By John Filar Atwood
The PCAOB has imposed $50,000 fines and other penalties against two auditors that used unregistered accounting firms to help them conduct issuer audits. In one instance, the unregistered firm, which is based in Hong Kong, had tried to register with the PCAOB but was unable to complete the process due to information-sharing restrictions imposed by China. Both auditors agreed to settle without admitting or denying the allegations.
Failure to supervise. One action was brought against WWC, P.C. for using its Hong Kong affiliate (WWC-Hong Kong) in ten issuer audits. According to the PCAOB, WWC allowed WWC-Hong Kong to exceed the level of participation requiring registration with the Board and thereby failed reasonably to supervise the Hong Kong firm in a manner designed to prevent violations of the Sarbanes-Oxley Act and PCAOB rules.
Specifically, WWC took no steps to ensure that WWC-Hong Kong’s participation would be consistent with PCAOB registration requirements. The PCAOB noted that in 2014 WWC-Hong Kong took steps to register with the Board, but did not complete the registration process after concluding that it would be unable to provide certain necessary information. Consequently, WWC-Hong Kong remained unregistered and was not permitted to play a substantial role in the preparation or furnishing of an issuer audit report.
For failure to supervise its unregistered affiliate, the PCAOB censured WWC, imposed a $50,000 civil penalty, and ordered WWC to take steps to improve its quality control policies and procedures. The PCAOB said that the WWC matter is the first in which it imposed sanctions for a failure reasonably to supervise an unregistered firm.
Unregistered Chinese firm. In the second matter, the PCAOB determined that JLKZ CPA LLP, under an arrangement with an unregistered Chinese accounting firm, issued two audit reports despite knowing that the personnel of the unregistered firm acted as the engagement partner, audit staff, and engagement quality reviewer for the audits. Moreover, the unregistered firm received most of the audit fees.
The PCAOB determined that because the Chinese firm, not JLKZ, performed the underlying audits, JLKZ was not in a position to express an opinion on the two audits in question. By doing so JLKZ violated AS 3101, the Board stated. The PCAOB further determined that JLKZ’s managing partner directly and substantially contributed to the firm’s violations.
The Board imposed a $50,000 penalty jointly and severally on JLKZ and its managing partner, censured them, and restricted for two years JLKZ’s ability to accept new issuer or broker-dealer audit engagements. According to the PCAOB, this represents the first time the Board has imposed sanctions against a firm for issuing an audit report where a separate, unregistered firm conducted the underlying audit.