPO audit market share in 2022.

Excluding SPACs, PwC had the most IPO audit clients with 11, and PwC’s clients also raised the most, with nearly $3.2 billion in gross proceeds total. Marcum and Friedman tied for second with nine traditional IPO clients each. Although Deloitte ranked fourth, their clients accumulated the second-highest gross proceeds at $1.7 billion.

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But that three-year streak of perfection came to an end, according to its recently released 2021 PCAOB inspection report. The firm messed up on one of its nine audits inspected, and it pertained to the financial statement audit only.

So that’s one mistake in the last 35 audits inspected, for a deficiency rate of 2.8%. If you include the last time Cohen & Company auditors screwed up an audit, which was in 2017, that’s two mistakes in the last 43 audits inspected, for a deficiency rate of 4.6%.

As the PCAOB noted at the bottom of the above graphic, Cohen & Company didn’t sufficiently evaluate significant assumptions that the issuer used in developing an estimate. The issuer in question is a registered management investment company in the financials sector with net assets under $1 billion. The PCAOB said:

The issuer held certain investments that were categorized as level 3 within the fair value hierarchy as set forth in FASB ASC Topic 820, Fair Value Measurement. The firm’s approach for substantively testing the valuation of these investments was to develop independent estimates. The firm did not evaluate the relevance of the pricing information and the appropriateness of another input the firm used in developing its fair value estimates of these investments.

It’s important to note that all nine of Cohen & Company’s audits inspected by the PCAOB during its most recent inspection cycle were financial statement audits only. No integrated audits of financial statements and internal control over financial reporting (ICFR) were reviewed. Compare that with, say, PwC, which during its last inspection had 47 integrated audits of financial statements and ICFR reviewed and nine more that were financial statement audits only. PwC has only made three mistakes in its last 108 audits inspected, for a deficiency rate of 2.8%.

We know Cohen & Company, the 51st largest accounting firm in the U.S. by revenue, isn’t on the same playing field as PwC, the second largest firm in the U.S. and in the world. But excellence—no matter how big or small—should be celebrated, especially during this time of dour audit quality. You can peruse Cohen & Company’s 2021 PCAOB inspection report below.

The post Turns Out Cohen & Company Auditors Are Human After All appeared first on Going Concern.

KPMG expects to increase its audit fees this year as the accounting firm looks to offset higher costs from regulatory requirements and operating expenses.

“The price of audit will have to increase this year,” the firm’s UK chief executive officer Jon Holt said in an interview with Bloomberg as the firm published its annual results. “The sector is facing a number of upward cost drivers, from new audit and accounting standards to inflationary pressures.”

“Higher costs from regulatory requirements” may include the numerous Financial Reporting Council fines levied against KPMG in recent years. For the fiscal year ended March 2022, audit firms in the UK were fined a record £46.5 ($57.3 million USD), more than half of that was levied against KPMG alone for a grab bag of audit mishaps. Total FRC fines are up £16.7 million from the fiscal year prior and the regulator is taking a similar approach to our own PCAOB this side of the Atlantic: zero tolerance.

KPMG is not unique in raising fees, revenue generation for the FRC Fine Department aside (note: no such department actually exists). In December, Big 4 firms’ largest clients across the pond wrote a strongly-worded letter about audit fee increases. “At this time of increasing cost pressure on big business we should not be expected to pick up the escalating costs within service company supply chains through further price increases,” read the CFOs’ letter to their auditors. “[The CFOs] do not commission our work and they are not the ones who we are reporting to,” said one audit partner in response to the letter.

The Bloomberg article goes on to discuss KPMG UK partner pay — the lowest of Big 4 firms at £717,000 for each of the firm’s 786 partners — and investments in people and technology:

KPMG UK said it invested £130 million into new hires and technology in 2022 as part of a push to expand the range of services it offers to clients. The firm also increased its bonus pot to over £105 million.

The firm hired over 4,500 people in the 12 months to September, and has a total of 16,036 employees on its payroll.

“Every area of the business contributed to our growth, showing the important role our multi-disciplinary model plays to support our clients,” said Jon Holt, KPMG’s UK chief executive officer.

Is that a dig at EY? Oh yeah, definitely is.

