Recent Litigation, Censures, and Fines – Brock Schechter & Polakoff LLP
The Public Company Accounting Oversight Board censured Brock, Schechter & Polakoff, LLP, (BSP) owing to its failure to comply with the PCAOB standards on quality control. The company’s registration was revoked and a civil money penalty was imposed. According to (Public Company Accounting Oversight Board, 2012) the company failed to develop policies and procedures that were sufficient to provide reasonable assurance that it undertook the audit engagements that they could manage with professional competence.
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The Primary Accounting Issues and Impact of the Litigation on BSP
The primary accounting issue that led the censoring of BSP was the company’s failure to comply with auditing quality control standards. First, the company allowed unqualified staff with no prior experience in auditing of an overseas company to oversee its audit engagements. Secondly, the company had insufficient internal controls to provide reasonable assurance of its audit competence. According to (ICPA, 2018) the accounting standards 1015 provides the need for professional care in planning and audit performance and preparation of the report. Section 06 of AS 1015, demands that an auditor should be assigned with tasks and supervised commensurate with their level of knowledge, skills and ability (pp. 33). Instead, BSP assigned James Waggoner to be practitioner-in-charge of audits yet he had never audited a public company. In addition, PCAOB provides that an audit firm should have monitoring procedures, which includes postissuance or preissuance of reviews of its selected audit engagements. The rationale is to provide reasonable assurance that there is an effective system of quality control. However, BSP failed to select any of the two audits involving the Chinese and Taiwanese company for peer review or its internal review program.
The censuring of BSP had significant impact on the company’s operations. First, the company was placed under probation, leading to impact on its financial capacity. Secondly, the registration of the company was revoked, which halted its audit engagements, causing severe economic losses to the CPA firm. Lastly, the company was fined $10,000 and Waggoner fined $3,000, which further created significant financial loss to the company.
Inferences of Corporate Ethics Related To Internal Controls and Accounting Principles that Led to BSP Censuring
It is a primary duty of every employee of a firm to ensure proper management of company internal controls. The company chief executive officers, the departmental heads and all the other employees have a responsibility of ensuring the presence of effective and appropriate controls are in place. However, as it concerns Brock, Schechter & Polakoff, LLP, there is an evident of weak internal control system. This is evident from the fact that the audit firm failed to implement internal controls that led to violation of the accounting standards. The weak internal controls did little in dissuading the audit firm from allowing people with low technical skills and experience to oversee audits.
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Evaluation of the Primary Ethical Standards of the Accounting Organization’s Leadership
Any audit firm has a fiduciary responsibility to provide relevant and accurate information that offers a true reflection of the position of a firm. In order to meet this objective, an audit firm must implement the ethical standards and values required of an audit firm. According to (Weygandt, Kimmel & Kieso, 2012) the PCAOB standards require that any audit commitments must be done with professional scepticism. However, the failure of BSP to have effective internal controls and use of staff with less experience and skills, showed lack of desire to provide effective audit procedure in accordance with the guidelines of PCAOB, which is a violation of the professional duty and ethical standards and accounting principles.
The audit firm knew of that Waggoner lacked professional experience to oversee and audit of international firm yet the company proceeded to allow him to oversee the audit process. In addition, the company deliberately (I say knowingly because it had been providing reviews before) failed to provide internal reviews as a source of assurance of its competence. These are violation of principle of corporate ethics as it could lead to provision of false information to potential investors, shareholders and stakeholders.
Specific Conduct Violations Committed
The BSP made two specific conduct violations, regarding the professional care in planning and conduct of an audits and monitoring procedures to provide reasonable assurance of the audit firm’s effectiveness. These conduct violations were in breach of the PCAOB standards that govern professional competence and due care. The decisions to fine Waggoner and BSP and to censure the firm were justified. The audit firm deliberately neglected its core ethical responsibility of proper audit planning and instead went ahead to perform an audit with no effective monitoring system and used inexperienced staff to over the audit process. The decision to fine Waggoner was also justified because he failed to adhere to his professional duty and ethical principles that govern conduct of audit staff by accepting to oversee an audit process for which he had neither prior experience nor skills.
The paper recommends that BSP develops and implement monitoring and controls systems that would ensure the company’s audit engagements are subject to internal controls which would help in identification of possible anomalies of the company auditing procedures before committing to audit engagements. Moreover, the presence of a strong and effective monitoring system will ensure the conformity to all audit assurance procedures.
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