In November 2021, the Securities and Exchange Commission (“SEC”) appointed four new Board members, including Chair Erica Williams, to the five-member Public Company Accounting Oversight Board (“PCAOB”).[i] Similar to the SEC, the Board has taken a more vigorous approach to enforcement of Board rules and PCAOB auditing standards. Throughout 2022, the new Board took significant steps to overhaul the enforcement program and to establish new priorities leading to levying record civil money penalties totaling $11 million. The Board has signaled through its increased enforcement activity and significantly higher monetary penalties that there is a new sheriff in town.
2022 Brought Tougher Enforcement That Will Continue Into 2023
In our article last year, we predicted that “[w]ith four new members of the Board, including a new Chair, who appear to be more in step with the progressive enforcement goals of SEC Chairman Gary Gensler and SEC Enforcement Director Gurbir Grewal and a budget increase of 8% in 2022, we expect more robust inspections and enforcement activity in 2022.”[ii] That prediction proved to be accurate. Both the PCAOB’s new Chair and its new Acting Director of the Division of Enforcement and Investigations (“DEI”) stated in public speeches that strengthened enforcement was one of three priorities for the PCAOB in 2022 and going forward into 2023.
After four years of lower enforcement activity, PCAOB enforcement experienced a significant uptick in 2022 in terms of both the number of settled orders made public and the amount of civil money penalties assessed. In 2022, the PCAOB made public 41 settled orders and one adjudicated disciplinary order.[iii] In contrast, 2018 through 2021 were years marked by a significant drop in the number of settled orders from a high of 54 settled orders made public in 2017.[iv]
Note: Settled orders may be classified in more than one category.
In public speeches, Chair Williams and enforcement staff have signaled their intent to strengthen enforcement going forward. In two speeches in 2022, Chair Williams noted the Board’s intention “to use every tool in our enforcement toolbox and impose significant sanctions, including substantial penalties, to ensure there will be consequences for putting investors at risk.”.[v] Chair Williams also stated that DEI would be pursuing enforcement actions involving certain types of violations for the first time and by increasing the use of sweeps against firms where there may be a violation of PCAOB standards or rules.[vi] In addition, the PCAOB appears to be lowering the bar for bringing enforcement actions. Where the bar used to be a single act of reckless conduct or multiple acts of negligent conduct, Chair Williams has noted that “a single, serious wrongful act, whether reckless or negligent” can be “serious enough to put investors at risk . . .”[vii] SEC Commissioner Hester M. Peirce has raised concerns that such an approach to enforcement “could devolve quickly into bringing enforcement actions for minor infractions . . .”[viii]
Enforcement Priorities in 2023
Some key takeaways from the 2022 settled orders are:
- Both firms and individuals settling enforcement matters with the PCAOB paid on average over 300% more in civil money penalties than in 2021;
- Continued focus on violations of Board processes (e.g., noncooperation with inspections due to improper alteration and/or backdating of audit work papers);
- Sweeps against firms related to Form AP and Form 3 filings;
- Four orders against three foreign affiliates of a Big Four firm, resulting in $7.7 million civil money penalties imposed on the firms;
- Continued focus on cross-border audits and non-U.S. firms (11 orders involved foreign auditors and more than half of civil money penalties were assessed against firms and individuals outside of the U.S.); and
- Renewed focus on quality control violations (e.g., KPMG exam cheating case).
In his presentation to the December 2022 AICPA conference, DEI Acting Director Adler stated that DEI would strengthen enforcement through:
- Rigorous enforcement;
- Significant sanctions;
- Increased transparency; and
- Collaboration with other regulators.
In 2023, we anticipate the following to be enforcement trends:
- Substantially higher civil money penalties;
- Continued focus on violations of Board processes (e.g., work paper alteration and backdating), including noncompliance with the Board’s reporting requirements;
- Renewed focus on cross-border audits by foreign registered firms, particularly in mainland China as a result of the new cooperation agreement between the PCAOB and Chinese regulatory authorities;
- Continued focus on deficient quality controls; and
- Potentially more actions against non-partner personnel.
