PCAOB enforcement sweep targets non-U.S. accounting firms for failing to report disciplinary matters
The Public Company Accounting Oversight Board announced six settled actions against non-U.S. accounting firms late last month for failure to report certain disciplinary or regulatory actions against them in their home country.
These actions are illustrative of the PCAOB’s ongoing focus on non-U.S. firms registered with the PCAOB, and particularly firms involved in cross- border audits for U.S. issuers. As of December 2016, of the 150 firms disciplined by the PCAOB, 17 of the firms (and 30 individuals) were located outside of the U.S. Sanctioned firms have been based in 13 countries. While the PCAOB has brought cases against non-U.S. firms in connection with audit failures, these recent enforcement actions are a reminder that firms’ more basic “blocking and tackling” with fulfilling their reporting obligations will remain under scrutiny. Firms, particularly smaller firms, need to continually assess their compliance with PCAOB reporting rules.
The respondents in the March 29 actions included member firms of the EY, Grant Thornton, KPMG and PwC global networks and encompassed firms from Argentina, Brazil, Colombia, South Korea and Spain. The PCAOB censured the six firms and fined most of them $10,000 (although one firm was fined $15,000) for their failure to report certain reportable events as required under the PCAOB rules. All of the firms failed to report disciplinary proceedings by their home country regulator or other governmental authority even though the relevant clients in the disciplinary proceedings were not U.S. issuers subject to PCAOB rules. The PCAOB also sanctioned the former chairman and CEO of Deloitte Brazil that same day for failing to cooperate with a board investigation.
PCAOB Rule 2203 provides that a registered public accounting firm must file a special report on its Form 3 to report any event specified in that form within 30 days of the event's occurrence. One such specified event occurs when a firm "has become aware that, in a matter arising out of the Firm's conduct in the course of providing professional services for a client, the Firm has become a defendant or respondent in a civil or alternative dispute resolution proceeding initiated by a governmental entity or in an administrative or disciplinary proceeding other than a [PCAOB] disciplinary proceeding." Significantly, to be reportable the proceeding only has to relate to professional services for a client, and does not necessarily have to involve an audit of an issuer, broker or dealer as those terms are defined under PCAOB rules.
The PCAOB orders follow an earlier action against BDO’s Spanish member firm in November 2015 for similarly failing to report disciplinary matters. Continued enforcement in this area reflects the PCAOB’s determination to enforce reporting requirements and, in particular, to remind non-U.S. firms registered with the PCAOB that they are subject to the same reporting requirements as U.S. accounting firms.
The PCAOB orders in these matters required the firms to revise their policies and procedures to provide reasonable assurance of compliance with PCAOB reporting requirements or confirm they have already taken such steps. Sanctioned firms were required to confirm that the firm has established policies to ensure training concerning PCAOB reporting requirements, and the firm has assigned the role of compliance with PCAOB reporting matters to an individual who possesses adequate knowledge and experience with these requirements and sufficient authority to fulfill them.
The PCAOB sweep against the six foreign firms confirms the need for registered firms to closely oversee their PCAOB reporting responsibilities. Firms must regularly review their inventory of any disciplinary or other regulatory matters to ensure appropriate reporting occurs. Given the actions were against member firms of the largest global accounting networks, smaller firms should now expect to focus on their reporting obligations.