Risk & Compliance

PCAOB Penalizes E&Y Auditors for Altering Papers

The case highlights a part of the board few get to see.
Sarah JohnsonAugust 3, 2011

The Public Company Accounting Oversight Board has imposed a three-year bar on a former Ernst & Young partner accused of changing and backdating documents the regulator used for evaluating the firm’s work. It’s the longest bar the PCAOB has ordered on a Big Four auditor to date. The case gives a rare look into the PCAOB’s inspection process, which for the most part happens behind closed doors.

Under the PCAOB’s sanction announced Monday, Peter O’Toole, who worked for E&Y for a decade until last fall, cannot work for a PCAOB-registered firm for at least three years. He has also agreed to pay a $50,000 penalty. The regulator accused O’Toole of authorizing his staff to add documents to a completed audit to make it look like the accounting firm did additional work five months after finishing the job. O’Toole “understood that he was violating E&Y policy on audit documentation as well as professional auditing standards,” the PCAOB wrote in its complaint.

The PCAOB has also disciplined O’Toole’s colleague, former E&Y senior manager Darrin Estella: he cannot work for an accounting firm that audits publicly traded companies for two years. Like O’Toole, Estella can petition the PCAOB to remove the bar after the time has passed.

E&Y spokesman Charles Perkins said his firm prohibits employees from supplementing or changing audit work papers in similar circumstances. The firm fired both accountants last fall after the PCAOB inspection. Their conduct “had no impact on our audit conclusions or on the client’s financial statements,” said Perkins. The client had received an unqualified opinion from E&Y.

According to the PCAOB’s sanction order, the accountants strayed from procedure soon after the PCAOB gave E&Y a heads-up that its inspectors wanted to look at one particular audit last March. In that audit, they wanted to focus on the valuation of the company’s investment in another company’s common and convertible preferred shares.

E&Y had about 20 days to prepare for the PCAOB inspection. Within that time frame, the PCAOB claims, Estella used a flash drive in a co-worker’s laptop to create new documents and add them to the audit work papers. Estella later threw the flash drive away.

The PCAOB accused O’Toole and Estella of breaking two of its rules. While auditors are allowed to add information to work papers even after a company has filed the auditor’s report with the Securities and Exchange Commission, they are supposed to date the new documents and explain the reason for the changes. The auditors did neither, the PCAOB claimed.

However, says Eugene Goldman, a partner at law firm McDermott Will & Emery who represents O’Toole, “The PCAOB did not allege any deficiencies in the carrying out of the audit or that any of the alleged conduct was designed to hide any audit deficiencies.” CFO‘s attempts to reach were Estella unsuccessful.

The PCAOB inspection occurred nearly half a year after E&Y’s client filed its financial statements for the period ending September 30, 2009, with the SEC. PCAOB inspection reports cloak many facts about the fairly new board’s overall process and findings. The board keeps auditors’ client names confidential and redacts its conclusion about the firms’ quality-control systems as long as the auditors make fixes within a year. The largest firms have been subject to the scrutiny of the regulator for the past nine years, after the Sarbanes-Oxley Act both established the board and required annual reviews of firms that have upward of 100 publicly traded clients.

 

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