September 20, 2007

Small Audit Firms Charged with PCAOB Registration Failures

Last week, the SEC announced charges against 69 audit firms and partners for issuing audit opinions while not registered with the Public Company Accounting Oversight Board. Most of these cases were settled, however the SEC did issue ten contested orders.

All of these cases were brought under Section 102(a) of the Sarbanes-Oxley Act, which provides that “it shall be unlawful for any person that is not a registered public accounting firm to prepare or issue, or to participate in the preparation or issuance of, any audit report with respect to any issuer.” Section 102(a) became effective on October 22, 2003, and to date 1806 accounting firms have registered with the PCAOB.

The SEC’s settled cases largely targeted firms that performed audits for fiscal years ending in 2003 and 2004. The audits were conducted for companies that were all issuers under Sarbanes-Oxley, including companies that were not traded, companies that were trading on the OTCBB or Pink Sheets, and in one case a company that was trading on the AMEX. The audit fees collected by these unregistered firms ranged from $32,000 to nothing, with the firm of Preferred Accounting Services, Inc. charging a whopping $100 for its audit while not registered. (Who says you can’t get anything for $100 these days?) For those firms that did collect audit fees, most returned the fees. Two firms that did not return fees were ordered to disgorge the fees they collected. The firms that collected no fees for their audits provided the SEC with an undertaking that they would not seek to collect the fees from the issuers. The other penalties faced by the audit firms and their partners included censures and cease-and-desist orders.

Among those settling charges were a number of sole proprietors, including an 81-year old auditor located in Bellmore, New York. In a few of the cases, the auditors continued to issue audit opinions even after the PCAOB had disapproved their registration applications because they had already conducted audits while unregistered. No issuers were charged in these actions with having filed non-compliant audit opinions.

You can easily check on the PCAOB’s website to see if an accounting firm is registered with the Board. The list of registered public accounting firms is updated regularly and includes the name of the firm and its headquarters office location.

PCAOB Board Member to Step Down

While on the topic of the PCAOB, founding Board Member Kayla Gillan announced on Tuesday that she will be stepping down from the Board by the end of January 2008. During her time at the PCAOB, Gillan has spearheaded efforts geared toward small businesses, known as the Forum on Auditing in the Small Business Environment. When the SEC re-upped Kayla, they gave her the unexpired term of departed Chair McDonough (whose term expires in January) rather than a full term – and PCAOB Board members are limited to only two terms under Section 101(e)(5)(B) of the Sarbanes-Oxley Act.

Tweaking Your D&O Questionnaire

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– Dave Lynn