Audits

Two former KPMG partners involved in PCAOB inspection leak fiasco surrender their CPA licenses.

Image courtesy of Adobe Stock.

There’s an old saying that the wheels of justice grind slowly, but they grind very fine. In the accounting world the wheels of justice don’t even start to turn until the criminal justice wheels have ground everyone into powder.

Effective this past August and November two of the key former partners from KPMG involved in the PCAOB inspection cheating scandal surrendered their licenses.

Brief overview of peer review issues – 11/21.

Image courtesy of Adobe Stock.

To help auditors in the CPA community, the AIPCA peer review staff publishes PR Prompts, a newsletter with information for firms providing audits, review, compilations, and other attestation services.

The newsletter is unbranded and AICPA gives explicit permission to peer reviewers to put their logo and branding information on the newsletter. Those of us who are peer reviewers have specific permission to send it to our clients.

The following comments are provided to you courtesy of the AICPA.  I gratefully acknowledge their work in preparing this info and gladly share it with you. 

For ease of reading, I will not put all the following material in quotations.

Topics in this post:

  • Revenue recognition: 4 top concerns noted by peer reviewers
  • Have you considered reviewer independence implications if additional services are performed for your firm?
  • Do your clients need a single audit?

PR Prompts – Fall 2021:

Revenue recognition: 4 top concerns noted by peer reviewers

To learn where challenges exist for entities and their auditors, the AICPA conducted a survey of peer reviewers, asking them to identify the areas where their firm or their peer review clients have experienced challenges in auditing revenue recognition. Over 230 peer reviewers responded to the survey to share what they’ve seen or experienced relative to the new accounting standard, FASB Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts With Customers. The biggest Topic 606-related challenges were identified as the following:

Educational institutions continue to shrink two years into the pandemic.

College classroom. Image courtesy of Adobe Stock.

The double whammy of Covid pandemic and government policies in reaction to the pandemic continue to hammer the educational sector. Unsettling thing is to consider these articles only discuss the current impact and not the long-term destruction of education for all students from pre-K to grad school.

Articles for you to consider:

  • Columbia University settles for a refund of fees their class-action lawsuit claiming refund of fees and tuition.
  • Freshman enrollment in colleges and universities continued to decline in fall 2021. The anticipated return of students who skipped matriculation in fall 2020 has not happened.
  • As an indicator of what is likely happening in all primary and secondary schools across the country, Washington state public schools estimate enrollment for the next two years will be down another 4.5% from their February 2021 estimate.

(Discussion cross-posted from my other blog, Nonprofit Update, because it may be valuable for CPAs performing analytical review procedures during reviews or audits.)

TaxProf – 11/27/21 – Columbia Settles Covid-19 Class Action Tuition Refund Suit For $12.5 Million – Looks like Columbia University got off easy. Students there established a class and were suing for refund of tuition and fees because they were prohibited from in-person classes and instead attended an Ivy League school on their monitor.

Brief overview of new rules for audits of 12/31/21 financial statements.

Image courtesy of Adobe Stock.

To help auditors in the CPA community, the AIPCA peer review staff publishes PR Prompts, a newsletter with information for firms providing audits, review, compilations, and other attestation services.

The newsletter is unbranded and AICPA gives explicit permission to peer reviewers to put their logo and branding information on the newsletter. Those of us who are peer reviewers have specific permission to send it to our clients.

I will present their comments in four posts:

  • New audit standards.
  • New accounting rules effective this year.
  • New accounting rules coming into play over next few years.
  • Tips for firms in peer review program.

One section of the newsletter provides a condensed introduction to new audit standards that will be required for our upcoming year end audits.

If you are an auditor, you really need to become familiar with the whole string of SASs, from #134 through #140 before you dig into your year end engagements.

The following comments are provided to you courtesy of the AICPA.  I gratefully acknowledge their work in preparing this info and gladly share it with you. For ease of reading, I will not put all the following material in quotations.

PR Prompts – Fall 2021:

New Standards

SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements, as amended

Required implementation is right around the corner for Statement on Auditing Standards (SAS) No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements. SAS No. 134, as amended, is effective for audits of financial statements for periods ending on or after December 15, 2021, with early implementation permitted.

Disciplinary actions from California Board of Accountancy – Spring 2021.

Image courtesy of Adobe Stock.

The California Board of Accountancy Update newsletter, issue #93 dated Summer 2021, has details of disciplinary actions with effective dates in the spring and early summer of 2021.

Interesting thing I noticed this time around is the timing of some of the underlying issues. The attestation failures for which a date is mentioned involve financial statements issued in the 2016 or 2017 timeframe. For one of the more splendiferous failures the firm had audit failures on 2015 and 2016 financial statements which generated a failed peer review with the report dated in early 2018, which led to an investigation by the board with disciplinary action effective in June 2021. That was the firm’s second consecutive peer review fail. Firm earned a $2,500 penalty along with reimbursement of $5,000 investigatory costs.

