PCAOB Announces Settled Disciplinary Orders And Extraordinary Cooperation Credit In Audits of Broker-Dealers

The Public Company Accounting Oversight Board today announced settled disciplinary orders sanctioning seven audit firms for violating independence requirements in connection with audits of brokers and dealers, as well as sanctioning engagement partners at two of those firms for causing such violations.

The Board also determined not to commence disciplinary action against an eighth audit firm based on credit given for the firm's extraordinary cooperation with the PCAOB, including self-reporting and remedial actions.

"Auditor independence is fundamental to audit quality," said James R. Doty, PCAOB Chairman. "Firms should not disregard basic requirements that are central to investor protection and the public interest; many other firms are working hard to audit in a compliant and conscientious manner."

Each of the eight firms prepared financial statements that it audited for a broker-dealer client. Under rules of the Securities and Exchange Commission, preparation of the financial statements filed with the SEC is a non-audit service that impairs the auditor's independence from the audit client. SEC independence rules (Exchange Act Rule 17a-5) have long applied to audits of broker-dealers, including privately held broker-dealers, and include restrictions on providing bookkeeping and other non-audit services related to the financial statements.

Of the seven sanctioned firms:

  • Two firms were sanctioned with a censure, a $20,000 civil money penalty, a one-year prohibition on accepting new broker-dealer clients, and remedial measures: Goracke & Associates, P.C. (Nebraska) and Mistretta Associates (California). Each of these firms prepared financial statements for a broker-dealer audit client, received an inspection comment noting that such preparation impaired independence, yet again prepared the same client's financial statements the following year. The Board also sanctioned the engagement partner at each of these firms responsible for the broker-dealer audits at issue with a censure and a one-year bar from association with a registered public accounting firm: Bret M. Sewell, CPA, formerly of Goracke & Associates, P.C., and Robert Mistretta, sole owner of Mistretta Associates. The Board also sanctioned Sewell with a $10,000 civil money penalty.
  • Two firms were sanctioned with a censure, a $7,500 civil money penalty, and remedial measures: CST Group, CPAs, P.C.(Virginia) and Walker & Armstrong LLP (Arizona). Each of these firms received an inspection comment noting that its preparation of a broker-dealer audit client's financial statements impaired independence, did things differently with respect to that client's financial statements during the next year's audit, but even with those changes, engaged in financial statement preparation for that client the following year.
  • Three firms agreed to orders imposing a censure, a $2,500 civil money penalty, and remedial measures: Conn & Company, P.C. (Georgia), James G. Pirolli, CPA (Pennsylvania), and Sanford, Baumeister & Frazier, LLP (Texas).

The Board also determined not to commence a disciplinary action against an eighth audit firm because of that firm's extraordinary cooperation with the PCAOB — specifically, the firm's timely and voluntary self-reporting to the PCAOB Tip Line after discovering that it had impaired its independence, as well as its timely, voluntary, and meaningful remedial actions. Those actions included, among other things, communicating the violation to the client and discussing the conduct and violation at an annual firm training session for all audit personnel.

"We encourage audit firms and their associated persons to take responsibility for their conduct, and to report and correct violations," said Doty.

The Board has set out guidance concerning how extraordinary cooperation may be considered in determining the outcome of a Board investigation in its Policy Statement Regarding Credit for Extraordinary Cooperation in Connection with Board Investigations, PCAOB Release No. 2013-003 (Apr. 24, 2013).

"Registered firms and associated persons should appreciate the enforcement consequences of their conduct, both good and bad," said Claudius B. Modesti, PCAOB Director of Enforcement and Investigations.

"On the one hand, repeat offenders who present heightened risk and culpability may expect to receive heightened sanctions," he said. "Conversely, extraordinary cooperation — whether voluntary and timely self-reporting, remedial actions, or substantial assistance to the Board's investigative processes or other law enforcement authorities — may also influence enforcement decisions and outcomes."

Respondents each consented to the respective orders without admitting or denying the Board's findings. The investigations that resulted in the settlements announced today originated with information obtained through the PCAOB inspection program.

The PCAOB investigation was conducted by PCAOB Enforcement staff members C. Ian Anderson, George P. Choundas, Stephen D'Angelo, and Thomas Barry. The PCAOB thanks the SEC for its assistance.

Firms or individuals wishing to report suspected misconduct by auditors, or to self-report possible misconduct, may do so using the PCAOB Tip & Referral Center.