Previously mentioned that I looked disciplinary actions reported in the last four newsletters from the California Board of Accountancy (CBA). Want to better understand what happened with firms that got in trouble for audit quality or for not getting a peer review when one was required.
Will continue that discussion by looking at sanctions imposed on smaller firms and then self-imposed trouble generated by some larger firms.
Of the 15 cases I looked at above, one practitioner surrendered the CPA license. All of the other cases had the practitioner’s license revoked, with the revocation stayed. That means the license was revoked with the board holding off on actually pulling the license. It was still officially revoked.
Most of the firms have a three-year probation. Two of the firms had a five-year probation with the common thread being that the substandard audit was a single audit. For those staying far away from the single audit world, those engagements are getting extra attention from regulators.
The revocation and a stay on the revocation is a part of the public record for those firms permanently. If any of those firms get in trouble with CBA again within the three or five-year probationary term, the board can revoke the license without even having a hearing.
How would you like a stayed revocation as part of your permanently visible record for anyone who ever looks up your license? How would you like to tell that to your insurance company? What do you think might happen to your policy premium?
Most of the sanctions where there is a problem with audit or comp quality included a prohibition on performing attestation engagements completely or only allowing compilation engagements. Some of the bans are for the term of probation and others are permanent (or until the practitioner requests and receives permission to provide such services). Some of the sanctions involve ongoing oversight and review of engagement workpapers.
Thought question: How would your firm handle a ban on performing all attestation engagements?
There are also costs associated with the disciplinary actions. All of the above cases included a reimbursement to CBA of their costs and three of the sanctions included fines. The costs ranged from $2,800 up to $36,000, with most of the reimbursements being in the range of $12,000 to $18,000.
Total cost reimbursement for those 15 cases are $193,769 with $10,000 of fines.
For the 4 sanctions only involving the firm not getting a peer review when required, the cost reimbursements were in the range of $2,800 to $4,800. The high amount was a firm that didn’t cooperate with the investigation, which also drew a $5,000 fine.
For the 7 smaller firms with a sanction for audit quality, the cost reimbursements were generally in a range of $12,500 up to $17,000. The outlier on the low side was one firm paying $4,000, for which I don’t understand why it was so small. The outlier on the high side was a reimbursement for $25,000 with that firm having multiple substandard audits, not obtaining a peer review when required, and not telling the truth to CBA about compliance with peer review requirements.
The 3 firms with sanctions for substandard compilation engagements all had a variety of other issues. Their cost reimbursements were $18K, $18K, and $36K. I’m guessing the issues on comps were a small portion of the total issues found by CBA.
For those who don’t already know, the renewal of a CPA license requires signing the renewal form under penalty of perjury.
I took a look at CalCPA’s 2014 Annual Oversight Report for some statistical data on peer reviews in the state. To put those 15 disciplinary actions by CBA in context, consider the number of firms in California enrolled in the peer review program as of 10/22/15:
- 1,506 – sole practitioners
- 2,765 – 2-5 professionals
- 369 – 11-49 professionals
- 30 – 50 or more professionals
- 4,670 – total firms
Those 15 disciplinary actions, many of which had peer review related issues, represent a really small portion of the total number of firms going through peer reviews.
Here is the number of peer reviews performed under CalCPA’s supervision for California firms in 2014:
- 582 – system reviews (essentially, firm performs audits)
- 1,077 – engagement reviews (essentially, firm performs only comps and reviews)
- 1,659 – total peer reviews performed
That is a whole bunch of peer reviews.
There are lots of other tidbits of info in the annual report. For example, there are 163 CPAs providing peer reviews in California.
I earlier mentioned that it looks like those 15 cases are individuals or very small firms.
Before you chuckle at the low-quality work of sole practitioners, consider a few more things I noticed.
There was an additional firm disciplined for having two substandard audits, one for a hospital and one for a pension plan. As part of the sanctions the firm had to give a copy of the notice from CBA to every professional in every office within a specific time.
Cost reimbursement from the firm was $62,601 with an order that the amount be paid by the partners with no reimbursement from the firm. The firm was assessed a fine of $125,000. One specific partner was separately sanctioned with cost reimbursement of $21,536.
Total cost reimbursement and fine for that firm and partner is $209,137. The dollar penalties in that case are just a little bit more than the total cost and fine for the above-mentioned 15 cases.
The firm and one individual had their licenses revoked with the revocation stayed and a five-year probation imposed.
Before you chuckle at the quality work performed by a bunch of small firms and one medium-sized firm, consider two more disciplinary actions.
A member of a Big 4 firm surrendered his license. What did this CPA do?
In advance of a PCAOB inspection of a publicly traded client, this practitioner fabricated, yes fabricated, audit documentation. Unwilling to take a hit for forgetting a document during wrap up, the practitioner fabricated the document in conjunction with two other practitioners. The PCAOB sanctioned three CPAs for this fabrication. If I recall correctly (and I don’t feel like looking up the details), it was two partners and one manager.
Consider one final case to put into context that slew of small firms that got in trouble.
A Big 4 firm was sanctioned for a substandard audit. The firm had their license suspended for 30 days with the suspension stayed and an 18 month probation period imposed.
Yes, a Big 4 firm had its license in California suspended.
The reimbursement of costs to CBA for this case was $100,000. In addition, the fine levied by CBA was for $600,000. That cost reimbursement plus fine is not quite double the total amounts from the other 16 enforcement actions I looked at. Final score for penalties earned based on my limited study:
- $203,769 – 15 small firms (total fines $10K)
- $209,137 – 1 medium firm (fine $120K)
- $700,000 – 1 Big 4 firm (fine $600K)
Oh, those assessments against the Big 4 firm from CBA were follow-on to a $2M civil penalty from PCAOB. That was in turn a follow-on to the SEC penalty of $1.2M disgorgement, $0.35M pre-award interest, plus $2.48M civil penalty for a total of $4.07M paid to the SEC.
Notice I shifted from dollars to millions? When Big 4 firms get in trouble, it is easier to round their checks to millions.
This Big 4 firm earned penalties of $0.7M from CBA, $2.0M from PCAOB, and $4.1M from SEC for total of $6.8M. That is somewhere around 30 times the combined penalties for the 15 small firms in my analysis.
Before you chuckle at any size firm, it might be worth considering that all firms at all size levels need to maintain an extremely high focus on audit quality. That means you dear reader. And it means me.
Perhaps none of us should be chuckling and instead we should put that effort into double checking our workpapers.
Comment on numbering: After posting yesterday’s discussion, I realized there is no post titled Misbehavin’ CPAs #5. Oops. I goofed up on the sequencing. Instead of creating more confusion over which post is #6, I’ll just leave #5 missing.