PCAOB Permanently Bars Repeat Violator, Revokes Firm Registration After Violations Tied to China-Based Company

The Public Company Accounting Oversight Board (PCAOB) today announced a settled disciplinary order sanctioning Michael T. Studer, CPA, and Michael T. Studer CPA P.C.(PDF) (“Studer” and the “Firm,” respectively), for violations relating to the Firm’s June 2019 audit report on the annual financial statements of JMU Limited (“JMU”), a public company that at the time was headquartered in the People’s Republic of China (“China”). Among other violations, Studer failed to perform testing for over 96% of JMU’s reported revenue, falsely entered workpaper sign-offs for auditors who had not performed the work, and failed to appropriately supervise an engagement team that included a newly-hired contract auditor residing in China.

The sanctions imposed include a permanent bar against Studer, a permanent revocation of the Firm’s PCAOB registration, and a $20,000 civil money penalty imposed jointly and severally on Studer and the Firm.

“When auditors blatantly fail to do their work, it puts investors at risk,” said PCAOB Chair Erica Y. Williams. “The PCAOB will take action to ensure investors on U.S. markets are protected.” 

As described in the PCAOB’s order, during the audit of the FY 2018 financial statements of JMU, Studer and the Firm:

• Failed to test a material revenue stream comprising 12% of JMU’s total reported revenue;
• Failed to obtain sufficient audit evidence for the remaining 88% of JMU’s total reported revenue by disregarding basic audit sampling principles;
• Failed to test management’s estimates underlying its impairment of $106 million in goodwill intangible assets; and
• Failed to adequately document the engagement team’s work on the audit, including where Studer entered workpaper sign-offs for engagement team members regarding journal entry testing and other procedures when they had not actually performed that work.

Studer also failed to appropriately supervise work performed by the JMU audit engagement team. For example, Studer relied on the work of a contract auditor residing in China to perform significant parts of the JMU audit work in China, despite the fact that the contractor had never previously worked with the Firm and had only directly interacted with Studer once, on the day they were introduced on a phone call. Additionally, the Firm failed to obtain concurring approval of issuance of the JMU audit report from an engagement quality reviewer.

As further described in the PCAOB’s order, the Firm violated PCAOB rules and quality control standards during the time of the JMU audit by failing to implement adequate quality control policies and procedures, including monitoring procedures, to provide the Firm with reasonable assurance that the work performed by engagement personnel met applicable professional standards and regulatory requirements. These violations were illustrated during the JMU and other audits by Studer’s and the Firm’s failures to (a) adequately perform journal entry testing to address certain identified fraud risks, (b) make mandatory audit committee communications, and (c) properly assemble and retain audit documentation in accordance with PCAOB standards. Studer was directly and substantially responsible for the Firm’s violations.

The above-described violations occurred despite the PCAOB’s previous notice to Studer and the Firm that such misconduct ran afoul of PCAOB auditing standards and quality control standards. For example, in 2012, the PCAOB issued a disciplinary order against Studer and the Firm(PDF) finding violations similar to the ones described above in connection with five issuer audits.

Additionally, in the years leading up to 2019, various PCAOB inspections of the Firm also notified Studer and the Firm of deficiencies in areas similar to the ones described above. Despite these repeated notices, Studer and the Firm persisted in committing the same types of misconduct at the time of the JMU audit.

“Repeat violations of PCAOB standards raise serious doubts about an auditor’s fitness to perform public company audits in compliance with those standards,” said Robert E. Rice, Director of the PCAOB’s Division of Enforcement and Investigations. “As evidenced by today’s order, the PCAOB will bar such recidivists from auditing public companies when appropriate.”

Without admitting or denying the findings, Studer and the Firm consented to the PCAOB’s order against them.

PCAOB enforcement staff members Thomas McCann, Tina Bell, Elliott C. Mogul, and Tima Hawes conducted the investigation, supervised by William Ryan and John Abell.

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 visit the PCAOB Tips and Referrals page.

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About the PCAOB 

The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers registered with the Securities and Exchange Commission, including compliance reports filed pursuant to federal securities laws.