Accounting firm Friedman agreed to pay a $100,000 penalty to settle charges by the Public Company Accounting Oversight Board (PCAOB) it over-relied on the work of unregistered Chinese firms across 12 public company audits.
The PCAOB announced Monday it found Friedman allowed unregistered firms Peking Certified Public Accountants (CPAs) and Beijing Baijielai Financial Consulting Co. to play a substantial role—either performing more than 20 percent of total audit hours or incurring more than 20 percent of total audit fees—in its work during fiscal years 2017 and 2018. The regulator faulted Friedman for failing to establish and implement adequate quality control policies and procedures regarding the use of other accounting firms.
Without admitting or denying the PCAOB’s findings, Friedman agreed to be censured.
The details: “Friedman knew, or should have known, that the unregistered firms were required to register with the board before the firms played a substantial role in any issuer audits,” said the PCAOB in its order. “Friedman, however, failed to take any steps to ensure that the unregistered firms’ participation in the audits was consistent with PCAOB registration requirements and that the unregistered firms did not ‘play a substantial role’ in the audits.
The regulator noted Peking CPAs incurred 52 percent of the total audit hours—well above the 20 percent threshold—in two instances.
Compliance ramifications: The PCAOB last year began cracking down on auditors’ overuse of unregistered accounting firms. WWC was fined $50,000 in April, followed by penalties levied against KPMG affiliates in the United Kingdom, Canada, Italy, the Netherlands, and South Africa for similar rule violations.
Paul Munter, chief accountant at the Securities and Exchange Commission, spoke earlier this month regarding increased regulator scrutiny being paid toward use of other auditors.
“An unregistered accounting firm causes a violation of PCAOB [rules] whenever it plays a substantial role in the audit of an issuer—irrespective of the audit engagement structure used by the lead auditor,” Munter said. “Any lead auditor should be aware of this requirement and safeguard against such violations in its use of other auditors during an audit engagement.”
Friedman’s assets were acquired by Marcum in September. Marcum did not respond to a request for comment.