The PCAOB has been fairly busy on the enforcement front and of the three cases it settled this month, all include an independence violation and therefore, violations of federal securities laws. One also included a finding of failure to meet the Board's quality control requirements and another, failure to meet the Board's auditing standards.
Case 1 involved a small firm in California that prepared and then audited its client's financial statements. The Board asserted that the firm also fell short by failing to gather enough evidence to support the opinion, which they attributed to a lack of due care and professional skepticism (i.e., they failed to corroborate management's statements about the ownership of a patent that comprised nearly all of the company's assets). To top things off, the firm also did not perform an engagement quality review, which violated the Board's Auditing Standard No. 7. The firm voluntarily disclosed the independence and AS 7 violations to the PCAOB, which the Board considered in imposing a censure on the CPA and the firm and suspending the CPA's and the firm's PCAOB registration for one year.
Case 2 involved an affiliate of a large firm in Hungary that audited and issued a client's financial statement despite the existence of material unpaid fees to the firm. The Board also found the firm in violation of PCAOB Rule 3526 on audit committee communications because it failed to raise the independence issue with the audit committee. Lastly, the Board found that the firm had not established suitably designed and functioning policies and procedures to help the firm comply with the independence rules. The Board imposed a $20K civil money penalty and directed the firm to take remedial actions by establishing policies and procedures to provide reasonable assurance of compliance with independence requirements, including training, and to certify to the Board in writing within 120 days evidence of compliance with the Order.
Case 3 involves a small firm in Florida that audited a client's financial statements despite the fact that the engagement quality reviewer's son was in an accounting role at the client during periods covered by the financial statements. The Board revoked the firm's registration (firm can re-apply after one year) and imposed a civil money penalty of $5K.