The Public Company Accounting Oversight Board (PCAOB) has announced a $1.5m (£1.11m) settlement with Grant Thornton in the regulator’s first ever findings of quality control violations at a domestic global network firm, along with identified audit failures
The quality control violations related to 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.
James Doty, PCAOB chairman, said: ‘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.’
The PCAOB also sanctioned David 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.
The board found 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.
With respect to the 2013 audit of Bancorp's allowance for loan and lease losses, the board found that Grant Thornton and Burns had 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.
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 $141m 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 $28.9m, or 98%, during 2013.
Neither of the respondents admitted or denied the findings contained in the board's orders.
In a statement Grant Thornton said: ‘This matter is related to two audit engagements from fiscal-year-end 2013 and, as indicated in the order, Grant Thornton has made efforts since then to address the issues connected with this settlement.
‘We appreciate the work done by the PCAOB, and are pleased to have this matter resolved. We are committed to delivering the highest standards of quality.’
Separately the PCAOB also announced a $750,000 settlement with Deloitte Turkey over charges including failure to cooperate with an inspection, quality control, ethics, and audit documentation violations, which the firm self-reported three years after the event.
Some of the firm’s most senior partners were found to have devised and implemented a plan to improperly alter documents in advance of its first PCAOB inspection in 2014. This involved downloading archived documentation onto laptops that were disconnected from the firm's network, and making these laptops available to three audit teams whose engagements had been selected for review by the PCAOB.
An audit partner on one engagement changed the date and time settings on the laptop and altered numerous documents, which were then provided to PCAOB inspectors without any disclosure of the alterations.
Doty said: ‘This case represents another troubling instance of a firm and its senior personnel trying to thwart PCAOB oversight through deception.’
Two former Deloitte Turkey partners, including the firm's former national professional practice director, were sanctioned for their involvement in the misconduct. Neither now works for the firm.
Berkman Özata, Deloitte Turkey's national professional practice director from 2010 to 2016, was censured and barred for two years.
Şule Firuzment, a Deloitte Turkey audit engagement partner, was censured, suspended from association with a PCAOB-registered public accounting firm for one year, and restricted for an additional year from serving as an engagement partner or an engagement review partner.
However, the board said the firm’s ‘extraordinary cooperation’ with its inquiry meant the financial penalty was lower than it might have been, and the board did not seek to impose additional sanctions.
Doty said: ‘The decision of the firm to self-report and the decisions of the partners to assist in our investigation were wise and saved them from much more severe consequences.’
The PCAOB decision in relation to Grant Thornton is here.
Report by Pat Sweet