Audit regulators have disciplined a pair of former Ernst & Young auditors for doctoring an audit file in anticipation of an inspection.
The Public Company Accounting Oversight Board has barred the now-former E&Y partner, Peter O'Toole, from associating with a PCAOB-registered firm for three years and fined him $50,000. The board barred the now former senior manager, Darrin G. Estella, from associating with a PCAOB-registered firm for two years. Both auditors can petition the board for reinstatement at the end of their penalty periods. In December, the PCOAB issued an earlier action against Jacqueline Higgins, an E&Y manager, in connection with the same incident.
The PCAOB says the three auditors created, backdated, and added documentation to an audit file when they learned it would soon be inspected by the board. The disciplinary orders say O'Toole was the engagement partner for an audit of an unnamed public company with a Sept. 30, 2009, year-end. The firm gave the company a clean audit opinion on Nov. 23, 2009, then learned the audit would be inspected in April 2010, with inspectors planning to study “securities valuation.”
According to the PCAOB disciplinary orders, the three auditors identified additional documentation that should be added to the audit file, including a review procedures memo, a tie-out of the final financial statements, a working paper related to the calculation of the average forward foreign currency contracts, and a working paper that compiled three checklists. They are accused of creating, backdating, and adding the documentation, then failing to identify it as paperwork added after the original documentation completion date. The board said the actions violate PCAOB Rule 4006, which requires cooperation with Board inspections, and PCAOB Auditing Standard No. 3, which governs audit documentation.
E&Y says O'Toole and Estella violated firm policy and were separated from the firm as a result. Higgins was placed on administrative leave and left the firm at the end of 2010. O'Toole and Estella both have LinkedIn profiles that show they left E&Y in October 2010. O'Toole is now employed as a principal with Citisoft, a business and systems consulting firm that focuses on investment management. Estella's profile lists no further employment.
“As the PCAOB's disciplinary orders describe, our firm's policy explicitly prohibits persons from supplementing or changing audit workpapers in circumstances like those present here,” said E&Y spokesman Charlie Perkins. “We have cooperated fully with the PCAOB throughout its investigation of this matter.”
The PCAOB declined to identify the company whose audit file was doctored or even link the disciplinary order with any inspection finding described in any E&Y published inspection report. So it's not clear whether the board ultimately had any quarrel with the firm's audit work on the specific audit in question or what the auditors might have been trying to cover by tampering with the audit file. “Under the facts and circumstances, the Board did not consider the name of the issuer to be relevant to its findings in the O'Toole and Estella orders,” said PCAOB spokesman Colleen Brennan. “The orders' findings address conduct after the completion of the audit and the issuance of the audit report, concerning non-cooperation with the Board's inspection process and related AS3 documentation violations.”
Perkins said the conduct described in the disciplinary orders had no impact on the firm's audit conclusions or on the client's financial statements.