As Q1 comes to a close next week, mid-tier audit firms are licking their wounds after writing big checks to regulators to kick off the year. The Public Company Accounting Oversight Board (PCAOB) settled a disciplinary order by sanctioning WithumSmith+Brown $2 million last month for violations in their SPAC audits. In a separate enforcement action, four audit firms — Baker Tilly, Grant Thornton Bharat LLP, Mazars, and SW Audit — were also fined after what the PCAOB referred to as “rules violations.”
In a statement associated with the enforcement of these four firms, PCAOB Chair Erica Williams referred to the committee's practice of using sweeps — or a technique that enables the PCAOB to collect information on potential violations from multiple firms at the same time — as a way to hold these types of firms to the board’s standard.
“Engaged and informed audit committees play a key role in promoting audit quality and protecting investors, and they must be kept informed in accordance with our standards,” said Williams. “Sweeps are a valuable tool in our enforcement toolbox to ensure there are consequences for putting investors at risk.”
The committee has focused on targeting firms that don’t properly staff audits, exhibit communication problems with their audit committees, and firms that lack quality control systems.
The explosion of SPAC use in 2020 and 2021 led to these firms taking on more business than they could handle, according to the PCAOB. This led to actions against Withum and accounting firm Marcum, who paid an even larger fine for similar practices, neither of whom the committee determined were able to demonstrate they could take on the workload properly.
As Chris Vanover, president of CPAClub, noted in a recent episode of The Accounting Podcast, there is great temptation for partners who are incentivized to tie compensation to revenue growth, and the result in the case of Withum was to take on significantly more business than the firm could handle. Withum’s audit practice increased almost 500%, from around 80 audit reports to nearly 450. Despite the increased workload, the number of partners working on these types of audits only went up 50% (15 to 23).
"I think this is the PCAOB's shot across the bow, where they're starting to hammer firms with respect to whether they actually have the resources to execute the audits... The crux of the issue is they didn't have enough people to get through the significant number of audits they decided to take on,” Vanover told podcast host Blake Oliver.
The four other audit firms were fined in the following amounts for civil money penalties and censure:
- Baker Tilly: $80,000
- Grant Thornton Bharat: $40,000
- Mazars: $60,000
- SW Audit: $60,000
Williams admitted last year that fines can only do so much. During her pre-recorded discussion at Baruch’s Audit Conference, she said, “Ultimately, the responsibility falls on audit firms to correct the problems that lead to deficiencies in their audits,” when talking about the crackdown on auditors.
Based on the enforcement patterns of the committee, audit firms that chase clients without properly assessing their capabilities of taking on new work may find themselves sharing some of their profits with regulators down the line.