KPMG UK CEO Says Audit Fees Will Increase Despite Complaints [Bloomberg]

The post The Most-Fined Big 4 Firm in the UK is Raising Audit Fees, Knows Clients Will Complain About It appeared first on Going Concern.

Our 2021 inspection report on RSM US LLP provides information on our inspection to assess the firm’s compliance with Public Company Accounting Oversight Board (PCAOB) standards and rules and other applicable regulatory and professional requirements. This executive summary offers a high-level overview of:

Part I.A of the report, which discusses deficiencies (“Part I.A deficiencies”) in certain issuer audits that were of such significance that we believe the firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion(s) on the issuer’s financial statements and/or internal control over financial reporting (ICFR); and

Part I.B of the report, which discusses deficiencies that do not relate directly to the sufficiency or appropriateness of evidence the firm obtained to support its opinion(s) but nevertheless relate to instances of non-compliance with PCAOB standards or rules.

[…]

Four of the 17 audits we reviewed in 2021 are included in Part I.A of this report due to the significance of the deficiencies identified. The identified deficiencies primarily related to the firm’s testing of controls over and substantive testing of revenue and related accounts and the allowance for credit losses/allowance for loan losses.

That comes out to a deficiency rate of 23.5%—a much better showing for a firm that not too long ago had an error rate of 73%.Of the four botched audits in 2021, all of them had problems in both ICFR and in the financial statement, with the most common deficiencies related to testing the design or operating effectiveness of controls selected for testing, testing controls over the accuracy and completeness of data or reports used in the operation of controls, testing the accuracy and completeness of information used to make selections for testing controls, and in some cases the resulting overreliance on controls when performing substantive testing, according to the PCAOB.

The three areas of the audit that were the biggest pains in the ass for RSM auditors were:

• Revenue and related accounts: The deficiencies in 2021 related to testing controls over revenue and related accounts and the resulting overreliance on controls when performing substantive testing.
• Allowance for credit losses/allowance for loan losses: The deficiencies in 2021 and 2020 primarily related to substantive testing of, and testing controls over, the valuation of the allowance for credit losses/allowance for loan losses.
• Inventory: The deficiencies in 2021 related to testing controls over inventory and the resulting overreliance on controls when performing substantive testing.

Of the four audits that weren’t up to snuff, two were for issuers in the financials sector, and the other two were for issuers in the industrials sector. RSM auditors got gold stars for their audits of issuers in the communication services, consumer discretionary, consumer staples, energy, IT, and materials sectors.

You can read the report in its full glory below. Let us know if anything else stands out to you.

The post RSM US Finally Might Be Taking Audit Quality a Little More Seriously, According to 2021 PCAOB Inspection Report appeared first on Going Concern.

From 2016 until its 2020 inspection report, Grant Thornton had an average audit failure rate of about 21%. Not bad for a firm that had an average audit failure rate of 44% from 2010 to 2015. For 2021, GT’s audit failure rate is right around its most recent five-year average:

Our 2021 inspection report on Grant Thornton LLP provides information on our inspection to assess the firm’s compliance with Public Company Accounting Oversight Board (PCAOB) standards and rules and other applicable regulatory and professional requirements. This executive summary offers a high-level overview of:

Part I.A of the report, which discusses deficiencies (“Part I.A deficiencies”) in certain issuer audits that were of such significance that we believe the firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion(s) on the issuer’s financial statements and/or internal control over financial reporting (ICFR); and

Part I.B of the report, which discusses deficiencies that do not relate directly to the sufficiency or appropriateness of evidence the firm obtained to support its opinion(s) but nevertheless relate to instances of non-compliance with PCAOB standards or rules.

[…]

Seven of the 31 audits we reviewed in 2021 are included in Part I.A of this report due to the significance of the deficiencies identified. The identified deficiencies primarily related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts and inventory.

Seven botched audits out of 31 inspected comes out to a failure rate of 22.6%, the same rate as its 2019 inspection report but not as good as its 17.2% rate in 2020, which was an all-time best for Grant Thornton.

For 2021, five audits had problems in both internal control over financial reporting and in the financial statement, one had deficiencies in the financial statement only, and one had deficiencies in ICFR only. The most common Part I.A deficiencies in 2021 related to identifying controls related to a significant account or relevant assertion, testing controls over the accuracy and completeness of data or reports used in the operation of controls, evaluating the appropriateness of the issuer’s accounting method or disclosure, and performing substantive testing to address a risk of material misstatement, according to the PCAOB.

