Auditing

PCAOB Censures California Auditor

Accounting regulator says Reuben E. Price & Co. failed to act after a client falsely claimed its annual report had been audited by Price.
Stephen TaubApril 24, 2006

The Public Company Accounting Oversight Board (PCAOB) has censured a small California accounting firm for failing to take action after one of the firm’s clients issued an annual report that appeared to be, but was not, audited.

Reuben E. Price & Co., which has only one office in San Francisco, agreed to the censure order. It neither admitted nor denied the PCAOB’s findings, which stemmed from its work with Universal Communication Systems Inc., a Nevada corporation headquartered in Miami Beach that develops and markets solar energy systems. Universal is listed on the OTC Bulletin Board and the Pink Sheets.

According to the PCAOB’s complaint, on Jan. 13, 2004, Universal filed its 2003 annual report, and included with it a document that it claimed was an audit report issued by Price. Although the accounting firm had provided Universal with a draft audit report, it had not completed the audit, according to the PCAOB.

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The accounting watchdog also asserted that on the same day, the accounting firm learned of the unauthorized use of its name, and notified the company’s management and board of directors.

According to the PCAOB, however, Universal’s management took no steps to correct the error, and Price did nothing further for 15 weeks. It was not until April 23, 2004 — when Price received notice that the PCAOB would be conducting an inspection — that the firm sent a letter formally notifying Universal that the audits of Universal’s financial statements had not been completed. The letter advised Universal not to rely on the draft audit report, and stated that Universal should notify the Securities and Exchange Commission. Price, noted the PCAOB, took action “only when prompted by the prospect of an imminent PCAOB inspection.”

On May 4, 2004, Universal filed an 8-K disclosing that the accounting firm was unwilling to be associated with the financial statements Universal filed back in January because it had not completed its audit procedures relating to those financial statements.

In its complaint, the PCAOB noted that auditors have a responsibility to make sure than any illegal act detected in the course of an audit is addressed by the company’s management or board. And if that act affects the financial statements, and neither company management nor its board responds, the audit firm must resign from the engagement or report its conclusions to the SEC.