At a conference about accountants’ liability, William Ryan, a deputy director in the PCAOB’s Division of Enforcement and Investigations (DEI), gave tips to audit firms and individuals facing investigations for potential violations of relevant rules and regulations.
These tips may especially come in handy as the board under Erica Williams’s leadership has ramped up its enforcement activities, imposing record fines, using statutory authority that was never used before and conducting sweeps, among other things. (See Number of PCAOB Enforcement Actions Sharply Increased in 2022 in the Feb. 27, 2023, edition of Accounting & Compliance Alert.)
Ryan’s first advice is for audit firms to timely self-report violations, which can be a form of extraordinary cooperation.
“It’s simply much better when the firm discovers misconduct to get out in front of the issue and voluntarily timely report it to DEI or report it to our inspections group,” Ryan said at Accountants’ Liability 2023 conference on May 5 in Washington, hosted by American Law Institute Continuing Legal Education.
When auditors provide extraordinary cooperation, one potential significant benefit is reduced penalty amounts. An example is an enforcement action against KPMG in Colombia in December last year.
“Absent this extraordinary cooperation, the civil money penalty imposed would have been significantly larger, and the Board may have imposed additional sanctions,” according to the PCAOB’s order.
Ryan’s second advice is for firms and individuals to consider resolving matters early. This would be especially relevant if PCAOB inspectors found numerous and significant audit deficiencies. Firms should engage early in discussions with DEI when faced with investigations.
“We can really shortcut things,” Ryan said. “That saves individual, firm time and money. It shortcuts our investigations. It’s really a win-win on both sides when it’s appropriate.”
Another way to make the process go more smoothly is to provide substantial assistance during the investigation, he said.
Moreover, firms can also implement remedial actions voluntarily.
A good example that shows these types of extraordinary cooperation that resulted in a smoother process was a case involving KPMG Australia in September 2021.
“In ordering these sanctions, the Board took into account the Firm’s extraordinary cooperation in this matter, including self-reporting, substantial assistance, and personnel and policy actions,” according to the order.
DEI also wants firms to produce workpapers and other relevant documents in a timely manner.
“We are more than willing to work with firms and individuals on a reasonable production schedule,” he said. “But what we want to avoid is last minute production. Certainly right before testimony, there’s no way for the staff to reasonably review the materials that are provided at the last minute. And inevitably it results in the witness having to come back for additional testimony” after the staff conducted a sufficient review of the documents.
In addition, DEI is willing to work with firms to streamline investigations.
“Among the ways we do that is by sending targeted interrogatories to firms so we can narrow the issues that we’re investigating,” which will make it for a smoother process, Ryan explained. “Those presentations, however, are only useful if the firm and counsel are up to speed on the relevant issues and provide fulsome and direct responses to the questions and concerns we have to make those meetings efficient.”
This way, cases could be closed sooner rather than later.
While these tips might be beneficial, the flip side is non-cooperation. The PCAOB can impose sanctions for failure to cooperate with DEI investigations, and the board has done so in numerous cases over the years.
In the meantime, Ryan said that DEI—after moving away for a couple of years from recommending that the board names issuers or broker-dealers whose auditors are involved in enforcement actions—is again following the policy.
“In matters that involve alleged deficiencies in the performance of an audit or violations of independence rules or standards, staff will generally recommend that the settled order identify any issuers or broker-dealers,” according to an updated policy in April 2022. “In matters that do not involve alleged deficiencies in the performance of an audit or violations of independence rules or standards, such as noncooperation with Board oversight and enforcement processes, staff will generally recommend that the settled order not identify any related issuers and/or broker-dealers.”
Ryan emphasized that this is DEI’s policy.
“We do think that transparency is extremely important,” he said. “And when we had that policy and for that lengthy amount of time [about 15 years], I don’t think we saw” unintended consequences or collateral damage.
This article originally appeared in the May 19, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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