Three areas of the audit that Grant Thornton auditors found problematic were:

• Revenue and related accounts: The deficiencies in 2021 (as well as in 2020 and 2019) related to substantive testing of, and testing controls over, revenue.
• Inventory: The deficiencies in 2021 related to substantive testing of, and testing controls over, the valuation of inventory.
• Business combinations: The deficiencies in 2021 (as well as in 2020 and 2019) primarily related to substantive testing of, and testing controls over, the reasonableness of assumptions used by the issuer to determine the fair values of acquired intangible assets.

Grant Thornton auditors nailed all of their audits for issuers in the energy, financials, and real estate sectors, but they flubbed three out of 11 audits reviewed for issuers in the industrials sector, half of the audits inspected for issuers in the IT and communication services sectors, one out of three for issuers in health care, and one out of five for issuers in the consumer discretionary sector.

Ever read a Grant Thornton inspection report from the PCAOB? If not, now’s your chance.

The post Grant Thornton’s 2021 PCAOB Inspection Report Wasn’t Too Bad appeared first on Going Concern.

In the 2021 inspection of BDO USA, LLP, the PCAOB assessed the firm’s compliance with laws, rules, and professional standards applicable to the audits of public companies.

We selected for review 30 audits of issuers with fiscal years generally ending in 2020. For each issuer audit selected, we reviewed a portion of the audit. We also evaluated elements of the firm’s system of quality control.

We also selected for review two reviews of interim financial information (“interim reviews”). Our reviews were performed to gain a timely understanding of emerging financial reporting and auditing risks associated with issuers that were formed by mergers between non-public operating companies and special purpose acquisition companies (SPACs). We identified instances of non-compliance with PCAOB standards, which appear in Part I.B.

[…]

Sixteen of the 30 audits we reviewed in 2021 are included in Part I.A of this report due to the significance of the deficiencies identified. The identified deficiencies primarily related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts and expenses.

Terrible PCAOB inspection reports are par for the course for BDO lately. For the second straight inspection cycle, the PCAOB found significant mistakes in more BDO audits than ones without (16 out of 30 in 2021 and 13 out of 24 in 2020). As a result, BDO followed its 54.2% failure rate in its 2020 inspection report with a failure rate of 53.3% in 2021.

For 2021 inspections, six audits had problems in both internal control over financial reporting and in the financial statement, nine had deficiencies in the financial statement only, and one ICFR audit wasn’t up to snuff.

The most common Part I.A deficiencies related to evaluating the appropriateness of the issuer’s accounting method or disclosure, performing substantive testing to address a risk of material misstatement, testing the design or operating effectiveness of controls selected for testing, and testing controls over the accuracy and completeness of data or reports used in the operation of controls., according to the PCAOB.

The three main areas of the audit where the most errors were found included:

• Revenue and related accounts: The deficiencies in 2021 (as well as in 2020 and 2019) primarily related to substantive testing of, and testing controls over, revenue.
• Expenses: The deficiencies primarily related to substantive testing of expenses, including deficiencies in substantive analytical procedures performed to test expenses.
• Allowance for credit losses/Allowance for loan losses: The deficiencies in 2021 (as well as in 2020 and 2019) related to testing controls over the valuation of the allowance for credit losses or allowance for loan losses.

Of the seven audits of issuers in the financials sector, BDO botched five of them. BDO also failed four of its six audits of issuers in the consumer discretionary sector, three out of five audits in industrials, one out of two in consumer staples, one out of four in health care, one out of two in materials, and it flubbed its only audit of an issuer in real estate. But congrats to BDO auditors for making no screw ups in their three audits of issuers in the IT sector.

The House of Berson did announce last May that it was doing some stuff to improve the quality of its auditing. First, it formed an Audit Quality Advisory Council. Then the firm said it had reorganized its assurance practice into two distinct functional areas and reporting structures. BDO said the purpose of the reorganization was “to consolidate the operational, professional, and client services under one umbrella and to implement an objective governance structure focused on delivering high-quality audits to protect investors and further the public interest.”

Time will tell if any of that will make BDO less shitty at auditing. The firm’s latest inspection report is below for your amusement.

