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.
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.
Update newsletter issue 89 for Fall 2019 has 33 disciplinary actions listed. Timeframe of the effective dates is the first half of 2019. My recap of actions by the California Board of Accountancy is listed below. I counted as one action those situations involving a firm and the owner of the firm.
didn’t complete contracted service
audit fail and no peer review
no peer review & expired license
some deeper issues, not quite apparent from summary
Of the CPAs with felony issues, two were for embezzlement, one also had an audit failure, and another ended up with conviction on 12 counts.
Two of the revocations were for rather extensive violations of a previous disciplinary action.
The most senior level former partner charged in the KPMG “steal the exam” fiasco was sentenced to one year and one day in prison for his role in the leak of PCAOB inspection targets. David Middendorf received a fraction of the 37-46 months requested by US Attorney office and 46-57 months recommended by the United States Probation Office.
One speaker said there are several common issues for weaknesses in risk assessment:
No linkage (relating the assessment of risks to further audit procedures)
Poor use of third-party practice tools
No assessment of IT risks
Not doing any risk assessment is now a major problem for you in a peer review if you missed the boat on the risk suite of standards.
For Yellow Book audit, the workpapers must document SKE (skills, knowledge, experience) of staff overseeing non-attest services. Although the professional standards do not exactly require documentation of SKE for non-attest service on a non-yellow book audit, the speaker said (if I heard correctly) that the California Peer Review Committee has a considered opinion that such documentation is required.
So, if you have non-attest services on a non-yellow book audit, …
For more discussion on the dual fiascos of the now-former-senior KPMG partners getting the PCAOB inspection list and altering workpapers along with cheating on continuing education classes, check out these two articles:
Article provides a good summary of the settlement.
Try this on for a word picture, which I’m expanding from Francine’s description in the article:
Getting a $50M fine from stealing the inspection list (and then altering workpapers) is the powerful right punch that everyone was expecting. The test cheating part is a staggering left hook that nobody saw coming.
By the time you finish reading this post or other reports on the SEC’s action, you may be wondering whether there needs to be an assertion the source of information for this post was neither The Onion nor Babylon Bee.
Reports of setting your own passing score for an ethics test could make you wonder if it is very early April. “Cooperate and graduate” exchanges of test answers with the engagement partner and your audit team makes one wonder whether we have entered some sort of alternate reality.
You may want to glance at the linked documents and verify for yourself they are for real.
I assure you the above documents are from the SEC.gov website.
In part II of the administrative action/cease & desist order, KPMG admits the facts described in part III.
Here are some highlights of part III.
First cause of action
The first cause of action by the SEC is the firm obtained the list of engagements which were going to be inspected by PCAOB and then altered workpapers which had not yet hit the lock-down date.
The California AG negotiated a settlement with a charity for their alleged overvaluation of medical GIK. I say alleged because the charity, three present or former board members, the charity’s insurance company, and the external auditor all deny in the settlement they did anything wrong.
The alleged scheme, according to the AG, was the charity used two other charities, which it formed, to buy medicine in the Netherlands and then donate it back to the ‘parent’, which then recognized GIK at US prices.
The AG asserts that over the course of 25 or more transactions, the purchase of about $225,000 of medicine by the two controlled charities generated gift-in-kind revenue of about $34,900,000 in the sanctioned charity.
Of note for readers of this blog is that the CPA providing an external audit was sanctioned as part of the negotiated settlement. She audited the charity and signed its 990s. She also audited one of the controlled charities and signed their 990s.