The Ernst & Young global network’s member firm in Indonesia has agreed to pay a $1 million penalty to the Public Company Accounting Oversight Board for audit failure, noncooperation, and violations of the board’s quality control standards.

Two audit partners at the firm, known as KAP Purwantono, Suherman & Surja, were also sanctioned for their roles in the audit failure in 2011 involving an Indonesian telecommunications company. The former professional practice director for the EY network’s Asia-Pacific region and a former EY Indonesia engagement partner were sanctioned for the audit failure, while the former engagement partner was also sanctioned for noncooperation with a PCAOB inspection and investigation.

PCAOB chairman James Doty
PCAOB chairman James Doty Photographer: Rich Clement/Bloomberg

EY acknowledged the behavior violated its own code of conduct. “Audit quality is EY’s highest priority,” said a statement forwarded by spokespeople Yvonne Diaz and John La Place. “This conduct at issue here goes against EY’s Global Code of Conduct, culture, values, policies and training. Since the events in this matter, we have continued to strengthen the rigor in our global audit processes and policies. We continually review and enhance our audit procedures, electronic tools, policies and training for our people around the world. We take our responsibilities very seriously and remain committed to delivering the highest quality work consistent with professional standards.”

A U.S.-based EY partner performing a review required by PCAOB standards told the engagement partner he thought the company didn’t provide enough evidence to support the accounting for more than 4,000 leases for spaces on cellular towers. In response, the engagement partner contacted the regional professional practice director. But despite the review partner's concerns, the director authorized the engagement partner to release the audit report, subject to the company completing its lease accounting analysis in the future and the engagement partner informing management that a restatement could be required. EY Indonesia then released its unqualified audit opinion without getting the finished analysis.

Not long before a 2012 PCAOB inspection of the audit, members of the EY Indonesia engagement team improperly created dozens of new audit work papers. During the inspection, the engagement partner participated in improperly creating another work paper that was given to PCAOB inspectors. EY Indonesia and the engagement partner then failed to cooperate with the investigation.

“Reliable audits are critical to providing investors a basis for confidence to participate in U.S. public capital markets,” said PCAOB chairman James R. Doty in a statement. “PCAOB standards and oversight are key protections for investors in U.S. securities. Wherever located, all audit firms that elect to register with the PCAOB must ensure that they and their personnel comply and cooperate with PCAOB inspections and investigations.”

The PCAOB gave “extraordinary cooperation credit” to a member of the 2011 audit engagement team who lent the board a great deal of help in investigating the misconduct.

The sanctioned auditors included Roy Iman Wirahardja, who was censured, fined $20,000, and barred for five years from association with a PCAOB-registered public accounting firm. He is no longer associated with EY Indonesia. James Randall Leali, a former professional practice director for the EY network's Asia-Pacific region, was censured, fined $10,000, and restricted for one year from acting as an engagement partner, an engagement review partner or professional practice director. Neither of them admitted or denied the allegations.

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