Expect High Civil Money Penalties In 2023
In the past, the PCAOB has been criticized for assessing civil money penalties that were considered modest.[ix]
In remarks to the December 2022 AICPA conference, DEI Acting Director Adler stated that the Board is imposing stronger sanctions, including increasing penalties to promote greater accountability and deter misconduct. In the past five years, the PCAOB assessed penalties against individuals less than half of the time and firms only about 86 percent of the time. In contrast, in 2021, civil money penalties totaled only $1.1 million and in 2020, only $1.5 million. In 2022, the Board assessed civil money penalties in 100 percent of its settled orders for a record total of $11 million.[x]
Of the $11 million, $10.1 million were from firms and $900,000 from individuals. The highest civil money penalty assessed against a firm was $4 million against KPMG Colombia for work paper alteration and quality control violations related to work paper archiving and training and monitoring that prevented the firm from identifying cheating on tests for mandatory training.[xi] Small firms got hit the most, with an increase in average civil money penalties close to 200% from 2021 to 2022, compared to less than a 70% increase for large firms.[xii]
Total penalties imposed against individuals more than quadrupled, and the PCAOB’s record of highest civil money penalty against an individual was made twice in 2021, imposing a civil money penalty against an individual of $100,000 in April 2022, and another individual of $150,000 in October 2022.[xiii] In 2022, the average civil money penalties imposed on individuals associated with small firm was only $5,000 lower than individuals associated with the largest six firms[xiv] and their foreign affiliates and more than $9,000 higher than individuals associated with other large firms and their foreign affiliates.
The PCAOB is not alone among regulators in assessing higher civil money penalties. The U.K.’s audit regulator, the Financial Reporting Council (“FRC”), meted out a record £43m in fines to audit firms.[xv] This represents a 300% increase from 2021.
Higher civil money penalties raise heightened concerns for small firms and their associated persons. A substantial civil money penalty can be a death sentence for a small firm and deplete the life savings of a small firm auditor. In four orders in 2022, involving one firm and four individuals, the PCAOB considered the financial resources of the respondents in imposing a lower civil money penalty.[xvi] These orders state what the penalty would have been prior to the reduction. In the case of the firm, the firm was a small firm that had ceased operations. In the case of the four individuals, all were associated persons of a Big-four. However, the PCAOB provides little guidance as to when and how the financial resources of a firm or individual are taken into account by the Board in assessing the respondent’s ability to pay and determining whether the civil money penalty should be reduced.
Board Continues Focus on Violations of Board Processes
Noncooperation with inspections continues to be an enforcement priority. Firms who improperly alter work papers, backdate work papers, or otherwise mislead PCAOB inspectors have received the highest civil money penalties. The largest civil money penalty of 2022 was a $4 million fine sanctioning KPMG’s Colombia affiliate.[xvii] KPMG Colombia failed to prevent or detect widespread document alteration and backdating in advance of a PCAOB inspection and failed to prevent or detect improper answer sharing in connection with internal training and related tests. The firm was required to pay a $4 million penalty, complete undertakings to improve its system of quality control, engage an independent consultant, and agree to admissions in the settled order. PCAOB also sanctioned three associated persons of the firm.
The PCAOB has recently focused on firms’ use of an unregistered firm in a substantial role on an audit. In three matters, the PCAOB sanctioned KPMG South Africa, KPMG U.K., and WWC P.C. for using unregistered firms to circumvent PCAOB registration requirements.[xviii]
The PCAOB also conducted enforcement sweeps against firms who failed to timely file Form AP (7 orders) and Form 3 (6 orders). In 2022, the Board sanctioned, in total, fifteen firms, including two orders were not part of the sweeps, for violating PCAOB Rule 2203, Special Reports, by failing to timely file Form 3 (6 firms) and PCAOB Rule 3211, Auditor Reporting of Certain Audit Participants, by failing to timely file Form AP (9 firms). One of the fifteen firms was also sanctioned for violating PCAOB Rule 2200, Annual Report, by failing to file Form 2 inaccurately.[xix]
Cross-Border Audit Enforcement
The PCAOB continues to focus on non-U.S. firms. Over half of the 41 settled orders in 2022 (22 orders) and the sole adjudicate disciplinary order involved foreign firms and individuals. $9.7 million of the $11 million civil money penalties the PCAOB imposed in 2022 were against foreign registered firms and their associated persons. The Board sanctioned KPMG’s South Korea affiliate and two individuals for audit failures related to accounts receivable and improper creation and alteration of work papers to cover up failures.[xx] The firm received a $350,000 civil money penalty and undertakings. The two individuals were each barred for three years and received $50,000 and $40,000 civil money penalties, respectively.
