PCAOB Sanctions Friedman LLP Partners for Violations of PCAOB Rules and Standards in Audits of a China-Based Issuer

The Public Company Accounting Oversight Board (PCAOB) today announced a settled disciplinary order sanctioning Eddie Wong, CPA (“Wong”) and Neil W. Ehrenkrantz, CPA (“Ehrenkrantz”) for violations of PCAOB rules and standards in connection with Friedman LLP’s (“Friedman”) 2016, 2017, and 2018 audits of Kingold Jewelry, Inc. (“Kingold”), a Delaware corporation headquartered in the People’s Republic of China. Wong served as the engagement partner for Friedman’s audits of Kingold, while Ehrenkrantz performed the engagement quality review for the audits.

The PCAOB found that Wong failed to exercise due professional care and skepticism by, among other things:

• Failing to obtain sufficient appropriate audit evidence concerning gold inventories pledged as collateral to secure loans from banks and financial institutions, and
• Failing to identify or evaluate significant unusual transactions entered into by the company.

The PCAOB also found that Ehrenkrantz violated AS 1220, Engagement Quality Review, by providing his concurring approval for the issuance of Friedman’s audit reports without appropriately evaluating the engagement team’s assessment of and responses to significant risks with due professional care. In August 2020, after the adequacy and integrity of certain of Kingold’s gold inventories pledged as collateral to secure loans had come under dispute, Friedman resigned as the auditor of Kingold.

“The PCAOB means business when it comes to enforcing our standards and removing those who put investors at risk,” said PCAOB Chair Erica Y. Williams. “There will be consequences for auditors who fail to exercise due professional care and skepticism when carrying out their professional responsibilities.”

Without admitting or denying the findings, Wong and Ehrenkrantz consented to a disciplinary order. The order imposes a $100,000 civil money penalty on Wong and a $25,000 civil money penalty on Ehrenkrantz. In addition, both individuals are barred from being an associated person of a registered public accounting firm. Wong may file a petition for Board consent to associate with a registered public accounting firm after two years from the date of the order, while Ehrenkrantz may file a petition for Board consent to associate with a registered public accounting firm after one year from the date of the order.

“As this order makes clear, auditors who are not observing inventories must perform other procedures sufficient and appropriate to justify their opinion,” said Robert E. Rice, Director of the PCAOB’s Division of Enforcement and Investigations. “The order also highlights the importance of the requirement that auditors identify and evaluate the business purpose of significant unusual transactions, which can be used by management to conceal misappropriation of assets or to facilitate other types of fraudulent financial reporting.”

PCAOB enforcement staff members R. Davis Taylor, Noah Berlin, Stefan Hagerup, and Tiffany Johnson conducted the investigation. Kyra C. Armstrong and Raymond J. Hamm supervised 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. Strengthening enforcement is one of the PCAOB’s most important strategic goals.

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, including compliance reports filed pursuant to federal securities laws.

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