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FAE Speaker Offers Up-Close Look at PCAOB Process for Investigating Firms

Published Date:
Jun 12, 2014

What happens when the Public Company Accounting Oversight Board (PCAOB) decides to look a bit closer at an audit firm’s activities? According to C. Ian Anderson, the PCAOB’s New York Regional Associate Director of Enforcement and Investigations, firms can expect a multilayered process, with a focus squarely on “whether the auditor acted diligently and with a reasonable degree of competence.”

Anderson was one of the speakers at the Foundation for Accounting Education’s Broker/Dealer Conference on May 8.

According to Colleen Brennan, the board’s public affairs director, the PCAOB currently has more than 80 open enforcement matters, including informal inquiries, formal investigations, and matters in litigation. But those numbers may increase. “Congress recently expanded the [PCAOB’s] jurisdiction to include auditors of broker/dealers,” she said. “And, for that and other reasons, we expect our enforcement program to continue growing in the coming years.”

Why would the PCAOB focus on any one firm to begin with? Anderson said that “information suggesting potential wrongdoing” comes from a variety of sources—potential cases may be referred from within other divisions of the PCAOB or from other regulatory agencies such as the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). Moreover, he explained, the board also uses public information such as newspapers, blogs and restatements, and maintains a robust tip system.

In each instance, he said, the board will evaluate the information it receives and decide whether or not “to open an investigation [and] if it merits committing resources to that particular case.”

Usually, he added, the board reaches this decision through an informal investigation to see if there’s anything that requires more serious attention. In the event that it does, the PCAOB will ask for additional information to see whether there’s evidence of anything untoward.

At this point, as the process moves from informal to formal; those requests stop being simple requests and, instead, become requirements backed with full legal force. “Once we go formal, there is now an obligation,” Anderson said. “We can compel testimony or documents, and if it’s not provided, it may constitute grounds for a noncooperation charge.”

And although this transition typically occurs when the board is confronted with evidence of serious wrongdoing, Anderson pointed out that it may also occur if “we decide the firm is not cooperating with our investigation and does not want to voluntarily provide the information requested.”

He added that when the PCAOB does find evidence of a serious wrongdoing, the board doesn’t try to catch a firm by surprise. “We believe it’s important to have a transparent process,” he said. Once evidence is found, “We will contact the firm and give them a fairly detailed description of what we believe are the violations and the evidence supporting the proposed charge, and give them an opportunity to respond,” he added. The firm can, at this time, explain why the evidence may not constitute a violation or might share any extenuating circumstances that the board was not aware of—in some instances, with success. “It’s entirely possible at that stage we may close the case,” Anderson said.  

If the board does decide to move forward, Anderson said one of two things will happen: Either the board will accept a settlement offered by the firm—according to Brennan, the board has settled six disciplinary orders to date this year—or it will begin litigation proceedings. If litigation does happen, Anderson said that it will be confidential and nonpublic until a final adverse decision is made, “meaning they decided not to appeal, or [the case] has been appealed up through the SEC and they issued a final decision that is adverse to the firm.”

Once that adverse decision has been made, Anderson further explained that the PCAOB has various sanction options at its disposal, which can be tailored to reflect the nature of the particular violation, how egregious it was and whether the firm in question is a repeat offender. The sanctions, he said, can range from a “mere censure and perhaps a temporary suspension” to “a permanent bar or revocation of ability to conduct public audits or audits of broker/dealers, as well as significant monetary sanctions.” He added that the board can also mandate remedies, such as requiring a firm to undertake remedial measures like education or training.

If an individual is barred, he or she will feel the weight of that punishment, according to Anderson.

“That person is not just forbidden from associating with a public accounting firm but also [with] an issuer or a broker/dealer that files with the SEC in any kind of accountancy or any other financial management capacities,” he said. “If you have been suspended from working on an audit, you can’t go off to an issuer company and become [its] CFO.”

He also emphasized that the PCAOB is not looking for whether the statements are inaccurate or materially misleading.

“The focus is on what did the auditor do and not do that they were required to do. Not whether the financial statements were ultimately misleading or not,” he said.

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