PCAOB Announces $1.5 Million Settlement with Grant Thornton for Quality Control Violations and Audit Failures
The first finding of quality control violations at a domestic global network firm
The Public Company Accounting Oversight Board today announced a $1.5 million civil penalty and censure against Grant Thornton LLP for violations of quality control standards and for audit failures.
The quality control violations were in connection with the firm's assignment, support, and monitoring of two engagement partners on 2013 audits performed in the financial services practice based in Philadelphia.
The Board also found that, in one of those audits, the 2013 audit of The Bancorp, Inc., Grant Thornton violated PCAOB auditing standards.
"A firm's system of quality control should reasonably assure that personnel with the right skills and experience are assigned to public company audits. When quality controls concerning personnel assignment and oversight fail, serious violations of auditing standards can result, as they did here, to the detriment of investors," said James R. Doty, PCAOB Chairman. "Effectively designed and operated quality control systems are crucial to conducting audits in compliance with PCAOB standards. This matter should serve as a case study for what not to do."
The PCAOB also sanctioned David M. Burns, a former Grant Thornton partner, who served as the engagement partner for the 2013 Bancorp audit, for his violations of PCAOB auditing standards in that audit.
Burns was barred from associating with a PCAOB-registered accounting firm, with the right to petition to remove the bar after one year, with further limits on his auditing activities for an additional year, censured, and ordered to pay a $15,000 penalty. Neither of the respondents admitted or denied the findings contained in the Board's orders.
The Board found, among others things, that Grant Thornton knew that Burns and another partner had failed to properly perform audits in prior years, yet continued to allow them to serve as engagement partners, without sufficient support or monitoring when it assigned them to serve as engagement partners in connection with two separate 2013 public company audits.
With respect to the 2013 audit of Bancorp's allowance for loan and lease losses, the Board found that Grant Thornton and Burns, among other things, failed to sufficiently consider red flags or contrary evidence indicating that certain commercial loans were impaired and relied on management representations without obtaining relevant and reliable evidence to corroborate those representations.
"Auditors must exercise professional skepticism when evaluating critical estimates, such as a bank's allowance for loan losses," said Claudius B. Modesti, Director of PCAOB Enforcement and Investigations.
"Grant Thornton and Burns violated fundamental PCAOB auditing standards when they failed to sufficiently question management's estimates, even when confronted with evidence that was inconsistent with those estimates," he said.
On April 1, 2015, Bancorp announced that its previously issued financial statements for the years ended December 31, 2012, and 2013, could no longer be relied upon because certain expected losses related to commercial loans were taken in incorrect periods.
The restatement resulted in a $141 million reduction in Bancorp's net loans as of December 31, 2013, as well as increases in Bancorp's provision for loan and lease losses of $28.9 million (or 98 percent) during 2013.
PCAOB enforcement staff members Jennifer Gibbons, Ke Xu, and Michael Plotnick conducted the investigation in this matter, which was supervised by William Ryan and Marion Koenigs. The PCAOB thanks the Securities and Exchange Commission for its assistance in this matter.
The PCAOB oversees auditors' compliance with the Sarbanes-Oxley Act, provisions of the securities laws relating to auditing, professional standards, and PCAOB and SEC rules. Further information about the PCAOB Division of Enforcement and Investigations is available on the PCAOB website. Firms or individuals wishing to report suspected misconduct by auditors, or to self-report possible misconduct, may use the PCAOB Tip & Referral Center.