The Public Company Accounting Oversight Board has revoked the registation of an upstate New York firm for relying on outside firms in China and Taiwan to audit three companies in those countries while exercising little supervision.

The PCAOB imposed the sanctions against Brock, Schechter & Polakoff LLP, a firm based in Buffalo, N.Y., censuring the firm and imposing a civil penalty of $20,000 against the firm. In addition, the board censured James R. Waggoner, CPA, the firm’s former director of accounting and auditing, and barred him from being associated with a PCAOB-registered public accounting firm. BSP confirmed that Waggoner is no longer employed at the firm.

According to the PCAOB, BSP began auditing companies in China and Taiwan in 2006, even though the firm had no prior experience auditing public companies using PCAOB standards, nor any experience auditing companies based in either country. The firm did not even have any staff with the ability to speak or understand Chinese.

BSP partner Thomas Grogan said the firm has decided to get out of the business of auditing Chinese and Taiwanese companies. “Several years ago, Brock Schchter & Polakoff LLP began working with a few small companies based in China for the provision of financial reporting services,” he said in an emailed statement. “Certain deficiencies with respect to that work were brought to the attention of BSP by the Public Company Accounting Oversight Board, the entity that oversees the audits of public companies. The firm worked cooperatively with the PCAOB during their inquiry and has reached an agreement with the PCAOB. The firm made the decision to voluntarily exit this area of auditing and has not performed work of that nature for more than a year. At no time did the aforementioned work exceed one percent of the overall client base of BSP. BSP does not foresee a return to that area of auditing in the future.”

In its order sanctioning the firm, the PCAOB said that despite the lack of professional staff with the relevant training or experience, BSP accepted engagements to audit the 2006 through 2008 financial statements of Shanghai-based Kid Castle Educational Corporation, the 2007 financial statements of China Junlian Integrated Surveillance, Inc., the 2008 financial statements of Shaanxi-based North American Gaming & Entertainment Corporation, and North American Gaming’s internal controls over financial reporting as of Dec. 31, 2008.

The audits were actually planned and performed by two other unidentified audit firms, one in Taiwan and one in China, not by BSP. During the audits, BSP had minimal contact with the foreign firms, and performed an inadequate review of the working papers prepared by the foreign firms, according to the PCAOB. In May 2006, the foreign firms had solicited several U.S.-based auditing firms, including BSP, to work with them in auditing the financial statements of Taiwan-based and China-based issuers. Neither BSP nor any of its professional staff had any prior experience working with the foreign firms when BSP responded to the solicitations. The foreign firms proposed that they would perform all of the audit field work, but that BSP would issue the audit reports.
Waggoner and BSP’s managing partner traveled to China and Taiwan to meet with the foreign firms.

The meetings—conducted over a 10-day, multi-city trip—were introductory in nature, the PCAOB noted. BSP representatives discussed business opportunities with the foreign firms, and discussed how the foreign firms and BSP would divide responsibility for completing audits, according to the PCAOB. BSP and the Taiwan firm also met with representatives of Kid Castle. The partners of BSP nonetheless agreed that the firm could accept audit engagements in which the foreign firms would perform all of the audit field work, and BSP would issue the audit opinions based on the audit work of the foreign firms.

“BSP determined to accept these engagements despite the fact that BSP had no professional staff with experience auditing the financial statements of issuers under PCAOB auditing standards; experience auditing companies based in Taiwan and China; or the ability to understand or communicate in Chinese,” said the PCAOB.

China Inspection Progress

The PCAOB has been negotiating with Chinese officials to inspect auditing firms in that country, which have been linked to companies that did reverse mergers to enter the U.S. markets. PCAOB chairman James Doty recently visited China with a U.S. delegation and reported progress on the negotiations.

“We expect to have something accomplished by the end of the year,” he said in an interview with Accounting Today at the PCAOB offices Friday. “It may be that these are observations, it may be that these are a first step of cooperation that can lead to the point of being able to issue a report.”

Doty noted that the main goal is to be able to issue reports on the Chinese auditing firms, the China-based affiliates of U.S. audit firms, and U.S. firms that audit in China. “The process by which we issue a report may be a little different in China than what it is in other countries, but fundamentally we’ve got to be able to get the documents, and look at the documents, and keep records of what we have looked at to enable us to issue a report,” he said. “I do not hold the prospect that we will be there by Dec. 31, 2012, but I think we should have accomplished some very tangible, concrete steps that will enable us to say we will get there. If we are still in limbo and unresolved by the end of the year, I will be disappointed and I think the SEC will be dismayed. We’ve got outstanding requests for documents in China. Those need to be cleared up. The enforcement requests, as the SEC has made clear, need to be resolved. There has to be motion and resolution of ambiguity, things that keep us from getting to a point of resolution on enforcement matters and eventually the issuance of inspection reports.”

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