In the 1990s, audit reports for public companies in the United States exhibited numerous record-setting bankruptcies, accounting "restatements," and high-profile accounting scandals by public companies (Daniels et al., 2016). For these reasons, the Public Company Accounting Oversight Board (PCAOB) was established by Congress in the Sarbanes-Oxley Act of 2002 to oversee and regulate the public accounting audits of these companies. Alongside handling the 1990s scandals, PCAOB is a charitable firm that promotes independent, accurate, and informative review reports protecting investors and public interests. To enhance the protection of investors, the PCAOB board also oversees the audit reports of brokers.
The Public Company Accounting Oversight Board (PCAOB) constitutes five Board members appointed by the Securities Exchange Commission (Daniels et al., 2016). The five board members, including the chairman who serves five-year terms, are selected after a thorough consultation between the Securities and Exchange Commission, the Treasury secretary, and the Board of Governor's chair for the Federal Reserve System. While two PCAOB members should be Public Certified accountants, the other members may have a variety of backgrounds. The PCAOB board serves three primary functions in overseeing these auditors: enforcing audit ethics, inspecting listed community companies, and setting auditing standards.
This paper is a detailed description of the enforcement of auditing standards function. The document outlines the process by which the PCAOB investigates and enforces its standards, and analyses a settled disciplinary order by describing the actions of a registered firm and the covered members involved in the law, as well as the penalties for the violations. In this paper, the case study of a settled audit order involving a Mexican firm (Castillo Miranda y Compania, S.C) and six personnel of the firm is analyzed.
PCAOB Process of Investigation and Enforcement of Standards.
Enforcement refers to the process of making people obey a rule or law or making a particular condition be accepted. In this regard, listed public auditing firms and individuals connected to these specific firms are liable to be investigated and disciplinary action imposed by PCAOB. These measures are imposed on companies that do not comply with either the Securities Exchange Commission and PCAOB rules, the Sarbanes-Oxley Act of 2002, professional standards, and other laws relating to the auditing of state-owned firms, brokers, and dealers (Daniels et al., 2016). When misconduct is detected and confirmed through investigation, the PCAOB imposes appropriate measures including a bar on a person's relationship with listed public firms, revocation of a firm's registration, a possible objection, and monetary penalties.
As a result of an inspection, the PCAOB has to decide on whether to proceed with an investigation. The PCAOB board has to decide on the approach to adopt in the inquiry once the decision to search is passed. The two types of investigation are; formal and informal.
This approach is mostly applied when the PCAOB board obtains a complaint indicating or alleging a violated rule with minimum supporting evidence (Daniels et al., 2016). When carrying out an investigation using this approach, the Director for the PCAOB Enforcement Board may demand interviews, testimony, and documents. A matter will be closed if this review does not result in adequate information to proceed with the investigations. If the information obtained is sufficient, then it leads to the following category of study.
Investigations in this category begin with the issuance of an "Order of Formal Investigation." from the Director of Investigations At any time, the PCAOB can give a new direction dismissing or abolishing the investigations after the "Order of Formal Investigation" is issued (Daniels et al., 2016). During the examination of the evidence provided, permitted persons to be present are the staff of the Board, the reporter, the witness' counsel, and the witness. The investigatory team has the mandate to search the firm records and books or associated persons during the overall course of the investigation to "verify the accuracy of the documents or information supplied in the course of an informal inquiry or formal investigation."
Conclusion of an Investigation
The PCAOB must decide whether the completion of any investigation warrants a disciplinary proceeding. Rule 5200 states that an investigation will proceed to result if a company or related individual is suspected of having violated the following-
- Sarbanes-Oxley Act provisions;
- Board Rules;
- Security laws provisions linking to the issuance of auditing reports
- Other specialized ethics.
If an investigation continues, it progresses on to the hearing stage. It is important to note that an inquiry may be ordered to terminate or suspend by the PCAOB board for a specific period. This announcement comes from the Director of Investigations and Enforcement.
Hearings and Adjudication
If the PCAOB resolves to penalize a company or members liable under any of the mentioned principles, an order will be issued inaugurating a proceeding and allocate a take charge of the procedures and, after that, give an initial decision (Daniels et al., 2016). The appointed Hearing Officer, in this case, functions as an unbiased primary judge of the disciplinary accusations and oversees procedures comprising registrations and application of board services by clients.
While a correspondent in PCAOB proceedings has a right to counsel and entitlement to representation through the proceedings by an attorney of one's wish, the PCAOB board cannot pay for or hire a Respondent's counsel. Instead, the committee advises all respondents to consider sticking to an attorney all through. Nevertheless, the Hearing Officer appointed to preside over a hearing, together with affiliates of the PCAOB board staff cannot serve as counsels for any the respondents suspected to be guilty.
