The paper-pushers at the PCAOB have punished another audit firm for running afoul of their rules, this time it’s Smythe of British Columbia, Canada and no one involved in this story is based in the United States except for said paper-pushers.
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]
Investors and companies are not going to appreciate not being able to find an auditor when the PCAOB is through.