Takeaways from the PCAOB’s Latest Sweep for Violations Relating to Audit Committee Communications or Reporting Requirements
By Matthew Rogers, September 30, 2024
Last week the PCAOB Sanctioned five audit firms for violations related to audit committee communications or reporting requirements. The PCAOB imposed censures, $165,000 in total fines, and remedial undertakings that include training and improvement to policies and procedures.
A brief summary of some of the alleged violations and the related civil money penalties imposed by the Board follows:
· Audit Committee Communications: Two of the audit firms were found by the PCAOB to have failed to make required communications to client audit committees. For example, both firms were found to have failed to communicate the names, locations, and planned responsibilities of other independent public accounting firms, who were not employed by the auditor, that performed audit procedures in the audit as required by AS 1301.10d. Additionally, one of these firms was found to have violated other audit committee communications requirements, such as failing to communicate all material weaknesses identified during the audit under AS 1305.04, among other things, in writing. The board imposed a civil money penalty of $40,000 on one of these firms and $45,000 on the other.
· Audit Committee Pre-Approval of Certain Tax Services: Two of the audit firms were found by the PCAOB to have failed to document pre-approval from a client’s audit committee of certain permitted tax services in violation of AS 1215, Audit Documentation. These firms were also accused of failing to “discuss with the audit committee of the issuer the potential effects of the services on the independence of the firm,” and to “document the substance of its discussion with the audit committee of the issuer,” in compliance with PCAOB Rule 3524. The board imposed a $30,000 civil money penalty on the two firms.
· PCAOB Form 3: The fifth audit firm was found to have failed to file a Form 3 with the board on time. Specifically, the firm did not report the initiation of a disciplinary proceeding brought by the U.S. Securities and Exchange Commission against the firm and its namesake partner for two years, as required by PCAOB Rule 2203, Special Reports. The board imposed a $20,000 civil money penalty on this firm.
The PCAOB is Actively Searching for Violators
According to the release, the four PCAOB orders relating to audit committee communications and pre-approval resulted from an ongoing PCAOB sweep that led to previous sanctions on four firms in February 2024, three firms in November 2023, and five firms in July 2023.
The fifth firm, which was flagged for a violation of Rule 2203, Special Reports, was “identified through regular monitoring that the PCAOB conducts of registered firms’ compliance with the requirement to timely report events listed in Form 3,” according to the PCAOB’s release.
Although not mentioned in this PCAOB release, the PCAOB has also been actively monitoring Form AP filings, the PCAOB form used to report the names of engagement partners and other accounting firms that precipitated in the audit. The PCAOB has settled more than 30 cases involving Form AP violations since 2019 and has similarly conducted sweeps in this area. Typical violations in this category include untimely submissions and failures to properly report other accounting firms that participated in the audit.
Takeaways
The PCAOB will continue to search for violations relating to audit committee communications, the preapproval of non-audit services, and the timely and accurate filing of required PCAOB forms (Form 3 and Form AP) through inspections, sweeps, and other monitoring activities.
The monetary and reputational damage of a PCAOB enforcement investigation and ensuing action is severe. The cost of compliance is high, but pales in comparison to the cost of enforcement defense and litigation. It would be beneficial for firms of all sizes to conduct a self-assessment of its policies, procedures, tools, templates, forms, and guides to ensure the firm is ready for the upcoming audit season and remains off the regulatory radar screen.
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