Every CPA that had an attest failure drew a ban on attestation services until such time as the practitioner requests and receives permission from the board to again perform attest work.

Four of the practitioners who had their license revocation stayed also had a suspension of their license in the range of 60 to 90 days. Imagine the lifetime stain of an official revocation on your public record and then on top of that being prohibited from providing any CPA services for two or three months.

Here is my recap of disciplinary actions reported in this issue:

Major revision to Quality Control Standards on the horizon.

Let’s dial up the quality of our A&A work. Image courtesy of Adobe Stock.

The AICPA’s Auditing Standards Board is proposing a massive overhaul of the Quality Control Standards.

Who will this affect? All CPA firms who provide any audit, review, compilation, preparation, or attestation engagements. In other words, anyone with any accounting & auditing work.

As a mere starting point, the new standards will be relabelled as Quality Management Standards.  Instead of QC system, we will now have a QM system.

As a reminder, QC or QM standards apply regardless of whether you go through a system review or engagement review during your tri-annual peer review. The QC/QM system is tested in a system review but you still must have a formal QC/QM system even if you only do comps and reviews.

This post will provide a quick mention of what I see as the three biggest changes followed by a lengthy summary.

Major changes

A massive change that will impact small firms is that the annual inspection (which is currently required and will continue to be required) may not be performed by anyone who worked on the engagement.

For one person firms, this will require us to get someone outside the firm to perform the annual inspection. Two or three partner firms where the partners do essentially all of the work will also have to get someone from outside to do the inspection.

Two of the other changes of note: new risk assessment process and annual evaluation of quality management system.

The risk assessment process will require establishing quality objectives, identifying risks to achieving those quality objectives, and implement responses to address the quality risks.

After a one year delay to allow running the new QM system for a while the new requirement of an annual assessment of the QM system will kick in.

Proposed effective dates

The first Statements on Quality Management Standards, referred to as SQMS #1, is proposed to require the new quality management system be designed and implemented by December 15, 2023. The first annual evaluation of the system of quality management is proposed to be required within one year following December 15, 2023.

Rephrasing the effective date, the new QM system has to be in place before the end of 2023 (by 12/15/23 to be exact). That is about 2½ years from now. The first annual evaluation will be required one year after that, by the end of 2024 (specific deadline 12/15/24).

Summary of exposure drafts

How can a football team’s position for scoring the game winning points illustrate the differences between an audit, review, compilation, and preparation?

Image courtesy of Adobe Stock.

(Cross-posted from my other blog, Nonprofit Update, not because CPAs need this information, but because it might be helpful for your clients. You might also be able to use this illustration as a tool to explain different service levels to your clients.)

Let’s think about a football team and how they are positioned for scoring the winning points in the last few seconds of a tied game. They could be 4th-and-goal or perhaps not yet to a position for a field goal attempt.

Let’s use that illustration to explain the services provided by your outside accountant.

A CPA can provide four levels of services if you’re looking for financial statements.

You can hire a CPA firm to provide:

  • audit,
  • review,
  • compilation, or
  • preparation service.

What is winning the game?

We all know what that is in football.

In our accounting illustration a winning score would be perfect financial statements. Every number is correct. Not just close-enough, but exactly correct. Every disclosure complies with every single requirement.  The presentation and classification are picture perfect.

That probably never happens in real life, so let’s simplify it by saying that there is nothing even close to materially incorrect in any number, presentation, or disclosure. The financial statements are as close to perfect as is humanly possible.

That is what a win looks like.

Audit

Let’s say there is under a minute left in a tied game. Our favorite football team has just completed a successful drive and is sitting on the 1 yard line on fourth down. There’s only one play left in 30 seconds and the game is over.

Likelihood of getting a touchdown and winning the game is pretty good. Right about now the odds look incredible.

Disciplinary actions from California Board of Accountancy for late 2020.

….what you do not want to have happen to your license. Image courtesy of Adobe Stock.

Update #92 newsletter from California Board of Accountancy dated winter 2021 lists 14 disciplinary actions summarized below. This tally excludes one listed action which is ending probation for a CPA and another separately listed case for the corporation owned by an individual who is also disciplined.

All these actions are effective at various times during November and December 2020.

My tally of these cases:

Disciplinary actions from California Board of Accountancy for the middle of 2020.

Image courtesy of Adobe Stock.

Update #91 newsletter from the California Board of Accountancy, dated Fall 2020, lists 33 disciplinary actions. The effective dates run from May 2020 through August 2020. Yeah, I’m just getting around to writing about the newsletter that arrived last November.

