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PCAOB Disciplines Grant Thornton Auditors

Tammy Whitehouse | February 19, 2010

Audit regulators have sanctioned a Grant Thornton engagement partner and staff auditor for failing to flag questionable revenue recognition practices in the 2004 financial statements of a small technology company.

Partner Ray O. Westguard, 69, has been barred from being associated with a public accounting firm that is registered with the PCAOB to do public company audit work, though he can apply for reinstatement after two years. Staff Auditor Jennifer Nakao, 34, is suspended from being associated with a registered firm for one year.

Both Grant Thornton auditors worked in the firm’s Salt Lake City, Utah, office auditing financial statements for Imergent, Inc., a technology company whose revenue comes primarily from software licensing. Imergent sells software that allows customers to build their own Websites, and most of the sales went to customers who were given 24-month extended payment term arrangements.

The PCAOB orders against Westguard and Nakao say the two failed to properly challenge Imergent’s practices around recognizing revenue when there was reason to doubt whether the company would fully collect on some of the extended payment plans. Even the firms’ internal concurring review partner questioned the accounting: “I am concerned that some of the company’s recognition conclusions are becoming less plausible,” the internal reviewer wrote in an e-mail message, according to the PCAOB. “Specifically, the company’s ‘bad debt’ experience raises questions.”

Imergent’s accounting ultimately caught the eye of the Securities and Exchange Commission’s Division of Corporation Finance in 2005, prompting the company to restate its 2003 and 2004 financial statements and fire Grant Thornton as its audit firm.

The PCAOB action does not make any findings of wrongdoing against Grant Thornton. The PCAOB’s inspection report regarding Grant Thorton’s 2004 audit work makes no mention of an audit deficiency with circumstances matching the claims against Westguard and Nakao. In that year, the PCAOB performed inspection work at the firm’s national office and 13 of its 49 field offices.