PCAOB Sanctions Heaton & Co. and a Partner for, Among Other Violations, Failing to Properly Document Five Audits

The Public Company Accounting Oversight Board (PCAOB) today announced a settled disciplinary order(PDF) sanctioning Heaton & Co. (the “Firm”) and one of its partners, Kristofer Heaton, CPA (“Heaton”) for violating PCAOB rules and standards in connection with five issuer audits.

The Firm violated AS 1215, Audit Documentation, by failing to timely assemble a complete and final set of audit documentation for five issuer audits. The Firm’s failure to timely assemble a complete and final set of audit documentation for two of these issuer audits resulted in the Firm making significant modifications and additions to the workpapers just prior to a PCAOB inspection. Although the Firm generally disclosed in the workpapers provided to PCAOB inspection staff that it had created and modified workpapers after the respective documentation completion dates, those additions and modifications were not adequately documented.

Additionally, the Firm failed to assemble complete and final sets of audit documentation for three other issuer audits, with one audit containing numerous incomplete workpapers, another containing workpapers related to a different client, and a third audit in which the Firm created over 90% of the workpapers almost two years after the documentation completion date upon receiving a request for those workpapers from PCAOB enforcement staff.

Heaton, as engagement quality review partner on the five audits, violated AS 1220, Engagement Quality Review, by failing to appropriately evaluate whether the audit documentation reviewed indicated that the engagement team responded appropriately to significant risks and supported the conclusions reached by the engagement team. At the time Heaton provided his concurring approval of issuance for each of the five audits, certain audit documentation either did not exist or was insufficient to indicate that the engagement team had responded appropriately to significant risks or supported the conclusions reached.

“Failing, not once, but multiple times to properly document audit work, calls the integrity of the entire audit into question, and the PCAOB will take action to protect investors,” said PCAOB Chair Erica Y. Williams.

The Firm also violated PCAOB quality control standards by failing to establish, implement, and monitor adequate policies and procedures to provide reasonable assurance that Firm personnel would comply with professional standards and the Firm’s standards of quality. During the relevant period, Heaton was the partner in charge of quality control and directly and substantially contributed to those quality control violations, in violation of PCAOB Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations.

“The respondents failed to comply with multiple PCAOB rules and standards. We will continue to bring enforcement actions to address these violations and ensure that accountability is upheld at every level of the profession,” said Robert E. Rice, Director of the PCAOB’s Division of Enforcement and Investigations.

Without admitting or denying the findings, the Firm and Heaton consented to the PCAOB order. The order:

• Censures each respondent;
• Revokes the Firm’s registration with the right to apply to re-register after two years, provided the Firm undertakes certain remedial measures;
• Bars Heaton from being an associated person of a registered public accounting firm, with the right to petition the Board for consent to associate with a registered firm after two years, provided he has completed 40 hours of continuing professional education (CPE), in addition to CPE requirements in connection with any professional license he holds; and
• Imposes civil money penalties of $35,000 on the Firm and $25,000 on Heaton.

PCAOB enforcement staff members Travis Miscia, Marcela Ciappi, and Samantha Parker conducted the investigation, supervised by C. Ian Anderson and Stephen D’Angelo.

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.