The PCAOB on February 21, 2024, said WithumSmith+Brown, PC was fined $2 million for widespread failures to comply with board rules and quality control standards as its public company practice significantly grew after taking on numerous special purpose acquisition company (SPAC) audit clients.
The growth occurred from January 2020 through December 2021.
The firm added 273 new clients in 2020 and 157 new clients in 2021. And a substantial portion of these new engagements occurred from September 2020 to February 2021, with the largest monthly increase in December 2020 with 98 new clients, according to the settled order.
The board is imposing the sanctions because the firm failed “to take sufficient steps to ensure that its system of quality control provided reasonable assurance that: (1) the Firm would comply with the requirements regarding the acceptance of issuer clients and engagements, and (2) its personnel would comply with applicable professional standards and regulatory requirement,” the order states.
“Growth must not come at the expense of quality,” said PCAOB Chair Erica Williams in a statement. “The PCAOB will hold firms accountable for upholding quality control systems that protect investors.”
Number of Clients vs. Number of Partners
In particular, in 2021 Withum issued 445 issuer audit reports, which is an increase of 369 from 76 issued in 2020. This is a 486% increase. By contrast, the number of engagement partners responsible for these issuer audit reports increased from 15 in 2020 to only 23 in 2021, an increase of eight or 53%.
“This relatively small increase in engagement partners, when compared to the corresponding increase in issuer audits, led to a large number of issuer engagements being assigned to certain partners,” the PCAOB said.
For example, there were five engagement partners who were each responsible for 40 or more issuer audits in 2021. These five issued 275 audit reports, which makes up 62% of Withum’s total issuer audit reports in 2021.
“This led to significant workloads for these partners,” the order stated.
For example, from January to March 2021, the average billable utilization rate for the five partners responsible for 40 or more issuer audits was 141%, 148%, and 178%, for each month, respectively. Utilization rate measures workload and productivity, and it is calculated by dividing client billable hours worked in the period by the number of available work hours for the partners in the period based on a 40-hour work week.
In addition, the five partners also averaged 15 hours per week on non-billable work over the same period, putting more pressure on them.
The violations occurred from January 2020 through April 2022, according to the settled order, which lists numerous problems.
The PCAOB said that the firm’s system of quality control failed to provide reasonable assurance regarding issuer client acceptance and partner workload. The system also did not provide reasonable assurance that personnel would consult with others when handling complex matters.
The engagement teams did not sufficiently perform procedures to test estimates or determine critical audit matters, among other problems.
“Today’s order should serve as a stark reminder that firms must have both the staff and necessary expertise to perform the audits they agree to perform,” Robert Rice, Director of the PCAOB’s Division of Enforcement and Investigations, said in a statement. “If they do not, we will hold them accountable for those failures.”
An attorney representing the firm did not immediately respond to a request for comment.
Withum settled with the PCAOB without admitting or denying the findings. It has to hire an independent consultant to review and make recommendations on the firm’s system of quality control. Withum also agreed to train its audit staff.
In the meantime, Withum has made the list of annually inspected firms, which have more than 100 public company clients. This makes 14 firms that are inspected each year, as of the 2022 inspection cycle.
This article originally appeared in the February 22, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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