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It’s not surprising that the FTX fiasco resulted in some charges against its auditor. But I noticed that the announcement also included the settlement of previous charges against Prager Metis for violating auditor independence rules.

The SEC’s complaint alleged that, between approximately December 2017 and October 2020, the Prager Entities improperly included indemnification provisions in engagement letters for more than 200 audits, reviews, and exams and, as a result, were not independent from their clients, as required under the federal securities laws.

The final judgments provide for permanent injunctions, combined civil penalties of $1 million, and combined disgorgement with prejudgment interest of $205,000. The Prager Entities also agreed to be censured. The settlement is subject to court approval.

This week, the PCAOB released a Spotlight on auditor independence — “an area of common deficiencies year after year” — highlighting recent staff observations. This follows May 2023 enhancements to audit inspection reports, which now include a section on auditor independence as part of the PCAOB’s transparency initiative. The data shows that independence-related comments increased to 14% (as a percentage of total comments) compared to 9% in 2022 and 7% in 2021. The most common issue in all three years was audit committee pre-approval requirements. These deficiencies consisted of:

– Lack of evidence that the necessary audit committee pre-approval had occurred prior to the audit firm commencing audit, non-audit and/or tax services

– Instances where the auditor did not describe in writing to the potential client’s audit committee the scope of any non-audit services provided that may bear on independence prior to its initial engagement

– Instances where the auditor did not describe in writing any non-audit services provided that may bear on independence annually to the client’s audit committee or where annual communications failed to describe share ownership (and subsequent sale) by a covered person or inaccurately presented professional standards

The end of the report lists audit committee considerations. Here are two related reminders:

– Independence is a shared responsibility between the entity under audit, its audit committee, and its auditor. It is important for the company to have policies and procedures to proactively alert auditors to proposed or pending merger and acquisition activity that could have an impact on auditor independence.

– If the audit committee pre-approves services using pre-approval policies and procedures, the audit committee should consider whether the pre-approval policies and procedures are sufficiently detailed as to the particular services to be provided so that the audit committee can make a well-reasoned assessment of the impact of the service on the auditor’s independence.

We’ve posted this and other resources in our “Auditor Independence” Practice Area. We also have heaps of other helpful resources in our “Audit Committees” Practice Area.

– Meredith Ervine