Fraud Focus: Contemporary and Historical Cases 6-22 Fraud

Ethics

PCAOB LO 5, 6

In the feature Why It Matters: Evidence-Related Findings in PCAOB Enforcement Actions at the beginning of the chapter, we learn about evidence tampering by auditors at BDO-Mexico (Release No. 105-2019-028) and KPMG-Singapore (Release No. 105-2021-001). It is important to note that PCAOB standards around audit documentation acknowledge and allow for making additions to audit documentation after the audit report release date (AS 1215, para. 16):

Audit documentation must not be deleted or discarded after the documentation completion date, however, information may be added. Any documentation added must indicate the date the information was added, the name of the person who prepared the additional documentation, and the reason for adding it.

The PCAOB Staff Audit Practice Alert No. 14 (April 21, 2016) begins with comments about auditors judgments around improper altering of audit documentation:

The PCAOB staff has prepared this practice alert to emphasize that improperly altering audit documentation in connection with a PCAOB inspection or investigation violates PCAOB rules requiring cooperation with the Boards oversight activities and can result in disciplinary actions with severe consequences. Improperly altering audit documentation is also inconsistent with an auditors professional duty to act with integrity and as a gatekeeper in the public securities markets. Evidence identified in connection with certain recent oversight activities has heightened the staffs concern about such misconduct.

Furthermore, there are rules about cooperating with PCAOB inspectors. For example, PCAOB Rule 4006 states that every accounting firm and their associated employees must cooperate with the Board as its inspectors work to complete their inspection processes. Unfortunately, what has happened repeatedly is that firms and personnel involved in interacting with PCAOB inspection teams have made poor judgments and decisions once they realize that a particular engagement has been chosen by the PCAOB for inspection.

In the simplest description, what sometimes happens is that the engagement team, upon learning of an impending inspection of a particular engagement, freaks out and alters audit documentation to shore up any potential areas that the team believes might be subject to criticism by the PCAOB inspectors. When the PCAOB discovers instances of altered documentation, it has taken enforcement actions, including revoking the firms registration with the PCAOB and barring relevant firm personnel from being associated with the registered firms.

In Staff Audit Practice Alert No. 14 , the PCAOB reminds auditors about the implications of such actions:

Improper alteration of audit documentation in connection with an inspection undermines the integrity of the Boards inspection processes and, as a result, impedes the Boards efforts to improve audit quality and fulfill its mission to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. Changes and additions to audit documentation, if any, following the documentation completion date must be made strictly in accordance with AS 1215.13. To reduce the risk of improper alteration of audit documentation in connection with a PCAOB inspection, it is important for registered firms to take actions to assure that (1) work papers are properly archived; (2) work papers, once archived, are not improperly altered; and (3) the documentation provided to PCAOB inspectors for an audit is the originally-archived documentation for that audit (supplemented, as appropriate, in accordance with AS 1215).

A) Speculate as to why altering audit documentation undermines the integrity of the Boards inspection processes. Why is it fraud to alter audit documentation inaccurately and in a manner designed to appear that the audit engagement team did a better job than it actually did?

B) Put yourself in the place of an audit engagement partner or manager who has just learned that their client engagement is going to be the subject of inspection by PCAOB inspectors. Do you think you might be a bit anxious and worried about the outcome of the inspection? Imagine and articulate the pressure that an individual in that position might feel.

C) Think about the professional and ethical decision-making frameworks presented in Chapter 1. Where in the process might an individual auditor go wrong when realizing that their engagement is going to be scrutinized by a PCAOB inspection team, thereby resulting in fraudulently altering audit documentation?

D) The PCAOB encourages auditors who become aware of improper alteration of audit documentation to inform them (Staff Audit Practice Alert No. 14):

The staff urges registered firms or individuals that become aware of any improper alteration of audit documentation that has occurred in connection with a Board inspection or investigation to report that information to the Board. They can do so by directly contacting staff in the Division of Registration and Inspections or the Division of Enforcement and Investigations, or by contacting the PCAOB Tip and Referral Center, including anonymously.

Put yourself in the place of an audit staff or senior. What factors would influence your decision to inform the PCAOB of a situation in which you realize that your superiors have altered documentation in anticipation of a PCAOB inspection? What concerns might you have in doing so (i.e., what would be the risks to you)? What motivation would you have to do as the PCAOB requests?