Public Company Accounting Oversight Board (PCAOB) Chair Erica Williams has a strong message to accountants who audit public companies: “This board is approaching enforcement with a renewed vigilance.”
“While we cannot talk about ongoing enforcement actions, I can assure you, we intend to use every tool in our enforcement toolbox and impose significant sanctions where appropriate, to ensure there are consequences for putting investors at risk and that bad actors are removed,” she said on Sept. 22, 2022, at the fall conference of the Council of Institutional Investors (CII) in Boston. “This includes substantial monetary penalties and significant or permanent individual bars and firm registration revocations.”
Williams, who became chair of the PCAOB in January, has been much more active in pursuing enforcement cases in part to send the message that wrongdoers will be held accountable.
The previous leadership was criticized for being more lenient towards auditors.
During Williams’s tenure, for example, the PCAOB for the first time in April sanctioned an auditor for failing to reasonably supervise. This relates to an old case involving KPMG LLP’s scheme to pass the board’s audit inspections.
Five years after Scott Marcello, then-vice chair of audit with KPMG, was fired for failing to supervise employees who engaged in a scheme to fraudulently improve the PCAOB’s audit inspection results, the board fined him $100,000.
The PCAOB seems to have been trying to send a message to the auditing profession about the importance of ethical conduct and accountability because the board said that this is the largest fine ever slapped on an individual in a settled case.
During the speech, Williams said that the board is expanding its case identification process.
Among other efforts, “We are looking for patterns and conducting more sweeps,” she said. “Sweeps enable us to get additional information from a number of firms at the same time on areas where we suspect that violations may be occurring. They make it harder for those violating our rules or standards to hide.”
The PCAOB, she said, is also expanding the types of cases it pursues.
“For any violation of PCAOB standards that is serious enough to put investors at risk, the excuse that, ‘it only happened once,’ simply won’t cut it,” she said. “We will not hesitate to bring cases that hinge on only a single, serious wrongful act, whether reckless or negligent.”
In addition, the board wants sanctions to matter.
She said that the current board has more than doubled the average penalties against individuals compared to the last five years. The PCAOB at the same time has increased its average penalties against firms by more than 65 percent.
“Those who break the rules should know we won’t be constrained by the types of cases the PCAOB has pursued in the past,” Williams said. “We won’t be limited to the level of penalties that have been seen before. And we will seek admissions of wrongdoing in appropriate cases – for example, where the conduct is intentional or egregious.”
Her remarks also come as the PCAOB is in the middle of establishing a five-year strategic plan. Before doing so, it issued a draft plan in August for public comment. One of the goals is having a robust enforcement program.
The board will fully use the authority provided by the Sarbanes-Oxley Act of 2002, which Congress passed to try to prevent large accounting scandals at companies like Enron and WorldCom when their managers cooked their books, and auditors let it happen. When Enron failed more than 20 years ago, it was the largest bankruptcy in U.S. history.
But business organizations and some audit firms were not pleased with the PCAOB’s enforcement goals.
The U.S. Chamber of Commerce wrote a comment letter that it is concerned by the elevation of enforcement. It said that the PCAOB was organized and operated under a supervisory model for oversight of audit firms, citing the board’s initial five-year strategic plan.
“The supervisory model gives primacy to the PCAOB’s inspection and standard-setting processes, while not ignoring the role of enforcement,” wrote Tom Quaadman, an executive vice president with the U.S. Chamber. That has worked to improve audit quality.
Quaadman said that he is concerned that the board’s plans for a more assertive approach to enforcement may indicate an abandonment of the supervisory model.
“Without any data or public observations by the PCAOB, it is unclear how such a shift can be justified,” he wrote.
PricewaterhouseCoopers LLP encouraged the board to strike an appropriate balance between enforcement and inspection resources.
“Because responding to investigations can be time consuming, resource intensive, and costly, enforcement inquiries and investigations should be reserved for those facts and circumstances where addressing issues through the inspection process is unlikely to be sufficient,” PwC wrote. “In our view, the Division of Registration and Inspections is well-placed to help identify issues and in many cases to promote appropriate change, given the nature of the interactions between the inspections teams and the firms.”
But on Sept. 22, Williams quoted Sen. Paul Sarbanes 20 years ago when Congress decided to establish the PCAOB.
“If you don’t protect the interests of the investors, it deals a major blow to the workings of the economic system,” Sarbanes said at the time. “The U.S. capital markets have established a reputation for integrity because we have a system designed to screen out people who are trying to cut the corners and rig the system.”
Inspection of Chinese Auditors
At the conference, Williams also discussed the latest development on the board’s effort to inspect accounting firms in China whose audit clients trade on U.S. exchanges.
Aided by U.S. legislation, the PCAOB in August finally signed an agreement with China that would allow the board’s inspectors to review Chinese audit work papers. And Williams said PCAOB inspectors began arriving last week in Hong Kong where they will conduct inspections of firms in both China and Hong Kong.
“I have been asked many times how long this process will take. The answer depends in part on China’s cooperation,” she said. “Our team will work swiftly and thoroughly. China must cooperate just as swiftly and thoroughly in return.”
The PCAOB by the end of this year must determine whether its inspectors were given complete access to do their job. The legislation in question is the Holding Foreign Companies Accountable Act. The U.S. Securities Exchange Commission (SEC) will impose a trading ban on the audit firm’s client if the PCAOB is not able to completely inspect three years in a row.
“The agreement we signed with our Chinese counterparts guarantees complete access. And the PCAOB will accept nothing less than complete access when we make our determinations by the end of this year,” she said. “Any interference with our ability to retain information as needed is a deal-breaker.”
But her remarks also come as some have been skeptical about whether the Chinese will fully cooperate in practice.
In response to questions about the agreement, Chinese officials issued a statement about the need to protect sensitive information. China in recent years enacted the Data Security Law, Personal Information Protection Law, and other relevant laws and regulations.
This article originally appeared in the September 23, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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