PCAOB crackdown shifting to focus on firms

The Public Company Accounting Oversight Board has been cracking down on firms and auditors alike, according to a new report. 

The report, released Wednesday by Cornerstone Research, found the PCAOB publicly disclosed 46 total enforcement actions, 37 of which related to the performance of an audit (auditing actions), an increase of more than 28% from 2022. Twenty-nine of the 37 auditing actions were concluded in the second half of 2023, matching the total number of auditing actions for 2022. Monetary penalties totaled $19.7 million, nearly doubling the previous record of approximately $10.5 million in 2022.

The study came out even as the PCAOB announced one of its biggest fines ever, for exam cheating.

"There was a notable shift in the types of respondents in 2023 auditing actions," said Jean-Philippe Poissant, who co-authored the  report and is co-head of Cornerstone Research's accounting practice, in a statement. "In the past, two-thirds of respondents were individuals. Yet in 2023, two-thirds of respondents were firms. This shift was the result of a substantial jump in the number of auditing actions that only involved firms."

The great majority — 79% — of the auditing actions in 2023 included alleged violations of auditing standards. Some 60% of those actions included additional allegations related to ethics and independence standards, quality control standards, or both. For the first time, the PCAOB included allegations related to critical audit matters, or CAMs, in enforcement actions, with three actions including such allegations.

Of the $19.7 million in total monetary penalties in 2023, $18.8 million were imposed on firms, nearly twice the $9.5 million imposed on firms in 2022. Some 15% of the firm respondents were required to obtain an independent consultant.

Many of the penalties involve firms outside the U.S., as in the cases today involving Big Four affiliates in the Netherlands, Indonesia and the Philippines.

"More than two-thirds of the PCAOB's record-setting monetary penalties were imposed on non-U.S. respondents in 2023, even though non-U.S. respondents accounted for less than half of the auditing actions during the year," said Russell Molter, a principal at Cornerstone Research and report co-author, in a statement. 

Courtesy of PCAOB

The number of respondents in auditing actions totaled 53, a 23% increase over 2022, according to the report. The PCAOB settled four actions involving three China-based firms after securing access to inspect and investigate Chinese firms in 2022.

For the second year in a row, there were no enforcement actions related to a company's disclosure of a material weakness in internal control. In contrast, SEC enforcement actions that referred to an announced restatement and/or material weakness in internal control reached their highest levels in recent years.

Violations of quality control standards were alleged in more than half of the actions involving firm respondents. Nearly 80% of the total monetary penalties in 2023 were assessed on just six defendants. The proportion of individual respondents who were barred increased from 64% in 2022 to 85% in 2023.

Enforcement activity appears to be on course for another record-setting year in 2024.

"This board set a goal to strengthen PCAOB enforcement, and we are doing just that," said Williams during Wednesday's press conference. "As of today, the PCAOB has imposed $34 million in penalties this year alone, and it's only April. We set a record in 2022. We broke that record in 2023, and we are breaking it again today."