Public companies and their auditors got a not-so-subtle reminder from regulators to pay close attention to auditor independence requirements as the Securities and Exchange Commission and the Public Company Accounting Oversight Board delivered more than a dozen enforcement actions against auditors of broker-dealers.
The SEC handed out sanctions to eight small audit firms with fines totaling $140,000 for violating auditor independence rules because they prepared financial statements of brokerage firms whose financial statements the auditors were also auditing. At the same time, the PCAOB disciplined seven different small firms with fines of $2,500 each for the same offense, preparing financial statements or portions of statements for audit clients. The SEC and PCAOB announced the actions in conjunction with a national conference of the American Institute of Certified Public Accountants to cover emerging auditing and financial reporting issues.
Speaking at the conference, SEC Deputy Chief Accountant Brian Croteau said his office has been hearing increasing questions the past few years about broker-dealer audits, “even though our independence rules have applied to these audits since 1975.” The PCAOB assumed regulatory authority over broker-dealer audits under Dodd-Frank. In addition to questions specific to broker-dealer audits, Croteau said he receives numerous questions each year about non-audit services, partner rotation, and business and employment relationships.
Croteau said he reminds companies to assure management and audit committees have appropriate policies and procedures in place to evaluate non-audit services, especially looking for evidence of “scope creep.” That occurs when auditors begin providing non-audit services that are permitted under independence rules, but expand over time to include services that are prohibited under those rules.
“Unfortunately, I am aware of at least one recent circumstance where a large accounting firm resigned from an issuer audit engagement because a purportedly permissible non-audit service was found to have deviated from its intended scope, causing the auditor to impair its independence for the current period,” Croteau said. “When such issues occur, unplanned changes in auditors and potential re-audits can be costly and distracting to the company and its shareholders, and can interfere with capital raising plans.”
To steer clear of auditor independence violations, Croteau said auditors and their public company clients must consider when a relationship creates a mutual or conflicting interest with the audit client, and when a service places an auditor in the position of auditing his or her own work. They also must watch out for actions that result in acting as management or an employee of the audit client, or places the audit firm in a position where the auditor becomes an advocate for the company.
In bigger recent enforcement actions, the SEC has pursued independence charges against EY for providing lobbying services to an audit clients and the KPMG for providing bookkeeping services to an audit client.