Lapses in global oversight by large auditing firms were highlighted once again on Tuesday, when the Securities and Exchange Commission charged foreign affiliates of three firms with being involved in audits that circumvented the full oversight of the Public Company Accounting Oversight Board (PCAOB).
Charged in the investigation were the the Zimbabwe affiliates of Deloitte & Touche and KPMG as well as KPMG’s affiliate in South Africa and BDO’s Canadian affiliate. The allegations concern audits of a Canadian company that has its principal offices in South Africa.
According to the SEC, the Zimbabwe affiliates of Deloitte & Touche and KPMG improperly audited the majority of assets and revenues of a publicly traded company without registering with the PCAOB. That company’s two principal auditors — KPMG’s affiliate in South Africa and BDO’s Canadian affiliate — were registered with the PCAOB but improperly relied upon the work of the two unregistered foreign component auditors to complete their audits.
“This violated PCAOB standards requiring sufficient analysis and inquiry when using the work of another auditor,” the SEC said.
Stated Scott W. Friestad, associate director of the SEC’s division of enforcement: “These unregistered foreign component auditors performed significant audit work outside the PCAOB’s regulatory purview, and the principal auditors failed to consider the registration status of these firms as they used their work.”
Section 102 of the Sarbanes-Oxley Act of 2002 makes it unlawful for any organization that is not a registered public accounting firm to participate in the preparation or issuance of an audit report.
The firms agreed to settle the charges by paying penalties or disgorging their profits from the audits.
Without admitting or denying the findings, BDO Canada agreed to pay a $50,000 penalty, KPMG in South Africa agreed to pay a $100,000 penalty, Deloitte in Zimbabwe agreed to pay disgorgement and interest totaling $99,057, and KPMG in Zimbabwe agreed to pay disgorgement and interest totaling $141,305.
The Big Four firms have been under fire as numerous affiliates around the globe are either under investigation by local regulators or having their audits of scandal-plagued clients questioned.
Audit firms’ legal structures keep foreign affiliates at arm’s length. The national branches of the Big Four are distinct businesses — affiliates rather than subsidiaries of the firms’ global networks.