PCAOB Sanctions Five Auditors for Independence and Other Violations

Recently, the Public Company Accounting Oversight Board, that oversees the audits of public companies, sanctioned five auditors for:

• Violating auditor independence requirements. 
• Providing bookkeeping and auditing services to the same client. 
• Allowing an unqualified person to oversee quality control requirements at a CPA firm.
• Failing to properly audit – among other things, the auditor failed to properly plan the audit, appropriately assess risks, evaluate the qualifications and competence of a specialist, perform sufficient audit procedures to assess the reasonableness of assumptions used by the specialist, and appropriately test the company's reported revenue.

I’m concerned that regulators at times pursue borderline issues that do not have much substance behind them. So I looked at the decision behind number 2 – providing bookkeeping and auditing services to the same client. It would seem to be a straightforward standard.

However, the rules that auditors must operate under create a real challenge because there is a fine line between acceptable and unacceptable activities.

PCAOB Rule 3520 discusses Auditor Independence. It says,

            “A registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period.”

Under ET section 100 – Independence, Integrity and Objectivity, Rule 101 says, 

“A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.”

The rules go on to say,

101-3—Performance of other services. A member or his or her firm (“member”) who performs an attest engagement for a client may also perform other nonattest services (“other services”) for that client. Before a member performs other services for an attest client, he or she must evaluate the effect of such services on his or her independence. In particular, care should be taken not to perform management functions or make management decisions for the attest client, the responsibility for which remains with the client’s board of directors and management….

The following are some general activities that would be considered to impair a member’s independence:

• Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of a client or having the authority to do so
• Preparing source documents or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, purchase orders, payroll time records, and customer orders)
• Having custody of client assets
• Supervising client employees in the performance of their normal recurring activities
• Determining which recommendations of the member should be implemented
• Reporting to the board of directors on behalf of management
• Serving as a client’s stock transfer or escrow agent, registrar, general counsel or its equivalent

The examples in the following table identify the effect that performance of other services for an attest client can have on a member’s independence. These examples are not intended to be all-inclusive of the types of other services performed by members.

Impact on Independence of Performance of Other Services
Type of Other Service	Independence Would Not Be Impaired	Independence Would Be Impaired
Bookkeeping	• Record transactions for which management has determined or approved the appropriate account classification, or post coded transactions to a client’s general ledger. • Prepare financial statements based on information in the trial balance. • Post client-approved entries to a client’s trial balance. • Propose standard, adjusting, or correcting journal entries or other changes affecting the financial statements to the client. • Provide data-processing services.	• Determine or change journal entries, account codings or classification for transactions, or other accounting records without obtaining client approval. • Authorize or approve transactions. • Prepare source documents or originate data. • Make changes to source documents without client approval.

So, things aren’t  quite as clear as I originally thought. It would appear the PCAOB allows bookkeeping and auditing to occur, but the member needs to be sure he or she does not cross a line that ultimately will be decided by the PCAOB.

Unfortunately they decided against the auditor in the following case:

http://pcaobus.org/Enforcement/Decisions/Documents/Herring.pdf