A few general observations before diving into a summary of the causes and levels of discipline.

Of the 10 stayed revocations for attestation failures, all but one had an attestation ban. General pattern is an audit failure will lead to a ban on attest services. The summary of the case does not give an indication why one CPA didn’t draw a ban.

Usually these are bans from performing any audits, reviews, compilations, or attestation engagements. Some of them were just bans from audits. Pattern seems to be the ban is for the duration of probation and then after that a firm may request permission to again perform attest work.

Imagine if you will, that attest work is a significant portion of your work and you cannot perform any of those for three years.

One big firm listed in this edition is PriceWaterhouseCoopers, who drew a stayed suspension with 18 months probation because of discipline by the SEC. They also earned a $300,000 fine and up to $26,000 reimbursement of costs for investigation and monitoring. An additional consequence is distributing a copy of the order to every employee who is in the state of California.

Of the seven disciplinary actions because of enforcement actions by federal agencies, six are from the SEC and one from PCAOB.

The attestation failures usually include three or four or more specific violations. For example, the actions may because there was not appropriate documentation, the opinion was not supported by workpapers, and there were violations of GAAS and violations of GAAP.  Those are overlapping issues but a major audit failure will likely cause a violation in all of those areas. Of grim note for two of the attest failures is one of the listed charges includes creating documentation after release of the audit report. You can make your guess as to what an allegation of that nature includes but could have been creating documentation after workpapers had been called in for review.

Here is a tally of the 33 cases:

2020 giving trends for churches and religious charities based on ECFA survey.

Image courtesy of Adobe Stock.

Finding data on prior year contribution trends early enough in the year to have analytical value in a review or audit has long been a challenge. Usable data for 2020 is now available in March. This is current enough to allow leaders in churches and ministries analyze the 2020 financial results in time for it to be actionable.

Throughout the pandemic the Evangelical Council for Financial Accountability (ECFA) has been conducting quarterly surveys of its members. Lots of data has been gathered and processed.

On 3/4/21, ECFA published the results of their survey of full year 2020 revenue and expense trends compared to 2019. They have graciously made the results of the survey available for free. You can find it on this page of Feature Surveys. Click on the “Free Download” button beneath the Remarkable Resilience survey report dated March 2021.

The survey is based on responses from 559 churches and 730 religious nonprofits. That is a total of 1,289 responses. ECFA has lots of subsectors for its membership. For those sectors with 20 or more responses, the survey aggregates and reports results.

Who would benefit from looking at this survey? Two groups.

First, finance teams and senior leadership of churches and religious nonprofits to see financial results for 2020 of a large group of their peers. This provides an incredible opportunity to see how other organizations are doing.

Second, CPAs performing reviews or audits of churches religious not-for-profit organizations can easily find industrywide information to use as a benchmark. As mentioned earlier, financial information is usually published long after most of the reviews and audits have been released. It is rare I can find anything that is actually usable.

High-level results from the ECFA survey are summarized into three broad categories:

At least one flaming hypocrite in public leadership has enough shame to retire from public life. But just so you know, it is our fault, not hers.

Image courtesy of Adobe Stock.

NoteThis discussion is cross posted from my other blog, Nonprofit Update because it provides a live-action illustration of rationalization. Auditors study the concept of rationalization because that is a factor we consider when thinking through fraud risk assessment during an audit. Part 1 of this series is cross posted here. Exercise for CPAs is to read these two posts, then identify multiple points where the rationalization thought process transforms inappropriate actions into acceptable behavior. 

At least one person on the constantly growing list of flaming hypocrites in public leadership has a sense of shame. Or, at least enough shame to realize she should retire. Eventually. Someday.

After two days of publicity about her non-Thanksgiving non-celebration trip to spend the Thanksgiving weekend with family she doesn’t live with, Dr. Deborah Birx made the announcement.

12/22/20 – National Review – Dr. Birx Announces She Will Retire after Holiday Travel Controversy and CBS news – Birx says she plans to retire, citing strain on family.

After two full days of controversy, Dr. Birx announced she will retire shortly after assisting in the transition to a new administration. Presumably, that means sometime in late January or early February. Or maybe March. Or maybe June.

Recall from yesterday the day after Thanksgiving she traveled from her home in D.C. to one of her vacation homes in Delaware for a 50 hour stay with her daughter, son-in-law, and two grandchildren, all of whom live in a different home she owns in Potomac.

When challenged about whether traveling to another state with people from a different household during the Thanksgiving weekend was appropriate given her very public advice not to travel at all over the weekend and not to be with anyone from a different household, she provided a splendiferous rationalization.

The parade of alleged leaders who ignore their own Covid recommendations keeps growing.

