The Public Company Accounting Oversight Board has sanctioned seven audit firms for violating independence requirements in connection with audits of brokers and dealers, and sanctioned engagement partners at two of the firms for causing the violations.
The PCAOB said it has also determined not to commence disciplinary action against an eighth audit firm based on credit given for the firm’s “extraordinary cooperation” with the PCAOB, including self-reporting and remedial actions.
“Auditor independence is fundamental to audit quality," said PCAOB Chairman James R. Doty in a statement. “Firms should not disregard basic requirements that are central to investor protection and the public interest; many other firms are working hard to audit in a compliant and conscientious manner.”
Each of the eight firms prepared financial statements that it audited for a broker-dealer client. Under Securities and Exchange Commission rules, preparation of the financial statements filed with the SEC is a non-audit service that impairs the auditor's independence from the audit client. The SEC’s independence rules in Exchange Act Rule 17a-5 have long applied to audits of broker-dealers, the PCAOB pointed out, including privately held broker-dealers. They include restrictions on providing bookkeeping and other non-audit services related to the financial statements.
Two firms, Goracke & Associates, P.C. in La Vista, Neb., and Mistretta Associates in Sacramento, Calif., were sanctioned with a censure, a $20,000 civil money penalty, a one-year prohibition on accepting new broker-dealer clients, and remedial measures. Each firm prepared financial statements for a broker-dealer audit client, received an inspection comment noting that such preparation impaired independence, yet again prepared the same client's financial statements the following year. The PCAOB also sanctioned the engagement partner at each of these firms responsible for the broker-dealer audits at issue with a censure and a one-year bar from association with a registered public accounting firm: Bret M. Sewell, CPA, formerly of Goracke & Associates, P.C., and Robert Mistretta, sole owner of Mistretta Associates. The board also sanctioned Sewell with a $10,000 civil money penalty.
Two other firms, CST Group, CPAs, P.C., of Reston, Va., and Walker & Armstrong LLP of Phoenix, Ariz., were sanctioned with a censure, a $7,500 civil money penalty, and remedial measures. Each firm received an inspection comment noting that its preparation of a broker-dealer audit client's financial statements impaired independence, did things differently with respect to that client’s financial statements during the next year’s audit, but even with those changes, engaged in financial statement preparation for that client the following year.
Three other firms agreed to orders imposing a censure, a $2,500 civil money penalty, and remedial measures: Conn & Company, P.C. of Atlanta, Ga., James G. Pirolli, CPA, of Southampton, Pa., and Sanford, Baumeister & Frazier, LLP, of Fort Worth, Texas. The PCAOB decided not to commence a disciplinary action against an unnamed eighth audit firm because of that firm's extraordinary cooperation— specifically, its timely and voluntary self-reporting to the PCAOB Tip Line after discovering that it had impaired its independence, as well as its timely, voluntary, and meaningful remedial actions. Those actions included, among other things, communicating the violation to the client and discussing the conduct and violation at an annual firm training session for all audit personnel.
“We encourage audit firms and their associated persons to take responsibility for their conduct, and to report and correct violations,” said Doty.
The PCAOB has written guidance on how extraordinary cooperation may be considered in determining the outcome of a board investigation in its Policy Statement Regarding Credit for Extraordinary Cooperation in Connection with Board Investigations.
“Registered firms and associated persons should appreciate the enforcement consequences of their conduct, both good and bad,” said PCAOB director of enforcement and investigations Claudius B. Modesti. “On the one hand, repeat offenders who present heightened risk and culpability may expect to receive heightened sanctions. Conversely, extraordinary cooperation — whether voluntary and timely self-reporting, remedial actions, or substantial assistance to the Board's investigative processes or other law enforcement authorities—may also influence enforcement decisions and outcomes.”
The sanctioned audit firms and engagement partners each consented to the orders without admitting or denying the PCAOB’s findings. The investigations that resulted in the settlements announced today originated with information obtained through the PCAOB inspection program.
The PCAOB investigation was conducted by PCAOB Enforcement staff members C. Ian Anderson, George P. Choundas, Stephen D'Angelo, and Thomas Barry, with the assistance of the SEC.
Firms or individuals who wish to report suspected misconduct by auditors, or to self-report possible misconduct can use the PCAOB Tip and Referral Center.
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