It took exactly seven years to make the charges stick, but a former EY partner accused of shoddy work has finally been named and held accountable for making light of revenue recognition anomalies that led to restatement.
The Public Company Accounting Oversight Board initiated action against Mark Laccetti in 2009 alleging audit violations in 2004. The board held hearings in 2010, issued a decision in 2011, then waited five more years for the appeals process to play out before the board’s prescribed disciplinary action would take effect. Now Laccetti is subject to a two-year bar from being associated with a PCAOB-registered firm and a civil penalty of $85,000.
The case stems from the audit of Taro Pharmaceuticals U.S.A., a subsidiary of Taro Pharmaceuticals Industries Ltd. based in Israel. Laccetti, then with Ernst & Young, was the engagement partner for the U.S. subsidiary’s audit for the year ending Dec. 31, 2004. He had been promoted to partner in July 2004.
According to the PCAOB’s now public 105-page account, an Israeli firm serving as principal auditor for the parent company hired EY to audit the U.S.-based subsidiary. Laccetti knew the company had weak processes for estimating sales allowances that would be key to the accounting for revenue recognition and accounts receivable, but failed to hold anyone’s feet to the fire.
Despite instructions from the principal firm to dig into the accounts receivable reserve, and despite his own audit plan that called for heightened audit attention, Laccetti was “reckless, or, at a minimum, repeatedly negligent,” the PCAOB says. The board accuses him of failing to exercise due professional care, failing to obtain sufficient audit evidence, failing to properly evaluate significant accounting estimates, and improperly relying on management representations. Those are concerns the board airs frequently as a result of its inspections of audit firms.
Laccetti appealed the board’s action to the Securities and Exchange Commission, which kept a lid on any public disclosure of the allegations as prescribed under Sarbanes-Oxley. The SEC says in a Sept. 2 opinion that Laccetti appealed solely on “constitutional and procedural challenges” to the PCAOB proceedings. “He does not challenge the Board’s findings of liability or imposition of sanctions,” the SEC wrote.
After its review of the case, the SEC rejected Laccetti’s arguments and sustained the PCAOB’s findings and sanctions. Then in a separate action published Oct. 21, seven years and a day after the PCAOB issued its initial disciplinary proceedings, the SEC lifted the stay on proceedings, freeing the PCAOB to publish its case.
Laccetti, however, apparently is not finished with his appeals. In its latest release, the SEC indicates Laccetti opposed a motion on behalf of the PCAOB to lift the stay, saying he should be “entitled to maintain the status quo at least until the time the appeal (the Commission’s decision) has run.”
Perhaps the SEC is starting to see through the real cause of Laccetti’s latest appeal? “We find that, because an application for Commission review triggers the stay and the Commission has completed its review, it is appropriate to lift the automatic stay,” the SEC wrote.
Perhaps PCAOB Chairman James Doty has been thinking of Laccetti each of the many times he and others have spoken publicly about the need for PCAOB proceedings to be performed in the open. “Continued litigation postpones -- often for several years -- the day on which the public learns that the PCAOB has charged the auditor or the firm,” Doty testified to Congress in 2012. That denies the investing public any notice that auditors they rely on are under investigation or even sanction by the PCAOB, and it gives auditors incentive to litigate, “regardless of whether they believe they will ultimately prevail,” he said.
Laccetti left EY in 2009 roughly six months before the PCAOB issued its first disciplinary action against him. He has been a partner at audit firm Baker Tilly Virchow Krause ever since, according to his LinkedIn profile. Laccetti did not respond to a request for comment, nor did his legal counsel. EY said it had no comment on the case.