Rationalization can blind our views and limit perspective. Image courtesy of Adobe Stock.

NoteThis discussion is cross posted from my other blog, Nonprofit Update because it provides a live-action illustration of rationalization. Auditors study the concept of rationalization because that is a factor we consider when thinking through fraud risk assessment during an audit. Part 2 of this series is cross posted here. Exercise for CPAs is to read these two posts, then identify multiple points where the rationalization thought process transforms inappropriate actions into acceptable behavior. 

It is taking more and more time to keep up with the political and public health leaders who don’t bother to comply with the recommendations they give us.

This time it is Dr. Deborah Birx who blew off the travel restrictions and gathering size limits at Thanksgiving. Oh, pardon me. It doesn’t count as a Thanksgiving trip since she traveled to her destination the day after Thanksgiving.

Saddest part of this example of hypocrisy is it took place after a large volume of other supposed leaders drew massive criticism for ignoring the rules. It isn’t as if every political and public health leader hasn’t been given notice their behavior is being observed.

Scariest part is her rationalization that there was absolutely nothing wrong with the trip.

Last point in this discussion is the wish that every American had the same freedom she has exercised. Specifically, the freedom to make our own decisions on what is best for our family given our circumstances.

12/20/20 – Associated Press – Birx travels, family visits highlight pandemic safety perils – The day after Thanksgiving, Dr Deborah Birx, coordinator for the official White House coronavirus response team, traveled from her D.C. home to her vacation home in Delaware. Joining her in Delaware were her husband, daughter, son-in-law, and two grandchildren. While in Delaware they ate meals together for two days.

Final two sentences announced in KPMG inspection list theft scandal include no jail time; there are lots of consequences though.

Image courtesy of Adobe Stock.

The final two sentences have been handed down in the KPMG fiasco for stealing PCAOB inspection lists.

Spoiler alert: no jail time.

Thoughts in last half of this post on other consequences they have earned.

Recap of perps:  Status of players in KPMG fiasco from leaked PCAOB inspection files.

 

Thomas Whittle

New audit report under SAS 134.

Image courtesy of Adobe Stock.

In May 2019, the Auditing Standards Board issued Statement on Auditing Standards Number 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements.

SAS 134 will make a lot of changes to auditing standards. The most visible impact likely will be complete revision of the audit report.

You can download a copy of SAS 134 at this link

SASs 135 through 140 also make lots of changes in audit procedures. A lot.

All of the documents are interrelated and will be effective at the same time.

Over the next year or two I will probably write more posts talking about the changes. For the meantime here’s an illustration of what the new report will look like.

Effective date

As issued initially, the effective date would have been for audits of years ending on or after December 15, 2020. First financial statements affected would be December 31, 2020.

Then the pandemic hit.

In May 2020, the ASB issued SAS #141, Amendment to the Effective Dates of SAS Nos. 134-140.

You can download a copy here. This pronouncement defers effective dates of SAS 134 through 140 by one year.

All of them will now be effective for years ending on or after December 15, 2021. That means the long series of SASs will first be required for audits of December 31, 2021 financial statements.

Another change made by SAS 141 is the series of SAS may now be early implemented. This allows firms who were well underway towards implementation on 12/31/20 audits to continue their transition.

Sample of revised audit report

Status of players in KPMG fiasco from leaked PCAOB inspection lists.

Image courtesy of Adobe Stock.

As refresher, some time back senior level staff from KPMG worked to illegitimately gain access to the list of engagements which were going to be subject to inspection by PCAOB. You can catch up on the news by reading my posts with tag of Big 4.

This is old news at this point. Those of us interested in the ethical failure still want to monitor the status of the players. Previous list, found here, has been reworked since it was getting a bit cumbersome to update and confusing to read.

The five KPMG staff and one PCAOB staff who were charged are listed below with their status at various times. Updates will be mentioned as time passes and this page updated with new status.

Overall status:

  • 10/19/20 – 1 released from prison, 1 sentenced & awaiting deportation, 2 awaiting sentencing, 2 convictions on appeal.
  • 12/13/20 – 4 sentenced (of whom 1 released from prison, 1 to serve house arrest after deportation, 2 on probation/supervised release) and 2 convictions on appeal.

Updates:

  • 10/18/20 update – David Britt was sentenced to six months home confinement to be served from his new home in Australia after he is deported from the United States.
  • 12/13/20 update – Thomas Whittle sentenced to two years supervised release and Brian Sweet sentenced to time serviced, three years probation, and to-be-determined restitution.
  • 1/4/22 – Brian Sweet and David Britt surrendered their CPA license to the California Board of Accountancy in 11/21 and 8/21, respectively.

Participants and their status:

=============== …