Tone at the Top for Auditors and Companies and a Next Step

On May 3, 2024, the SEC announced a settled enforcement case against an audit firm and its owner charging them with “deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards” in more than 1,500 SEC filings.

In June 2023, the SEC announced a settled enforcement case against another audit firm for accepting so many new SPAC clients that it overloaded its underlying quality control process.  “[I]n hundreds of SPAC audits, [the firm] failed to comply with audit standards related to audit documentation, engagement quality reviews, risk assessments, audit committee communications, engagement partner supervision and review, and due professional care.”

Over the last several years the PCAOB has enforced against nine audit firms and the SEC has enforced against two other firms for creating environments that encouraged and even required cheating on CPE and ethics exams.

Addressing what appears to be a common theme in all these cases, on May 15, 2024, Chief Accountant Paul Munter issued a Statement titled “Fostering a Healthy ‘Tone at the Top’ at Audit Firms.”  In the Statement Dr. Munter starts by acknowledging that audit firms, like other businesses, have a legitimate interest in earning a profit.  He then emphasizes an overriding issue for auditors:

“But audit firms have also been entrusted to be essential gatekeepers in maintaining the integrity of our capital markets. The leaders of audit firms, and the tone that they set, play a central role in ensuring that professionals within audit firms do not sacrifice integrity and professionalism for profit and growth.”

The Statement discusses a hypothetical situation focused on how a firm might handle a partner who has violated the profession’s independence requirements and the implications alternative treatments may have on firm culture and personnel.  He then discusses why tone at the top matters for public accounting firms and ways of instilling a positive tone at the top.

Tone at the top is an important issue not just for auditors but also for company directors and managers.  As an example financial reporting case, you can read Item 9A of this Chemours Form 10-K which states:

“We did not design and maintain an effective control environment as senior management failed to set an appropriate tone at the top resulting in a material weakness.”

When financial reporting and auditing problems are discovered, tone at the top weaknesses are almost always a root cause.  For audit firms and companies that are focused or want to focus on tone at the top considerations, this assessment tool from the Anti-Fraud Collaboration can be helpful.

As always, your thoughts and comments are welcome!

Auditor Fraud and the Related Client Impact

On May 3, 2024, the SEC announced charges against a Colorado audit firm, BF Borgers CPA PC and its owner, Benjamin F. Borgers.  The SEC’s Accounting and Auditing Enforcement Release’s extensive charges include:

“…the deliberate and systematic failure to audit and review public company and SEC-registered broker-dealer clients’ financial statements in accordance with Public Company Accounting Oversight Board (“PCAOB”) standards … and their fraudulent issuance of audit reports falsely representing that they had done so from at least January 2021 through at least June 2023.”

These failures affected over 350 clients and more than 1,500 SEC filings.

The firm and its owner will pay civil money penalties of $12 million and $2 million respectively.  They are also denied the privilege of appearing or practicing before the Commission and censured.

This case is eerily similar to a 2009 case against Moore & Associates Chartered and Michael J. Moore.  That case involved over 300 clients and also resulted in fines and bars.  (Mr. Moore’s violations actually continued, as you can read in this 2015 Litigation Release.)

Both these cases were brought by the SEC rather than the PCAOB, perhaps because of the structure of the PCAOB’s enforcement activities imposed by the Sarbanes Oxley Act.  Another interesting aspect of these two cases is the difference in the magnitude of the penalties.  In the Moore case the firm paid disgorgement of $179,500 and Moore paid a penalty of $130,000, amounts significantly less than the BF Borgers penalties.

You can find the PCAOB’s 2022 inspection report for BF Borgers CPA PC here.

Companies and their audit committees should be conscious of the issues created when an audit firm does not perform appropriately.  Because of the magnitude and complexity of the issues former BF Borgers clients face, CorpFin and the Office of the Chief Accountant issued this Statement addressing issues including the requirement to file a change in auditor Form 8-K and the impact on annual and quarterly reporting.

As always, your thoughts and comments are welcome.

SEC Climate-Related Disclosure One-Hour Briefings

In this blog post we overviewed the SEC’s new climate-related disclosure rules and mentioned that we would be providing two One-Hour Briefings delving into the details of the rules.  Those briefings, both scheduled for April 18, 2024, are now available for registration:

The SEC’s Revolutionary New Climate Disclosure Requirements – A Deep Dive Into Governance, Strategy, and Risk Disclosures – April 18, 2024 – 1:00 PM EDT

The SEC’s Revolutionary New Climate Disclosures – New Greenhouse Gas Disclosure, Attestation, and Financial Statement Disclosure Requirements– April 18, 2024 – 3:00 PM EDT

As always, your thoughts and comments are welcome.

