In a January 2012 article, we reviewed the enforcement program of the Public Company Accounting Oversight Board (the "PCAOB" or "Board") over its initial decade, following the Board's establishment under the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley").1 This article updates that analysis by examining the PCAOB's enforcement program in 2012, as reflected in Board proceedings made public last year.
Our update focuses on PCAOB proceedings "made public" last year, because the PCAOB remains subject to restrictions under Sarbanes-Oxley that limit its ability to publicize enforcement actions against registered public accounting firms or their associated persons. Specifically, under Sarbanes-Oxley and the Board's rules, the PCAOB is not authorized to make its enforcement proceedings public until (1) the parties consent to a public hearing,2 (2) the Board has imposed sanctions and the time to file an appeal with the Securities and Exchange Commission (the "SEC" or "Commission") has expired,3 or (3) the SEC, on appeal, issues an order regarding the sanctions imposed.4 On many occasions, the PCAOB has chafed at these requirements, arguing that they limit the public's ability to understand the Board's enforcement priorities. The PCAOB is also concerned that the restrictions create an incentive for respondents in enforcement cases to contest the Board's allegations and appeal adverse decisions in order to delay publicity about the proceedings.5 To date, however, the PCAOB has not been able to persuade Congress to amend Sarbanes-Oxley to allow the Board to announce when it has commenced a disciplinary proceeding against a registered public accounting firm or an associated person.6
Between 2005 and 2011, the PCAOB publicly announced the resolution of 45 enforcement actions. In 2012, the Board made 11 additional enforcement proceedings public, compared to 10 the prior year. They included eight proceedings that were settled with the consent of the respondents and three adjudicated proceedings where the time for the respondents to file further appeals had expired. The cases announced by the Board in 2012 provide insights into the PCAOB's recent enforcement priorities and include:
Several proceedings where the PCAOB found that registered firms or their associated persons had failed to cooperate with the Board's Inspection Staff or Enforcement Staff, had improperly created or altered workpapers or related audit documentation, and/or had failed to file required annual reports or pay required Board support fees; A number of proceedings alleging serious audit failures relating to audits of public companies headquartered in China and other jurisdictions outside the United States; A case against a "Big Four" accounting firm and several of its partners that included a $2.0 million fine against the firm and illustrates when the Board may decide that an engagement team's alleged misinterpretation of GAAP or PCAOB auditing standards should also give rise to sanctions against a firm; Several proceedings in which the PCAOB decided to hold senior partners at registered public accounting firms secondarily liable under Board Rule 3502 for their firms' failure to adopt or implement adequate systems of quality controls; and A proceeding in which the PCAOB found repeated audit failures by a registered firm, but decided to require the firm to retain an independent monitor to oversee and evaluate improvements to the firm's quality controls, rather than terminate its registration with the Board or suspend the firm from auditing public companies for an extended period. We discuss below the most notable features of the cases announced by the PCAOB in 2012. The proceedings suggest that the Board is focusing its enforcement resources on matters that it believes will send crucial messages to registered public accounting firms and their associated persons regarding compliance, not only with auditing and quality control standards, but also with the Board's procedural rules on inspections and investigations.7
Notable Features of PCAOB Proceedings Announced in 2012
Alleged Failures to Cooperate with the Board's Inspection or Enforcement Staffs
Under Sarbanes-Oxley and the Board's rules, registered public accounting firms and their associated persons must cooperate with requests for information from the Board's Inspection or Enforcement Staffs. This obligation includes the responsibility, when requested, to provide the PCAOB Staff with access to audit workpapers and related documentation on a timely basis that accurately reflects the work performed before issuing an audit report on an issuer's or registered broker-dealer's financial statements or internal controls. When a registered public accounting firm fails to cooperate with the Board's Inspection Staff or Enforcement Staff, or provides the Staff with altered or misleading audit documentation, the PCAOB treats such actions as a threat to the integrity of its processes. Several cases announced by the PCAOB in 2012 reflect the Board's continued efforts to sanction registered firms and their associated persons for engaging in such misconduct.
Specifically, cases announced by the PCAOB in 2012 included allegations that accounting firms or individual CPAs obstructed the Board's inspection program by adding workpapers to audit files after they learned that the Inspection Staff intended to review specific audit engagements, as well as backdating documents to create the misleading impression that required audit procedures had been performed.8 In two actions brought against firms, the PCAOB revoked the firms' registration with the Board, allowing one firm to reapply in five years and the other firm to reapply in two years. In other proceedings against individual CPAs, Board sanctions ranged from restrictions on the role that a CPA could play on public company audit engagements over a two-year period to a permanent bar on association with a PCAOB-registered firm.
In a separate proceeding announced in 2012, the SEC, to which adverse PCAOB decisions may be appealed...