Proceedings before a PCAOB Hearing Officer are divided into three phases, the Prehearing phase, the Hearing phase, and the Post-Hearing phase.
Pre-Hearing Phase. In this phase, a case management order is issued by the Hearing Officer outlining measures that supplement and implement the rules set by PCAOB rules. Copies of names and other information about witnesses and exhibits are usually required to be exchanged by both parties before the hearing begins (Daniels et al., 2016).
During the pre-hearing stage, any of the parties can file a formal appeal for specified rulings.
The Hearing Phase. This phase is similar to a federal court session. Opening statements by parties may be permitted or directed by the Hearing Officer. Respondents in this phase have the right to offer exhibits and present witnesses. If a respondent wishes to raise favorable defenses, they will have a load of attesting that particular confirmatory defense. Individual respondents may exercise their rights guaranteed by the Fifth Amendment to the Constitution by refusing to testify to any incriminating (Daniels et al., 2016).
Post-Hearing Phase. According to Daniels et al. (2016), the hearing officer prepares an "Initial Decision" with results, and, if the firm or individual member is found guilty, sanctions will be proposed, which are filed by the PCAOB Secretary. This will be the final decision if the accused does not file a timely "Petition for Review" or the board reviews the decisions made.
The PCAOB's Secretary then issues an announcement of conclusiveness to an accused not later than 20 days after the day the file of the petition for review of the Initial Decision was initiated. Parties to a disciplinary proceeding may get a report of the board of the Initial Decision by submitting a review appeal within 30 days the Initial Decision is made; disciplinary proceeding parties may obtain review of the Board within ten days after the Initial Decision service (Daniels et al., 2016).
Settling of cases before the hearing is called "Offer of Settlement." This technique provides that an offer is submitted and acknowledged by the PCAOB for the respondent to waive judicial reviews of the case against the respondent.
Analysis of a Settled Disciplinary Order: Castillo Miranda Y Compania, S.C.
The Castillo Miranda y Compania, S.C. is a settled disciplinary order issued by the PCAOB board in 2019. This analysis covers the violations that led to the firm and members' disciplinary, and the penalties for the actions. The firm name in this case is Castillo Miranda y Compania,S.C. ("BDO-Mexico") while the six associated persons to the firm are; Bernardo Soto Penafiel, Carlos Rivas Ramos, Juan Francisco Olvera Diaz, Luis Raul Michel Dominguez, Juan Martin Gudino Casillas and Ignacio Garcia Pareras.
Rules Violated by Castillo Miranda y Compania, S.C. and the Firm Members
According to Public Company Accounting Oversight Board (PCAOB) (2019) Castillo Miranda y Compania, S.C. was confirmed to have violated PCAOB rules and standards by:
Failure to present audit documents for retention in the required time, done in cooperation with issuer audits. These are claims that were made deliberately by the Castillo Miranda y Compania, S.C. staff.
Repeated alteration of audit documents after the expiry of the archiving period.
Failure to liaise with the Board's 2017 inspection of the Firm by making inappropriately manipulated work papers from two issuer audits available to PCAOB inspection personnel.
Failure of the firm to effectively implement procedures and policies to provide PCAOB with enough assurance, the firm's engagement personnel act in compliance with professional standards and with integrity. Including the obligation to cooperate with PCAOB inspections and PCAOB audit documentation standards.
Failure in taking necessary and timely corrective actions, comprising improving quality regulatory systems, upon learning of the violations. The Firm had violated PCAOB audit regulations in several years, starting from 2015.
On the other hand, findings by the PCAOB Board indicated that the firms' six members violated auditing regulations and imposed sanctions on the Individuals (Public Company Accounting Oversight Board (PCAOB), 2019). The members were found guilty of violating PCAOB standards by:
Soto, Rivas, Olvera, Michel, and Gudino made inappropriate adjustments to audit documentation after the expiration of the archiving deadline. The five also failed to timely archive issuer audit documentation.
Failure to collaborate with the PCAOB's inspection Board in 2017. Members found guilty of breaching this rule are Soto, Olvera, Michel, and Gudino.
Garcia was found guilty of substantially and directly contributing to the Firm's abuses of PCAOB audit documentation ethics and its failure to liaise with the 2017 inspection team.
Michel was responsible for direct and substantial contribution to violation of PCAOB quality control standards by the Firm.
Penalties Subjected to Castillo Miranda Y Compania, S.C. And Its Members
It is the authority of PCAOB to investigate and discipline listed public accounting organizations and individuals associated with those firms for non-compliance with auditing standards.
There exist two types of sanctions, the first type on every violation confirmed to be done, except for the failure to observe the auditing board demands, the inability to collaborate with an investigation, and the giving of false testimony. These exceptions include past the standard revocation and suspension.
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