Chastised HLB Mann Judd partner, Darryl Swindells
Australia’s regulatory system needs its arse kicked when it comes to dealing with auditors following the recent decision from the American regulator, the Public Companies Accounting Oversight Board (PCAOB), related to the performance of accounting firm HLB Mann Judd in its audit of an issuer in the United States.
The folks at Mann Judd including auditors Darryl Swindells and Adrian Smith were rapped over the knuckles severely by the peak regulatory body that oversees the audit for what the PCAOB says were multiple breaches of the auditing standards in the United States.
This public savaging from the audit regulatory body, which was set up as a by-product of the concerns about auditing the followed the collapse of Enron and Arthur Andersen, told the firm in no uncertain terms it would not be doing further work for issuers in the American market for some time.
HLB Man Judd is able to reapply for registration in the American regime in three years’ time.
Swindells can reapply for American regulatory recognition in three years as an associated person while Smith just has to wait 12 months to be able to put an application to get back into the US public auditing fold.
Each party was hit with fines, with the firm copping a US$50,000 penalty, Swindells US$15,000, and Smith US$10,000.
So what caused this firm and its auditors to get their recognition spiked by the regulatory bodies in America?
The PCAOB said that the firm had undercooked its training of staff in such a way that there was no understanding of all of the PCAOB requirements.
“When HLB Mann Judd accepted [the company] as an audit client and performed audits of six years of [the company’s] financial statements, the Firm was not in a position to adequately audit issuer clients under PCAOB rules and standards,” the PCAOB thunders.
“It failed to (i) train its personnel to perform issuer audits in accordance with PCAOB standards and (ii) staff its audits of Issuer A with auditors qualified and knowledgeable to perform issuer audits in accordance with such standards.”
The audit regulator said that the firm did not have quality controls in place that were adequate for the audits of entities playing in the American capital market.
There were also major transgressions, according to the PCAOB, in areas related to audit work done on revenue recognition as well as on the testing of goodwill balances.
All of this was uncovered as a result of the firm being reviewed by the PCAOB in Australia. HLB Mann Judd was required to subject itself to a PCAOB review because the firm did work on an issuer in the American market. That inspection report was published in February 2019 with the final enforcement action being delivered almost 18 months later.
What is the practical impact of this on Australia?
The first thing shaming of HLB Mann Judd will hopefully do is frighten auditors in smaller firms thinking about dealing with an entity that is aiming for a US listing to pause, and think carefully about the client’s prospects.
PCAOB enforcement is public and it remains on the public record. Forget the fact that the firm and Smith can reapply to engage in the American financial markets as practitioners of audit when their time in the doghouse ends. That’s small comfort to those looking at the final enforcement ruling.
What leaders and the whole team in audit land ought to be asking themselves is whether they are properly tooled up with the suitable level of knowledge to tackle the regulatory system in America.
HLB Mann Judd had one client that played in the Trump sandpit and that one client got them unstuck, according to the firm inspection report and the enforcement orders, because the firm failed to comply with the PCAOB’s audit rules.
The findings and ban should frighten smaller accounting firms because every additional jurisdiction that a client operates in adds greater regulatory risk for both the client and the external audit firm. Audit firms need to have expertise across the domestic reporting and regulatory framework as well as the regulatory framework of the country in which the company wants to raise capital.
The message from the PCAOB’s rulings in relation to Mann Judd’s audit of the one issuer is that the regulator expects knowledge of US regulation to be watertight.
What is also extraordinary is the strong language in the 17-page ruling which merits further analysis because it is public. It names the firm. It names the partners and lists all of the issues the regulator believes are evidence of shortcomings in the conduct of audit.
This ruling needs to be studied carefully because it provides an example of a regulator showing its teeth, sinking them in and leaving people in no doubt about its seriousness when it comes to enforcement.
Accountants in Australia have been waiting for the Australian Securities and Investments Commission to do something similar in order to firm up its message on issues related to audit quality.
This is precisely what should have happened more often during the term of office of Greg Medcraft as ASIC chairman and this ruling will encourage James Shipton, the current chairman, to strengthen the actions against firms and practitioners chasing the wooden spoon award for audit quality.
There is no point for a regulator to bleat about audit quality if there are no scalps on spikes to cause the industry to hasten, and ensure they comply in every respect with every rule.