Securities Regulation Daily PCAOB brings first action against domestic global network firm for quality control violations
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Wednesday, December 20, 2017

PCAOB brings first action against domestic global network firm for quality control violations

By Jacquelyn Lumb

The PCAOB has announced its first settled disciplinary proceeding against a domestic global network firm for quality control violations. The board found that the Philadelphia financial services practice of Grant Thornton LLP allowed two partners to serve as engagement partners even though they had failed to properly perform audits in previous years. In addition to its failure to support and monitor the partners, the firm also violated PCAOB auditing standards. Grant Thornton was censured and ordered to pay a $1.5 million civil penalty. One of the partners was censured, ordered to pay a $15,000 penalty, and was barred from associating with a PCAOB-registered accounting firm (Release No. 105-2017-054, December 19, 2017).

According to the board’s order, from 2013 to 2014, Grant Thornton violated PCAOB rules, quality control standards, and auditing standards related to the assignment, monitoring, and supervision of personnel in connection with two issuer audit engagements. The firm also violated the board’s rules and standards during its integrated audit of The Bancorp Inc.’s 2013 financial statements and internal control over financial reporting.

Lack of proficiency. Grant Thornton had significant concerns about the proficiency and technical competence of two engagement partners—David Burns, the engagement partner in the Bancorp audit, and one referred to as Partner B, who had been placed on a performance improvement plan. Burns had served on previous audits in which the firm’s internal reviews had resulted in noncompliant ratings and audits in which PCAOB inspectors had identified significant deficiencies. Partner B had served as the engagement partner on four audits in which the PCAOB inspectors identified significant deficiencies.

The firm failed to exercise due professional care, including professional skepticism, during the 2013 audit of Bancorp. The firm failed to obtain sufficient audit evidence with respect to the reported value of Bancorp’s net loans, the effectiveness of Bancorp’s controls relating to its allowance for loan and lease losses (ALLL), and the reasonableness of Bancorp’s ALLL, which the Board noted is a known significant risk and a significant accounting estimate.

Financial restatement. Bancorp announced on April 1, 2015 that its previously issued financial statements for the years ended December 31, 2012 and 2013, and the quarterly financial statements for those years and the first three quarters of 2014 could no longer be relied upon because certain provisions for loan losses for commercial loans were taken in the wrong periods. Bancorp restated its financial statements to report a $141 million reduction in its net loans as of December 31, 2013 and increases in its provision for loan and leases losses of $28.9 million during 2013 and $90.5 million during 2012.

Grant Thornton settled the proceedings without admitting or denying the board’s findings. The firm agreed to arrange for a member of its national professional practice department to conduct a pre-issuance quality control monitoring review of all of its financial services issuer audits in which the Philadelphia office issues an audit report or plays a substantial role in the issuance of an audit report. The firm also agreed to assign a financial services designated engagement quality reviewer from another office for one year and to provide education and training to the Philadelphia office personnel in ALLL, among other topics.

Burns also settled the proceedings without admitting or denying the findings. He may petition the board to associate with a registered public accounting firm after one year, but if he is permitted to do so, he will be prohibited from participating in certain capacities until two years from the date of the order, including serving as an engagement partner or engagement quality reviewer, or supervising the work of another person serving in those roles (Release No. 105-2017-055, December 19, 2017).

Deloitte Turkey proceeding. In a separate action, the PCAOB announced a $750,000 settlement with DRT Bagimsiz Denetim ve Serbest Muhasebeci Mali Musavirlik A.S. (Deloitte Turkey) for its failure to cooperate with an inspection and for quality control, ethics, and audit documentation violations. The firm was censured, ordered to certify that it has remediated the quality control deficiencies identified in the order, ordered to adopt policies and procedures related to its system of quality control, and to provide additional training to its associated persons. The firm agreed to the sanctions without admitting or denying the findings. The board noted that in imposing the sanctions, it took into account the firm’s extraordinary cooperation in its investigation into the improper alteration of work papers in advance of a 2014 inspection (Release No. 105-2017-050, December 19, 2017).

The individuals who devised the plan to alter the work papers were senior partners of the firm. According to the order, in 2016, the firm began the process of installing new leadership, which, in turn, has begun to enhance the firm’s system of quality control.

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