PCAOB Sanctions Smythe LLP for Improper Use of Unregistered Firms in Four Audits

The Public Company Accounting Oversight Board (PCAOB) has announced a disciplinary order against Smythe LLP, a prominent accounting firm, for multiple violations of PCAOB rules and quality control standards. The sanctions come in response to Smythe's improper utilization of unregistered firms in connection with four audits, a practice that raised concerns about investor protection and regulatory compliance.

The PCAOB's investigation into Smythe's audit practices revealed that the firm had engaged two public accounting firms, PKF Audisur and PwC Malta, that were not registered with the PCAOB to play a substantial role in four issuer audits. In doing so, Smythe repeatedly contravened PCAOB rules and professional standards.

PCAOB Chair Erica Y. Williams emphasized the seriousness of the misconduct, stating, "Improper use of unregistered firms puts investors at risk, and the PCAOB will take action to hold firms accountable." The violations raised concerns regarding the integrity and reliability of financial reporting, which could have adverse consequences for investors and the broader financial market.

Failure to Meet Professional Obligations

Smythe's transgressions included failing to diligently assess the professional reputation of the unregistered firms, even though they contributed significantly to the audits. PCAOB rules dictate that if unregistered firms participate in more than 20% of total audit hours or incur more than 20% of the total audit fees (the material services threshold for substantial role participation requiring Board registration), they should be subject to PCAOB oversight. In several instances, the unregistered firms' involvement far exceeded this threshold, warranting PCAOB registration.

Key Violations Listed in PCAOB Order

The PCAOB order outlined several key violations by Smythe:

1. Inadequate Audit Planning: Smythe failed to conduct comprehensive audit planning, a fundamental aspect of ensuring the quality and integrity of financial audits.
2. Lack of Coordination: The firm neglected to coordinate its activities appropriately with the unregistered firms, leading to concerns about the consistency and reliability of the audit process.
3. Failure to Determine Principal Auditor Status: In some audits, Smythe did not adequately assess whether it could serve as the principal auditor, raising questions about its overall role and responsibilities in the audit process.
4. Inadequate Quality Control Policies: The firm fell short in establishing and implementing sufficient quality control policies and procedures concerning the use of work performed by other accounting firms.

Robert E. Rice, Director of the PCAOB's Division of Enforcement and Investigations, emphasized the importance of adequate planning and coordination in multi-firm audits. He stated, "When an audit of a public company involves multiple audit firms, the principal auditor must plan on not only using PCAOB-registered firms if they play a substantial role, but also on coordinating appropriately with them." The PCAOB's order underscores its commitment to enforcing compliance with these crucial principles.

Without admitting or denying the PCAOB's findings, Smythe LLP consented to the PCAOB's disciplinary order. The order censures the firm and imposes a civil money penalty of $175,000. In addition to the penalty, Smythe is required to undertake specific remedial actions. This includes reviewing and evaluating its quality control policies and procedures to ensure reasonable assurance that its personnel and associated individuals adhere to professional standards and regulatory requirements when using audit work performed by other accounting firms.

Looking Ahead

The PCAOB's sanctions against Smythe LLP serve as a reminder of the critical role of regulatory oversight in maintaining the integrity of financial audits and protecting investor interests. The PCAOB continues to vigilantly monitor audit practices to uphold standards of quality, reliability, and compliance within the industry. The financial community will be closely watching how firms respond to such regulatory actions, as they underscore the importance of adherence to PCAOB rules and the maintenance of rigorous quality control measures.