By Amanda Maine, J.D.
Patrick Bryan, director of the PCAOB’s Division of Enforcement and Investigations, spoke at the AICPA’s recent conference on SEC and PCAOB developments, highlighting the Division’s areas of focus as well as how it has conducted investigations in light of the COVID-19 pandemic. Quality control continues to be a top priority for the board’s enforcement efforts, Bryan said. While some enforcement trends, such as audits of China-based issuer clients and the alteration of audit work papers, continue to be troubling, Bryan also praised how audit firms have availed themselves of the board’s self-reporting program to reduce penalties for cooperation with the PCAOB’s investigations.
Remote investigations. The COVID-19 pandemic and the move to a remote environment presented challenges to enforcement staff, but it was able to use technology to continue its investigations and open new inquiries at a similar rate to the recent past, Bryan said. He also noted that when the staff transitioned to work-from-home, he had been at the PCAOB for only two months and was still getting know his team and his way around the office, including "where the coffee maker is." But Bryan maintained that the transition to work-from-home was made relatively seamlessly and praised the staff for their productivity and professionalism.
Bryan pointed out that, as the SEC’s enforcement staff mentioned earlier in the conference, the PCAOB’s staff also has had to deal with taking testimony remotely. Notwithstanding the challenges relating to remote testimony, the PCAOB was still able to use technology to take sworn testimony, conduct interviews, and advance the board’s investigation priorities, Bryan said. However, he noted that the virtual environment for conducting PCAOB investigations worked better for domestic investigations than cross-border investigations. According to Bryan, cross-border investigations present their own unique challenges. For example, in some jurisdictions, the staff faces data privacy issues for remote interviews, Bryan explained. Still, the enforcement staff remains diligent in pursuing cross-border investigations, he assured.
Going forward. Bryan also outlined the PCAOB’s vision for enforcement and investigations in the future. He expects further referrals from the Inspections Division related to COVID-19, including those implicating failures to adequately respond to risks in this new, virtual operating environment. He cited intangibles as an example the staff will be paying close attention to.
Beyond issues related to the pandemic, Bryan discussed how the Division is setting its goals overall. Consistent with the PCAOB’s strategic plan, Bryan said that the enforcement staff is focused on promptly investigating and prosecuting serious violations of the board’s standards, with the emphasis on "promptly." The faster that the PCAOB can bring these enforcement actions to a close, whether by settlement or litigation, the more investors will be protected, Bryan said.
The Enforcement Division’s priorities continue to be investigations involving violations that present potential risk of harm to investors or to the public interest, Bryan advised. Enforcement staff will also focus on matters concerning integrity of audits, such as the alteration of work papers and non-cooperation with either the inspections or the investigations process. In addition, Bryan echoed remarks made by his Inspections Division counterpart, George Botic, that independence remains a high priority as well.
Quality control is another area of focus for enforcement, just as it is for inspections, Bryan said. While not mentioning it as a separate priority, Byran explained that quality control is subsumed into every investigation involving serious audit violations.
Recent cases. According to Bryan, nearly 34 percent of the PCAOB’s cases over the past two years involved quality control standard violations and will continue to be a focus as the board looks to updating its QC standards.
Bryan also highlighted some specific enforcement and disciplinary actions brought by the Division in 2020. While the numbers of published settled actions are down slightly compared to 2019, Bryan said it was due to the "natural fluctuation" of the enforcement pipeline and remarked that the decline should not be attributed to the staff’s new operating environment related to COVID-19.
In 2020, the PCAOB has issued 16 settled disciplinary orders to date representing 13 different registered firms, and almost 20 individual associated person disciplinary orders, primarily engagement partners and engagement quality review partners, Bryan said. Among some of the more notable cases of 2020, Bryan drew attention to the board’s settled order against Marcum, LLP. In that matter, the PCAOB contended that the firm accepted a new issuer client when the previous auditing firm, having cited material weaknesses in ICFR, resigned from the engagement. There was also a high level of turnover in management, particularly in the accounting function, Bryan described. In addition, the issuer client had significant operations in China, including a subsidiary that was involved in "unusual" transactions.
Marcum allegedly failed to adequately respond to these fraud risks and to problems relating to the staff’s oversight of the audit, Bryan explained, noting that the engagement partner had no prior experience auditing issuers with substantial operations in China. In addition to agreeing to pay a monetary penalty of $250,00 as part of the settlement, Marcum also agreed to review its QC controls and procedures relating to initial client acceptance, Bryan said. He noted that the Marcum case received press attention due to the limitations the PCAOB imposed on the firm from auditing China-based issuers for three years.
Bryan also highlighted an enforcement sweep involving four firms (three China-based and one Hong Kong-based). The firms (Da Hua CPAs, East Asia Sentinel Limited, Ruihua, Zhongua) were fined and censured for failing to timely file their Form 3 disclosures on reportable disciplinary actions. Bryan said he chose to discuss this sweep not because it involved significant audit failures, but because it represented a troubling trend of firms not taking their disclosure obligations seriously.
Other trends noted by Bryan included interference with the PCAOB’s oversight process. There are still too many cases involving the alteration of work papers or interference with the board’s inspection process, according to Bryan. He also singled out cases involving the Big Six, their global network firms, and their associated persons as being another worrisome trend, although he also said the PCAOB will still focus on the accountability of all audit firms, regardless of size.
Not all trends in 2020 were negative, however, Bryan remarked. One positive trend is firms taking advantage of the board’s policy on cooperation and timely and voluntary self-reporting of misconduct, such as backdating or interference with work papers. He added the PCAOB’s policy on self-reporting is available on its website. Under this policy, firms can be eligible for a reduced sanction or even no sanction at all, Bryan explained.