The post BDO USA Botched More Than Half of Its Audits Inspected By the PCAOB In 2021 appeared first on Going Concern.

2022 was also the year the PCAOB handed out the largest civil money penalty against an individual in PCAOB history ($150,000). Will they beat their high score this year? The odds are pretty good. If you have caught any of PCAOB Chair Erica Williams’ speeches in the last 12 months, you know that she and the PCAOB are done playing around.

According to FT, all this fining might do some good. The PCAOB is planning “a big expansion” of its scholarship program for students this year.

Under the law that created the PCAOB 20 years ago, in the wake of the accounting scandal at Enron, the fines it collects are put in a scholarship fund and distributed to promising accounting students across the US to help cover tuition and other education costs.

The agency gave out 250 awards in 2022 and is planning as many as 325 this year, according to PCAOB chair Erica Williams.

“We have to make sure that investors are protected today, but we’re looking to make sure they’re protected tomorrow as well,” she said. “There is a decreasing number of people majoring in accounting, and this is our opportunity to pull more young people into the field and also to expand the types of young people who see it as a path for themselves.”

The PCAOB Scholars Program has handed out more than $18 million in scholarships since 2011. These scholarships are one-time awards and cover direct education expenses like tuition and books.

So yeah. The fines will continue until morale improves. Nice to know all that bad auditing is doing some good.

Related: KPMG Still Rocks at Having the Worst PCAOB Inspection Report Among the Big 4

The post Believe It Or Not, KPMG Is Helping to Fix the Accountant Shortage Through Its Terrible Audit Work appeared first on Going Concern.

In the 2021 inspection of KPMG LLP, the PCAOB assessed the firm’s compliance with laws, rules, and professional standards applicable to the audits of public companies.

We selected for review 54 audits of issuers with fiscal years generally ending in 2020. For each issuer audit selected, we reviewed a portion of the audit. We also evaluated elements of the firm’s system of quality control.

We also selected for review two reviews of interim financial information (“interim reviews”). Our reviews were performed to gain a timely understanding of emerging financial reporting and auditing risks associated with issuers that were formed by mergers between non-public operating companies and special purpose acquisition companies (SPACs). We did not identify any instances of non-compliance with PCAOB standards related to the interim reviews that we reviewed.

[…]

Fourteen of the 54 audits we reviewed in 2021 are included in Part I.A of this report due to the significance of the deficiencies identified. The identified deficiencies primarily related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts, allowance for credit losses, inventory, and going concern.

So that’s an error rate of 26%, which is behind EY’s 21.4%, Deloitte’s 13%, and PwC’s 3.6%. The good news for KPMG is its deficient rate for 2021 was slightly better than the one in its 2020 auditing report card—26% vs. 26.4%.

For 2021, eight audits had problems in both internal control over financial reporting and in the financial statement, two had deficiencies in the financial statement only, and four had deficiencies in ICFR only. The most common Part I.A deficiencies related to testing the design or operating effectiveness of controls selected for testing, testing controls over the accuracy and completeness of data or reports used in the operation of controls, testing data or reports used in substantive testing, and in some cases the resulting overreliance on controls when performing substantive testing, according to the PCAOB.

The five main trouble spots for KPMG auditors were:

• Revenue and related accounts: The deficiencies in 2021 (as well as in 2020 and 2019) related to substantive testing of, and testing controls over, revenue.
• Allowance for credit losses: The deficiencies in 2021 primarily related to testing controls over the allowance for credit losses.
• Inventory: The deficiencies in 2021 primarily related to testing controls over the existence of inventory.
• Going concern: The deficiencies in 2021 primarily related to substantive testing of the evaluation of an issuer’s ability to continue as a going concern.
• Investment securities: The deficiency in 2021 related to testing a control over the evaluation of investment securities for possible impairment.

KPMG failed five of its nine audits for issuers in the financials sector, while mistakes were found in three of the seven audits of issuers in the consumer discretionary sector, three of the 12 audits of issuers in the industrials sector, two of the seven audits of issuers in the IT sector, and in one of the four audits of issuers in the energy sector. KPMG did get a passing grade in its audits of issuers in the communications, consumer staples, materials, real estate, and utilities sectors.

You can read more about the 2021 audit inspection season at KPMG below.

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