SEC Adopts Final Rules for Climate-Related Disclosures

In a long-anticipated development, on March 6, 2024, the SEC adopted final rules requiring climate-related disclosures.  The rules add:

    • Non-financial disclosures about climate-related risks, how such risks are managed and related board oversight;
    • Scope 1 and Scope 2 greenhouse gas (GHG) emission disclosures along with phased-in attestation requirements for large-accelerated and accelerated filers;
    • Financial statement disclosures about “capitalized costs, expenditures expensed, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds”;
    • Disclosures about carbon offsets and renewable energy credits or certificates (RECs) if material; and
    • Information about the impact on the estimates and assumptions used to produce the financialstatements from risks and uncertainties associated with severe weather events and other natural conditions and other related issues, if material.

To help companies and advisors implement these new requirements, PLI’s SEC Institute will offer several programs.

We will present two One-Hour Briefings delving into the final rules at 1 p.m. and 3 p.m. on April 18, 2024.  The first briefing will focus on governance related disclosures and the second briefing will focus on GHG emission and financial statement disclosures.  We will put links to the briefings in this blog as soon as they are available.

Our Midyear Forums will include in-depth discussion of the details of the rules.

We will also have a special conference in the early fall focused on understanding and implementing these extensive new disclosures.  We will put a link to this conference in this blog as soon as it is available.

You can read more in the related Fact Sheet and the Final Rule Release.

As always, your thoughts and comments are welcome.

FASB’s Redesigned Website

On January 23, 2024, the FASB launched a redesigned website.  According to the related Media Advisory from the Financial Accounting Foundation, the new website features “streamlined navigation, a simpler menu structure, more attractive and intuitive design, a more robust search algorithm, and more prominent placement of the most important information stakeholders are looking for.”

New websites are in process for the GASB and the FAF.

As always, your thoughts and comments are welcome.

Chief Accountant Statement on Investor Protection and Auditors

On February 5, 2024, SEC Chief Accountant Dr. Paul Munter issued a Statement titled “An Investor Protection Call for a Commitment to Professional Skepticism and Audit Quality.”  The Statement reminds auditors and audit committees that their ultimate responsibility is to investors.

In the introduction to the Statement Dr. Munter notes that the PCAOB inspection process has found an increase in audit deficiencies over the last several years:

“The Public Company Accounting Oversight Board (“PCAOB”) reported a troubling increase in deficiency rates found in its recent inspections.  In its 2022 inspections of audits performed in 2021, the PCAOB inspections program found that insufficient audit evidence was obtained to support the auditor’s opinion in 40% of inspected audits. In its 2021 inspections, this same deficiency rate was 34%, up from 29% in its 2020 inspections. This is a troubling trendline in PCAOB inspections results.”

He then goes on to state:

“While we believe strongly that most auditors are talented professionals, dedicated to performing high-quality audits, the issues and trends identified in PCAOB inspections in recent years demand the attention and renewed commitment of the entire profession to deliver on its mission of protecting investors.”

The Statement then focuses on two principal areas:

Management’s Role and Auditors’ Exercise of Professional Skepticism in Response to Changing Conditions 

After a discussion focused on several audit issues, including frequent inspection findings and the importance of professional skepticism, the Statement emphasizes that audits are not like other business services:

“Applying professional skepticism can sometimes come at a cost, whether it is budget overruns, conflicts with management, or pressure from within the audit firm to maintain client relationships. But the audit engagement is not a standard business relationship between service provider and client, with profit as the primary goal and indicator of success. Instead, as the Supreme Court recognized, the auditor’s ultimate responsibility is to the investing public.”

The Importance of the Audit Committee in Prioritizing and Promoting Audit Quality

In this section of the Statement Dr. Munter focuses on important aspects of audit committee oversight of the audit process:

“Academic studies highlight the risk that, in some cases, in executing their mandate, audit committees may look to protect the interests of the issuer and its management over the interests of investors.  This risk can arise out of an audit committee’s association or coziness with the issuer or its management or through management’s influence over the audit committee’s supervision of the auditor. We remind audit committees of their role as critical gatekeepers for investor protection through oversight of a high-quality audit and the benefit of having an audit committee that is independent of management.”

As always, your thoughts and comments are welcome.