Due to the recently enacted Holding Foreign Companies Accountable Act, in August, the PCAOB signed a Statement of Protocol (“SOP”) Agreement with the Chinese authorities. The SOP allows the PCAOB to conduct inspections and investigations of PCAOB-registered public accounting firms in China and Hong Kong. In December 2022, the PCAOB announced that it secured complete access to inspect and investigate registered public accounting firms in mainland China and Hong Kong. In 2023, with this new access, we anticipate that DEI will be pursuing more investigations of Chinese auditors.
Quality Control
Quality control is a new enforcement priority. PCAOB inspectors have been increasingly focused on accounting firm’s systems of quality control system, and 2022 saw an increase in enforcement activity in this area. In 2022, fourteen orders involved quality control violations, including seven against foreign affiliates of Big Four accounting firms, compared to seven orders in 2021 of which two were against foreign affiliates of Big Four accounting firms.
In KPMG LLP (United Kingdom),[xxi] the PCAOB sanctioned KPMG’s UK affiliate or quality control violation involving exam cheating and imposed a $2 million civil money penalty and undertakings requiring the firm to revise existing and adopt new quality control policies. In another exam cheating case involving quality control standard violations, the PCAOB imposed a $750,000 penalty and undertakings on PwC Canada.[xxii]
The PCAOB sanctioned KPMG India for quality control violations for implementing and monitoring policies regarding documenting and dating of audit documentation.[xxiii] KPMG engagement team members signed and dated blank audit work papers and then went back and completed the work papers after the audit opinion was issued, but before the end of the 45-day audit documentation period. The Board imposed a $1 million civil money penalty and undertakings on the firm.
Conclusion
Overall, in 2023, we expect more robust PCAOB enforcement efforts. DEI will continue to focus on significant audit failures, quality control, audit integrity, and compliance. However, both large and smaller firms and their associated persons should be prepared to face substantially higher civil money penalties in settling enforcement investigations. In addition, we expect that DEI will be more aggressive in including multiple violations, some of which may not have been charged in the past. We also anticipate that the PCAOB will continue its broadened use of undertakings in settled orders against firms, particularly when the violations involve quality control policies and procedures.
Bob Cox is a partner at the law firm of Briglia Hundley, P.C. and a former Assistant Director with PCAOB DEI.
Steve Richards is Senior Managing Director at Ankura, former special advisor to the PCAOB Chairman, former special advisor to the PCAOB DEI Director, and former assistant chief accountant SEC Enforcement.
[i] Board member Duane DesParte, who was appointed to the Board in 2018, was the only Board member to survive the SEC’s 2021 house cleaning.
[ii] Cox and Richards, “Expect More Robust PCAOB Enforcement This Year,” Law360 (Feb. 9, 2022).
[iii] PCAOB also announced five orders terminating a bar of an accountant which are not included in the 41 settled disciplinary orders. See In re Hyung Seung Lee, PCAOB Rel. No. 105-2022-008 (May 24, 2022); In re Gale Moore, PCAOB Rel. No. 105-2022-018 (Sept. 27, 2022); In re Alexandria Yi, PCAOB Rel. No. 105-2022-023 (Oct. 4, 2022); In re Marco Aurélio Paulino Neves, PCAOB Rel. No. 105-2022-016 (Aug. 29, 2022); In re Susan Lunn Powell, PCAOB Rel. No. 105-2022-030 (Nov. 30, 2022).
[iv] The PCAOB made public 20 settled orders in 2018, 30 settled orders in 2019, 17 settled orders in 2020, and 21 settled orders in 2021.
[v] Speech, Erica Y. Williams, Council of Institutional Investors (Jul. 28, 2022), PCAOB Chair Williams Remarks on 20th Anniversary of Sarbanes-Oxley Act and Establishment of the PCAOB | PCAOB (pcaobus.org).
[vi] Id.
[vii] Speech, Erica Y. Williams, Council of Institutional Investors Fall Conference (Sept. 22, 2022), https://pcaobus.org/news-events/news-releases/news-release -detail/pcaob-chair-williams-delivers-remarks-at-cii-fall-conference; see also id. (“For any violation of PCAOB standards that is serious enough to put investors at risk, the excuse that ‘it only happened once’ simply won’t cut it. We will not hesitate to bring cases that hinge on only a single, serious wrongful act, whether reckless or negligent”).
