Question

The PCAOB Staff Audit Practice Alert No. 14 (April 21, 2016) begins with comments about auditors’ judgments and decisions around improper altering of audit documentation:

The PCAOB staff has prepared this practice alert to emphasize that improperly altering audit documentation in connection with a PCAOB inspection or investigation violates PCAOB rules requiring cooperation with the Board’s oversight activities and can result in disciplinary actions with severe consequences. Improperly altering audit documentation is also inconsistent with an auditor’s professional duty to act with integrity and as a gatekeeper in the public securities markets. Evidence identified in connection with certain recent oversight activities has heightened the staff’s concern about such misconduct.

It is important to note that PCAOB standards around audit documentation acknowledge and allow for making additions to audit documentation after the audit report release date (AS 1215, paragraph 16):

Audit documentation must not be deleted or discarded after the documentation completion date, however, information may be added. Any documentation added must indicate the date the information was added, the name of the person who prepared the additional documentation, and the reason for adding it.

Further, there exist rules about cooperating with PCAOB inspectors. For example, PCAOB Rule 4006 states that every firm and any associated employee of every accounting firm must cooperate with the Board as its inspectors work to complete their inspection processes. Unfortunately, what has happened repeatedly is that firms and personnel involved in interacting with PCAOB inspection teams have made poor judgments and decisions once they realize that a particular engagement has been chosen by the PCAOB for inspection.

In the simplest description, what sometimes happens is that the engagement team, upon learning of an impending inspection of a particular engagement, “freaks out!” and alters audit documentation to shore up any potential areas that the team believes might be subject to criticism by the PCAOB inspectors. When the PCAOB discovers instances of altered documentation, it has taken enforcement actions, including revoking the Firm’s registration with the PCAOB and barring relevant firm personnel from being associated with the registered firms.

In Staff Audit Practice Alert No. 14, the PCAOB reminds auditors about the implications of such actions:

Improper alteration of audit documentation in connection with an inspection undermines the integrity of the Board’s inspection processes and, as a result, impedes the Board’s efforts to improve audit quality and fulfill its mission to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. Changes and additions to audit documentation, if any, following the documentation completion date must be made strictly in accordance with AS 1215.13. To reduce the risk of improper alteration of audit documentation in connection with a PCAOB inspection, it is important for registered firms to take actions to assure that (1) work papers are properly archived; (2) work papers, once archived, are not improperly altered; and(3) the documentation provided to PCAOB inspectors for an audit is the originally-archived documentation for that audit (supplemented, as appropriate, in accordance with AS 1215).

1. Speculate as to why altering audit documentation undermines the integrity of the Board’s inspection processes. Why is it fraud to alter audit documentation inaccurately and in a manner designed to appear that the audit engagement team did a “better job” than it actually did?

2. Put yourself in the place of an audit engagement partner or manager who has just learned that his/her client engagement is going to be the subject of inspection by PCAOB inspectors. Do you think you might be a bit anxious and worried about the outcome of the inspection? Imagine and articulate the pressure that an individual in that position might feel.

3. Think about the professional and ethical decision-making frameworks presented in Chapter 1. Where in the process might an individual auditor “go wrong” when realizing that his/her engagement is going to be scrutinized by a PCAOB inspection team, thereby resulting in fraudulently altering audit documentation?

4. The PCAOB encourages auditors who become aware of improper alteration of audit documentation to inform them (Staff Audit Practice Alert No. 14):

The staff urges registered firms or individuals that become aware of any improper alteration of audit documentation that has occurred in connection with a Board inspection or investigation to report that information to the Board. They can do so by directly contacting staff in the Division of Registration and Inspections or the Division of Enforcement and Investigations, or by contacting the PCAOB Tip and Referral Center, including anonymously

Put yourself in the place of an audit staff or senior. What factors would influence your decision to inform the PCAOB of a situation in which you realize that your superiors have altered documentation in anticipation of a PCAOB inspection? What concerns might you have in doing so, i.e., what would be the risks to you? What motivation would you have to do as the PCAOB requests?

Answer 1

Answer 1

Audit documentation is one of the documents that indicates the quality and integrity with which the audit was undertaken, the evidence that the auditor recorded and conclusions the auditor reached. The Board in turn uses this documentation to assess the degree of compliance by registered public accounting firms with laws and regulations.

Thus, if the audit documentation is altered in any manner other than that which has been prescribed under AS 1215.13, it would mean that auditors have deceived the main motive behind undertaking audit of firms and alterations are being made just to escape penal consequences in case discrepancies are found by the Board during inspection.

Answer 2

Yes, as an engagement partner I would be anxious if I would hear about my client being inspected by PCAOB. However, if due diligence was exercised during audit and there were no material particulars that were knowingly suppressed while audit was finalised, there would be no reason to worry and I would always be in a position to explain all the assumptions on the basis of which audit was undertaken and justify my viewpoint. However, if the scenario was exactly opposite for example audit undertaken hastily with gross negligence, then I would be under severe pressure and would try to find out ways to conceal my misdeeds since the penalties and punishments prescribed in such cases are very severe.

Answer 3

An auditor might "go wrong" if he realizes that :

(i) he had missed out on reporting material misstatements

(ii) he has not reported non compliances of laws and regulations

(iii) financial reporting framework has not been followed in preparation and presentation of financial statements

(iv) auditor has not followed professional skeptisim while undergoing audit

(v) he had exercised gross negligence in conduct of his duties

Thus, all the above factors might compel the auditor to fraudulently change the audit documentation after the expiry of 45 days from the audit report release date.

Answer 4

Factors that would influence my decision to inform PCAOB of situation in which I realize that my seniors have altered the documentation in anticipation of a PCAOB inspection are:

(i) If the alteration of audit documentation was done with respect to material particulars, I would definitelt inform the same to PCAOB inspectors

(ii) If supressing the financial material particulars has been long drawn practice of the auditors, it needs to be informed to the inspectors since public in general is being deceived by the means of such practices which needs to be put an end to ensure better accountability.

Risks to me if I inform PCAOB inspectors:

(i) There would be a direct risk of me losing up my job.

(ii) Seniors might trap me and put all the blame in turn on me.

Motivation to heed to PCAOB requests:

(i) I would request PCAOB to not reveal my name in case the information is given to them.

(ii) It would be in the interest of the public in large if I do so.