Wednesday, October 29, 2008

PCAOB Suspends Audit Firm's Registration for Numerous Violations of Board Standards

The PCAOB has suspended the registration of an audit firm for at least five years for conducting deficient audits replete with numerous violations of auditing standards and violations of Board audit documentation standards. In conducting the audits of four issuer clients, the audit firm failed to perform the most basic functions and procedures required to evaluate the financial statements. Two audit partners at the firm were barred from the industry for at least five years. The two partners alternated between performing as engagement partner and concurring review partner on the various audits. The firm and its partners settled the action without either admitting or denying the Board’s findings. In the Matter of Jaspers + Hall, PC, Thomas M. Jaspers, CPA, and Patrick A. Hall, CPA., Release No. 105-2008-002.

The Board found that the auditor failed to perform adequate, or sometimes any, audit procedures in areas such as cash, deferred revenue, business acquisition accounting, income taxes, related party transactions, and using the work of specialists. In addition, the firm failed to plan the audits, prepare audit programs, and prepare audit completion documents. The auditor also failed to identify and appropriately address departures from GAAP concerning contingencies. And, finally, the auditor failed to retain audit documentation for the period required by PCAOB standards.

In one audit, the auditor failed to perform sufficient procedures to verify the existence of $155 million in cash, which represented 57 percent of the client’s reported assets. When an account confirmation request to the bank proved unavailing, the auditor failed to perform alternative procedures to verify that the issuer had the cash. Similarly, the auditor also failed to perform any procedures or gather any evidence concerning a reported deferred tax benefit representing 67.7 percent of the issuer’s net earnings.

The audit was deficient in various other respects as well. Specifically, the auditor failed to comply with PCAOB standards requiring it to obtain written representations concerning management's belief that the financial statements were fairly presented in conformity with GAAP. The auditor also failed to document an understanding with the client regarding the services to be performed for each engagement. The auditor also used the work of a valuation specialist in performing the audit but, in violation of PCAOB standards, failed to evaluate the professional qualifications of the specialist, failed to test the data the issuer provided to the specialist, and failed to obtain an understanding of the assumptions used by the specialist in its valuations.

The auditor also violated a PCAOB standard requiring it to retain audit documentation for seven years. The auditor failed to retain significant portions of its documentation for the required period and was unable to provide the documentation in response to the demands of a PCAOB investigator.

In another separate audit, the partners failed to perform any procedures to test the values an issuer assigned to the tangible assets acquired and the liabilities assumed in a business combination. They also failed to perform any procedures concerning the company’s reported acquisition expenses.

The Board found that they also failed to perform any audit procedures with respect to the goodwill that the client initially recorded upon consummating the business combination, but then completely wrote off only three months later. More specifically, the auditor did not review any impairment test on the goodwill and failed to perform any procedures to test management's conclusion that the goodwill should be written off.

In yet another audit, the Board found that the auditor failed to adequately consider the risk of fraud. PCAOB standards on fraud risk require an auditor to gain an understanding of the business rationale for transactions that are outside the normal course of business, or that otherwise appear to be unusual. In violation of those standards, the auditor failed to ascertain the business purpose of several unusual expenses reflected on the issuer’s credit card statements. The auditor failed to evaluate whether those unusual expenses were individually, or in the aggregate, qualitatively material to the client’s financial statements.

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