The Public Company Accounting Oversight Board posted settled disciplinary orders Friday involving three auditing firms and three people associated with them, charging them with violating the federal securities laws in addition to PCAOB auditing standards and rules in the audits of 10 public companies.
“PCAOB standards and the federal securities laws require auditors to undertake their critical task with care, skepticism, and independence,” said PCAOB chairman James R. Doty in a statement. “These obligations are essential to the protection of investors and, as these cases demonstrate, the board will not hesitate to take action against auditors who do not live up to them.”
The violations include, among other charges, fraud, non-cooperation and lack of independence, as well as failures under Section 10A of the Securities Exchange Act of 1934 relating to procedures for detection of illegal acts. Each of the respondents offered to settle the charges and, in each settlement, agreed to the imposition of certain sanctions. The respondents neither admitted nor denied the board’s findings.
“Across these cases is the type of misconduct that puts investors at risk: false audit reports, failures relating to the detection of illegal acts, and a lack of independence,” said PCAOB director of enforcement and investigations Claudius B. Modesti. “Investors deserve better.”
Harris F. Rattray, CPA, PL
The sanctions imposed on the audit firms and auditors included Harris F. Rattray, CPA, PL, in Miramar, Fla., and its sole owner. The PCAOB found that Rattray and his firm repeatedly violated the Exchange Act and PCAOB rules and auditing standards in connection with the issuance of audit reports for four issuers. Rattray and his firm violated the antifraud provisions of the Exchange Act by falsely stating in three audit opinions that the audits had been conducted in accordance with PCAOB standards.
They also failed to plan and sufficiently perform work on critical aspects of the audits of three issuers and, for one of those issuers, failed to include procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts.
The PCAOB permanently revoked the firm’s registration, and the board also permanently barred Rattray from associating with a registered firm.
Hood & Associates CPAs, P.C.
Also sanctioned were Hood & Associates CPAs, P.C., in Tulsa, Okla., and its sole audit partner, Rick C. Freeman, CPA. The board found that the firm violated the antifraud provisions of the Exchange Act by issuing audit opinions for three issuers that falsely stated that they had performed the audits in accordance with PCAOB standards. Freeman directly and substantially contributed to this violation.
The board also found that the firm and Freeman failed to plan, perform and document their audit work, failed to exercise due professional care and professional skepticism for three issuers, and failed to include audit procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statements amounts for one issuer.
The Hood firm and Freeman also violated independence standards because Freeman served as lead audit partner on the audits of two issuers for more than five consecutive years. The firm further failed to have a required engagement quality review performed on any of the audits and failed to comply with PCAOB quality control standards, a violation to which Freeman substantially contributed.
The PCAOB revoked the firm's registration with a right to reapply after three years, and imposed a $10,000 civil monetary penalty. The board also permanently barred Freeman from associating with a registered firm.
Acquavella, Chiarelli, Shuster, Berkower
The PCAOB found that the firm of Acquavella, Chiarelli, Shuster, Berkower in New York, N.Y., and Iselin, N.J., violated PCAOB quality control standards and that a former non-equity partner, David T. Svoboda, CPA, substantially contributed to those violations.
The board also found that the firm and Svoboda violated PCAOB auditing standards in connection with the audits of the financial statements of two issuers based in the People’s Republic of China and one based in Hong Kong.
The firm assigned Svoboda to serve as the auditor with final responsibility for the audits. A significant portion of the firm’s audit procedures were conducted by China-based staff. In each instance, the firm and Svoboda failed to adequately plan the audit, supervise and review the work of assistants, and exercise due professional care.
The firm and Svoboda also violated the independence provisions of the federal securities laws because the firm and Svoboda prepared the consolidation and financial statements that formed the basis of two issuers’ financial statements filed with the Securities and Exchange Commission. Svoboda further failed to cooperate with PCAOB inspectors and violated audit documentation standards in connection with the PCAOB inspection of the firm by improperly causing the creation or alteration of audit documentation after receiving notice of a PCAOB audit inspection without indicating when the documents were altered or added to the working papers, by whom, or why.
The PCAOB revoked the firm's registration with a right to reapply after two years, and imposed a $10,000 civil monetary penalty. The board also barred Svoboda from associating with a registered firm, with a right to petition the PCAOB to terminate the bar after three years.
In addition, all of the firms and individuals were censured.
"The PCAOB regularly reviews registered firms that audit public companies," said Doty. "When audit firms are not living up to their responsibilities to the public, the PCAOB’s Division of Enforcement and Investigations, through close and continuous coordination with the SEC’s Division of Enforcement, including its Operation Broken Gate, will take action to prevent that from continuing.”
PCAOB enforcement staff members Alan Lo Re, Michelle Jaconski, Michael Occhuizzo, David Ware, Margaret Vizzi, Bryant Coleman, Pamela Woodward, and Tima Hawes conducted the investigations.
Suspected misconduct by auditors can be reported to the PCAOB Tip and Referral Center.
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