Charges include one case of fraud, and other violations ranging from auditor independence to noncooperation
Washington, DC, May 7, 2014
The Public Company Accounting Oversight Board today announced settled disciplinary orders against two audit firms and four individuals for violations of the federal securities laws and PCAOB rules and auditing standards relating to auditor independence, quality control, and audit documentation.
Charges in the disciplinary orders also include instances of noncooperation in a Board inspection and a Board investigation, and the auditor committing fraud by issuing an audit report falsely stating that the audit had been conducted in accordance with PCAOB rules and standards.
"Investors in U.S. capital markets rightly expect the auditors of public companies to abide by the professional standards and rules set by the federal securities laws and the PCAOB," said James R. Doty, PCAOB Chairman. "Investors also rightly expect the PCAOB to hold accountable auditors who fail to meet those standards."
Each of the respondents offered to settle the charges and, in each settlement, agreed to the imposition of certain sanctions. The respondents neither admitted nor denied the Board's findings.
"Today's cases demonstrate that auditors must take seriously their obligations to investors," said Claudius B. Modesti, PCAOB Director of Enforcement and Investigations.
"Just as importantly, these cases also show that auditors must be candid and forthright in their dealings with PCAOB inspectors and investigators. Cooperation in the PCAOB's processes is mandated by the Sarbanes-Oxley Act and is essential to the Board's ability to oversee the auditing profession and effectively conduct its work to protect the interests of investors," said Director Modesti.
The sanctions imposed on the audit firms and auditors are:
Additionally, both firms and all individuals were censured.
Berman W. Martinez y Asociados and Berman W. Martinez
The Board found that the Martinez firm and Martinez violated the provisions of the Securities Exchange Act of 1934 in connection with audits of the firm's sole issuer client for the fiscal years ended December 31, 2009, through December 31, 2011. They issued audit reports for those years representing that the audits had been conducted in accordance with PCAOB rules and standards despite knowing, or being reckless in not knowing, that these representations were false, a violation of the antifraud provisions of the Exchange Act.
Martinez and the firm performed few, if any, audit procedures before issuing these audit opinions and had no training or experience in performing audits under PCAOB standards.
The firm also failed to establish and implement quality control policies and procedures sufficient to provide it with reasonable assurance that its work met all applicable professional standards, in violation of PCAOB standards. Martinez, who was responsible for the development, implementation, and monitoring of the firm's quality control policies and procedures, directly and substantially contributed to those violations.
The firm also failed to file an annual report with or pay an annual fee to the Board in 2013, in violation of the Sarbanes-Oxley Act and Board rules.
Jeffrey & Company and Robert G. Jeffrey, CPA
The Board found that the Jeffrey firm and Jeffrey, the firm's sole owner and managing partner, repeatedly violated the provisions of federal securities laws and PCAOB rules and auditing standards that require auditor independence. The firm and Jeffrey were not independent with respect to two issuer clients because Jeffrey served as the lead audit partner for more than five consecutive years. In addition, the firm and Jeffrey were not independent as to a third client because Jeffrey served as the lead audit partner for that client within five years of previously serving for the maximum permitted period.
Paul W. Marchant, CPA
The Board found that Marchant, who was associated with the Jeffrey firm, failed to cooperate in a Board investigation and violated PCAOB auditing standards related to audit documentation. Marchant altered and created audit documentation prior to supplying that documentation to the Board's Division of Enforcement and Investigations. He also falsely testified during the Board investigation that certain work papers were created at the time of the relevant audit when he knew they were not. By adding documents after the documentation completion date without including required information about the changes to the files, Marchant also violated the PCAOB's audit documentation standards.
Henry Mendoza, CPA
The Board found that Mendoza, the managing partner of the formerly registered firm Mendoza, Berger & Company, LLP, failed to cooperate in a Board inspection and in a Board investigation in violation of PCAOB rules. The Board also found that Mendoza violated PCAOB auditing standards related to audit documentation. According to the Board's order, when Mendoza learned of an upcoming Board inspection, he announced in a firm-wide meeting that the work papers for the relevant audits needed to be "cleaned up" prior to the inspectors' arrival. He instructed staff members to fill out audit programs that had not been completed at the time of the audit and directed changes to work papers, including backdating them to the time of the audit. Mendoza did not advise Board inspectors of the changes to the work papers and did not comply with standards for documenting the changes.
Later, after the Board commenced an informal inquiry, Mendoza directed additional modifications to work papers, including backdating them. These documents were provided to the Board's Division of Enforcement and Investigations during the informal inquiry and then again after the Board commenced a formal investigation of the firm. Again, Mendoza did not inform the Board's staff of the changes or comply with standards for documenting the changes.
PCAOB Enforcement staff members George Choundas, Joshua Cutler, Stephen D'Angelo, Carol Der Garry, Vincent Heintz, Michelle Jaconski, Michael Rosenberg, and Margaret Vizzi conducted the investigations.
The PCAOB thanks the Securities and Exchange Commission for its assistance in the Henry Mendoza, CPA, matter.
Further information about the PCAOB's Division of Enforcement and Investigations may be found on the PCAOB website. Suspected misconduct by auditors can be reported to the PCAOB Tip and Referral Center.