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  • Writer's pictureDaniel Goelzer

PCAOB Charges Four More Firms with Audit Committee Communications Violations

On February 20, the Public Company Accounting Oversight Board announced settled disciplinary proceedings against four audit firms for violating the Board’s rules related to communications with audit committees. The four firms each failed to provide client audit committees with one or more required items of information; three of the firms also committed other audit committee-related violations, such as failing to obtain audit committee pre-approval of certain services or failing to document such approval.  The four firms, the sanctions to which they consented, and the nature of the violations are:

 

  • Baker Tilly US, LLP – $80,000 civil money penalty and censure. The PCAOB’s order alleges that Baker Tilly (1) obtained audit committee pre-approval of certain audit services but failed to document the pre-approval in the work papers; (2) informed a client’s audit committee that audit procedures would be performed in China but failed to communicate the name and responsibilities of the firm performing those procedures; and (3) informed a client’s audit committee of eight critical accounting policies and estimates, but it failed to inform it of two other critical accounting estimates.

 

  • Grant Thornton Bharat LLP (India) – $40,000 civil money penalty and censure. The PCAOB’s order alleges that Grant Thornton Bharat (1) failed to inform a client’s audit committee of the name, location, and planned responsibilities of other firms and individuals that performed audit procedures and (2) failed to provide a copy of management’s representation letter to a client’s audit committee or to obtain evidence that management provided the letter to the committee.

 

  • Mazars USA LLP – $60,000 civil money penalty and censure. The PCAOB’s order alleges that in one audit Mazar’s (1) failed to inform a client’s audit committee of certain significant risks identified during its risk assessment procedures and (2) failed to inform the audit committee of the name, location, and planned responsibilities of a person not employed by Mazars that performed audit procedures. In another audit, the Board alleges that Mazar’s (1) failed to inform a client’s audit committee of certain significant risks identified during its risk assessment procedures, of the specialized skill needed to perform certain audit procedures, and of the extent to which the engagement team planned to use the work of internal auditors; (2) failed to inform the audit committee of the names, locations, and planned responsibilities of another firm and of an individual, each of which performed audit procedures; and (3) failed to inform the audit committee of the results of the audit, including Mazars’ evaluation of the quality of the client’s financial reporting, its assessment of critical accounting policies and practices, and its conclusions regarding critical accounting estimates.

 

  • SW Audit (Australia) – $60,000 civil money penalty and censure. The PCAOB’s order alleges that in one audit SW Audit (1) failed to obtain audit committee pre-approval to provide certain services and (2) entered into an indemnity agreement with the client, thereby impairing its independence.  In another audit, the Board alleges that SW Audit failed to inform the audit committee of critical accounting policies and practices; of its evaluation of matters relevant to the quality of the client’s financial reporting; of its responsibility with respect to other information presented in documents containing the audited financial statements; and of any significant difficulties encountered in performing the audit.  SW Audit also failed to inform the audit committee in writing about material weaknesses included in the client’s Form 10-K.

 

This is the second set of firms that the PCAOB has charged with failing to comply with the audit committee communications requirements. In July, the Board settled similar charges against five other firms. See PCAOB Charges Five Firms with Audit Committee Communications Failures, August-September 2023 Update.  According to the PCAOB’s press release announcing the new cases, these actions and those made public in July arose from a PCAOB enforcement sweep.  Sweeps are investigations in which the Board collects information about a specific type of potential violation from many firms at the same time.  The press release quotes PCAOB Chair Erica Williams as stating: “Engaged and informed audit committees play a key role in promoting audit quality and protecting investors, and they must be kept informed in accordance with our standards. *  Sweeps are a valuable tool in our enforcement toolbox to ensure there are consequences for putting investors at risk.”

 

Comment:  The cases announced on February 20 include both allegations of violations that would seem to have little effect on an audit committee’s ability to discharge its responsibilities (e.g., failure to document audit committee preapproval that was in fact obtained) and violations that could deprive the committee of important information (e.g., failure to communicate significant audit risks affecting key financial statement accounts).   In any event, enforcement actions of this nature are likely to spur auditors to be scrupulous in assuring that all required audit committee communications are made and fully documented. Audit committees should have a general understanding of the types of information their auditor is required to communicate and should ask questions if they do not receive all required communications.

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