Regulation

PCAOB Digs Up a Case Against an Audit Firm

Spokane, Wash., firm of Williams & Webster consents to board charge that it failed to exercise skepticism over client's deal to sell mining claims ...
Stephen TaubJune 14, 2007

The Public Company Accounting Oversight Board (PCAOB) censured a small Spokane, Wash., accounting firm, citing its founder and a second partner for errors stemming from a 2003 audit that allowed a company to take a huge gain on a questionable sale of mining claims.

The 11-page order seemed unusual in the amount of detail the board unearthed in alleging abuse by a small accounting firm, Williams & Webster P.S., and two CPAs there.

“Respondents failed to exercise due professional care, failed to exercise professional skepticism, and failed to obtain sufficient competent evidence to afford a reasonable basis for an opinion regarding the financial statements,” the accounting oversight group asserted in its order against Williams & Webster.

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The PCAOB barred Kevin J. Williams, founding shareholder and lead engagement partner on the audit cited in the order, from associating with a public accounting firm, and suspended John G. Webster from associating with a public accounting firm for one year. Webster was a shareholder of Williams & Webster from 1996 until 2006, and the concurring review partner on disputed audit.

The board said that Williams may file a petition to allow him to associate with a registered public accounting firm after two years. It said that respondents Williams and Webster settled with the PCAOB, consenting to the order without admitting to or denying the board’s findings.

The 2003 audit case cited by the PCAOB involved Diatect International Corp., a Heber City, Utah-based producer of insecticide products. The board said that when preparing Diatect’s financials, the Williams & Webster didn’t pursue evidence related to Diatect’s reported gain on the sale of mining rights, among other things.

During the audit, the PCAOB alleged, Webster raised issues about apparent departures from U.S. generally accepting accounting principles (GAAP), and documented his concerns in a memorandum to Williams a month before the audit report date. Eventually, however, Webster concurred with the audit firm’s decision to issue its unqualified audit report, even though those issues remained inadequately addressed, according to the PCAOB’s order.

Specifically, the PCAOB noted a fiscal 2001 case in which Diatect claimed it had spent $540 to acquire mining claims on 640 acres of federal government land that contained earth used in insecticide products. Two years later, however, Diatect submitted second-quarter financial information “in which management had marked up the valueÂ…to $34,584,000 based on a 1991 geologist’s report.” When Williams and Webster told Diatect that no gain could be recorded until the claims were sold, the board said, Diatect entered into a sale of the claims for $31.1 million to a newly formed shell company owned by an outside director of Diatect. The company accepted an 18-year promissory note in payment and recorded a $12-million 2003 gain.

Although Williams & Webster questioned the transaction, the firm made an unqualified audit report on the company, without addressing the issues that the auditor had identified, according to the PCAOB.

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