By Amy Leisinger, J.D.
PCAOB Enforcement and Investigations Director Claudius Modesti opened the second day of the Standing Advisory Group’s meeting with a discussion of the Board’s enforcement efforts and issues that should remain at the forefront of auditors’ minds while moving through the audit process. With record disciplinary proceedings, he said, the goal must be to maintain credible deterrence of auditor misconduct.
Enforcement. In reviewing recent PCAOB enforcement and litigation matters, particularly with the late 2016 actions against Deloitte Brazil and Deloitte Mexico, Modesti stressed the increased need for a focus on cross border concerns and the roles of affiliates. Deloitte Brazil was ordered to pay an $8 million civil penalty, the largest ever imposed by the PCAOB, to settle charges that it issued materially false audit reports and attempted to conceal violations by altering documents and providing false testimony. Deloitte Mexico agreed to pay a $750,000 penalty for failing to effectively implement quality control measures to ensure proper retention of audit documentation. Like these matters, the director noted, most actions citing failure to cooperate involved improper alteration of work papers, and the staff issued an audit practice alert to address the issue. Ultimately, Modesti said, we want firms to spot and remediate issues themselves, without waiting for Board intervention. This may require a shift in conversation from “tone at the top” to “tone in the middle” to allow for broad contribution to the overall health of firms, he said.
In 2017, Modesti stated, PCAOB enforcement and investigations will focus on four specific issues: (1) investigations involving a lack of professional skepticism; (2) audit matters relating to the independence and integrity of audits; (3) matters eroding integrity of the Board’s regulatory oversight processes; and (4) investigations focusing on risks associated with cross border audits. In working towards the PCAOB’s goals, the staff will continue to coordinate with SEC enforcement, the Department of Justice, and FINRA, as well as legal and regulatory counterparts around the world, he concluded.
Economic analysis. Office of Economic and Risk Analysis Acting Director Patricia Ledesma and Senior Advisor Michael Gurbutt noted the ERA’s focus on econometric research in connection with standard-setting projects. The bulk of the ERA’s work involves preparing economic analyses to inform standard-setting and rulemaking activities, they explained. However, the use of economic and statistical techniques and research to enhance effectiveness of the PCAOB’s oversight programs and investor protections remains at the forefront as well, they explained.
Former Center for Economic Analysis Senior Fellow Preeti Choudhary of the University of Arizona shared her research on the possibility of preventing material errors by identifying and improving internal controls. She found that material weaknesses infrequently precede material errors, and, as such, internal controls of audits appear to be working. In addition, Choudhary found that lower level controls also did not seem to predict restatements. There may be more career implications for reporting material weaknesses than significant deficiencies, she said, but deficiencies do not seem to lead to weaknesses. The root of problems seems to be difficulty in testing identified controls or even identifying the proper control to test in the first place, she stated.
Former fellow Daniel Aobdia also discussed the effect of audit firms’ quality control measures on overall audit quality, efficiency, and pricing. He found that quality control deficiencies are negatively associated with audit quality, but asked the question of whether all aspects of quality control systems matter or tone at top and selected methodologies are more important. Further, Aobdia explained, partner incentives are different than firm incentives, and it may be improper to generalize findings from an individual-engagement inspection to a firm as a whole. The existence of a benefit to remediation of issues identified by PCAOB and the potential modernization of quality control standards should be considered, he concluded.