PCAOB Sanctions Four Firms for Failure to Communicate with Audit Committees

The Public Company Accounting Oversight Board ("PCAOB") sanctioned four audit firms for failure to make certain required communications to issuer audit committees.

According to the first Order, the PCAOB found, among other compliance shortcomings, that the firm failed to make all required communications to issuer audit committees in violation of Auditing Standard ("AS") 1301 ("Communications with Audit Committees"), including failing to provide the name and planned responsibilities of an independent public accounting firm in China that performed audit procedures.

According to the second Order, the PCAOB found that the audit firm failed to make certain required communications to the audit committee of an issuer client, in violation of AS 1301 and AS 2805, ("Management Representations") including failing to inform the audit committee of the name, location and planned responsibilities of independent public accounting firms that performed audit procedures in the audit in the Channel Islands, South Africa and the UK.

According to the third Order, the audit firm failed to inform the issuer's audit committee of the significant risks identified during its risk assessment procedures related to inventory, accounts payable and other liabilities for entities affiliated with the issuer. The firm also failed to inform the audit committee of the name, location and planned responsibilities of a person that performed audit procedures for the client in violation of AS 1301.

According to the fourth Order, the audit firm impaired its independence when it entered into an indemnification agreement with the issuer. PCAOB found that the firm failed to inform the issuer's audit committee of (i) critical accounting policies and practices; (ii) the firm's evaluation of matters relevant to the quality of an issuer’s financial reporting; (iii) the firm's responsibility under PCAOB rules and standards with respect to other information presented in documents containing audited financial statements, related procedures performed and the results of those procedures; and (iv) any significant difficulties encountered in performing the audit. The firm also (i) failed to inform the issuer's audit committee in writing about the material weaknesses included in its Form 10-K filed with the SEC and (ii) failed to establish policies and procedures sufficient to provide reasonable assurance that its personnel complied with applicable professional standards and regulatory requirements in violation of AS 1301 and AS 1305 ("Communications About Control Deficiencies in an Audit of Financial Statements").

To settle the charges, the firms agreed to (i) a censure; (ii) pay a civil money penalty of (1) $80,000, (2) $40,000, (3) $60,000 and (4) $60,000 respectively and (iii) undertake remedial measures outlined in the Orders.

A PCAOB press release highlighted that the enforcement actions were the result of a PCAOB enforcement sweep of auditor engagement with issuer audit committees that resulted in eight enforcement actions in 2023.

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