[viii] Statement, Commissioner Hester M. Peirce, “PCAOB’s Ballooning Budget” (Dec. 23, 2022), SEC.gov | PCAOB’s Ballooning Budget.
[ix] In September 2019, the Project on Government Oversight published an analysis criticizing PCAOB enforcement and civil money penalties. POGO noted that only $6.5 million in civil money penalties had been assessed against Big Four accounting firms from 2003 to 2019 and auditors at Big Four firms were fined only $40,000 during that same period. Ellen Graper, “PCAOB on pace for record year of financial penalties,” Accounting Today (Aug. 19, 2022).
[x] Speech, Erica Y. Williams, Council of Institutional Investors (Jul. 28, 2022), PCAOB Chair Williams Remarks on 20th Anniversary of Sarbanes-Oxley Act and Establishment of the PCAOB | PCAOB (pcaobus.org).
[xi] In re KPMG, S.A.S., PCAOB Rel. No. 105-2022-034 (Dec. 6, 2022).
[xii] Large firms include the 2022 Annually Inspected Firms published by the PCAOB and their foreign affiliate.
[xiii] In re Scott Marcello, CPA, PCAOB Rel. No. 105-2022-004 (Apr. 5, 2022) ($100K penalty against former vice chair of KPMG LLP for failure to supervise); In re Jonathan B. Taylor, CPA, PCAOB Rel. No. 105-2022-025 (Oct. 18, 2022) ($150K penalty against partner of a small firm for non-cooperation involving altering and backdating audit work papers).
[xiv] The largest six firms, as referred to in this article, are BDO, Deloitte, Ernst & Young, Grant Thornton, KPMG, and PricewaterhouseCoopers.
[xvi] In re KPMG Inc., Cornelis Van Niekerk, and Coenraad Basson, PCAOB Rel. No. 105-2022-015 (Aug. 29, 2022) (one individual); In re Hall & Company Certified Public Accountants & Consultants, Inc. and Anthony J. Price, CPA, PCAOB Rel. No. 105-2022-029 (Nov. 3, 2022) (firm had ceased operations); In re José Daniel Meléndez Giménez, PCAOB Rel. No. 105-2022-035 (Dec. 6, 2022); In re Edgar Mauricio Ramírez Rueda, PCAOB Rel. No. 105-2022-036 (Dec. 6, 2022); In re Marco Alexander Rodríguez Ramírez, PCAOB Rel. No. 105-2022-037 (Dec. 6, 2022).
[xvii] In re KPMG, S.A.S., PCAOB Rel. No. 105-2022-034 (Dec. 6, 2022).
[xviii] In re WWC, P.C., PCAOB Rel. No. 105-2022-006 (Apr. 19, 2022); In re KPMG Inc., Cornelis Van Niekerk, and Coenraad Basson, PCAOB Rel. No. 105-2022-015 (Aug. 29, 2022); In re KPMG LLP (United Kingdom), PCAOB Rel. No. 105-2022-031 (Dec. 6, 2022).
[xix] See In re Spielman Koenigsberg & Parker, LLP, PCAOB Rel. No. 105-2022-024 (Oct. 18, 2022).
[xx] In re KPMG Samjong Accounting Corp., PCAOB Rel. No. 105-2022-012 (Aug. 16, 2022); In re Jin Tae Kim, PCAOB Rel. No. 105-2022-013 (Aug. 16, 2022) (3-year bar and $50,000 penalty); In re Se Woon Jung, PCAOB Rel. No. 105-2022-014 (Aug. 16, 2022) (3-year bar and $40,000 penalty).
[xxi] In re KPMG LLP (United Kingdom), PCAOB Rel. No. 105-2022-032 (Dec. 6, 2022).
[xxii] In re PricewaterhouseCoopers LLP, PCAOB Rel. No. 105-2022-002 (Feb. 24, 2022).
[xxiii] In re KPMG Assurance and Consulting Services LLP and Sagar Pravin Lakhani, PCAOB Rel. No. 105-2022-033 (Dec. 6, 2022).
Originally published by Law360
© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
