In a speech to a US law conference Andrew Ceresney, director, SEC division of enforcement, said there have been action taken over audit failures and auditor independence violations against  57 individual accountants and 19 firms in that period.

‘In policing the auditing space, one key systemic issue we encounter is firms taking on issuer clients well beyond their capacity. We have seen instances of a lack of understanding of the applicable rules, a lack of resources given the number and size of issuers, or undue reliance on generic audit checklists, particularly during the planning phase of the audit,’ Ceresney said.

He cited the example late last year when the SEC suspended five accountants and two audit firms for deficient audits of public companies, including one firm which had over 70 public company clients but had only one partner — the firm’s sole owner — authorised to sign or issue audit reports.

In an another case Baker Tilly Hong Kong. and two of the firm’s accountants were found to have failed to adequately audit 176 related-party transactions that were called into question in an independent forensic accounting report, partly because of a lack of adequate professional training in US GAAP.

‘Another class of cases against auditors involves failure to exercise sufficient professional scepticism in evaluating management representations. Particularly where there are red flags, representations from management will not be sufficient evidential matter to support an audit finding and we have emphasised the need in our actions for more substantiation,’ Ceresney said.

In policing the auditing space, one key systemic issue we encounter is firms taking on issuer clients well beyond their capacity

He cited the example of two KPMG auditors — the engagement partner and senior manager — for their alleged roles in a failed audit of TierOne Bank, a Nebraska-based bank that hid millions of dollars in loan losses from investors during the financial crisis and eventually was forced to file for bankruptcy.

The SEC alleged that the two auditors failed to appropriately scrutinise management’s estimates of TierOne’s allowance for loan and lease losses which, due in part to the financial crisis and problems in the real estate market, was one of the highest risk areas of the audit.

‘We also see examples of firms engaging in essentially no audit at all, often related to audits of microcap issuers. In the microcap space, from April 2013 to the present, the Commission has brought proceedings against 23 audit firms and sole practitioners and 43 individual auditors for audit failures or — where warranted — for fraud. Last fiscal year alone, the Commission proceeded against 14 accountants for their roles in aiding perpetrators of microcap fraud,’ Ceresney reported.

He also cited ‘repeated audit failures’ in the review of management valuation estimates as an ongoing problem, along with insufficient audit documentation.

Ceresney highlighted two recent enforcement actions BDO and Grant Thornton, the first against national audit firms for audit failures since 2009 other than for independence violations and the first settled actions that included admissions of wrongdoing by an audit firm.

The charges against BDO and five of its partners arose from an audit client’s purported certificate of deposit, representing approximately half of its assets, which went missing.

When the money was returned to the client under suspicious circumstances from parties other than the bank where the funds were purportedly held, management made inconsistent statements to the auditors. BDO’s initial demand that the audit client conduct an independent investigation was subsequently withdrawn, and the firm failed to review its decision to issue an unqualified audit opinion after the bank’s president and CEO pleaded guilty to charges of conspiracy.

The SEC’s charges against Grant Thornton and two of its partners arose from the failure to heed numerous warnings and red flags concerning alleged frauds occurring at two audit clients - Assisted Living Concepts and Broadwind Energy - both of which eventually became the subjects of enforcement action by the Commission for improper financial reporting.

As regards the SEC’s actions on auditor independence violations, this week has seen the regulator’s first independence-related actions based on close personal relationships between auditors and audit clients, with EY required to pay £9.3m in settlement of two charges.

Ceresney said: ‘In recent years, we have brought independence-related cases involving, among others: the provision of bookkeeping and expert services to affiliates of audit clients; audit personnel owning stock in audit clients or affiliates of audit clients; lobbying on behalf of audit clients; service by audit firm employees or affiliates on boards of audit clients; preparation of financial statements of brokerage firms who also were audit clients; circumvention of the lead audit partner rotation requirements; and for indemnification provisions included in engagement letters.’

Lessons for auditors

In conclusion, Ceresney stressed that before engaging with an audit client, auditors should ensure that the firm and its assigned personnel have sufficient capacity and competence to audit the client according to professional standards.

Audits need to be properly planned and executed, while auditors need to exercise appropriate professional scepticism, and should consult internally when particularly troublesome issues arise.

‘Finally, firms must have robust monitoring processes and training on independence issues so that firms comply with independence requirements and so that individual auditors are aware of, and well-versed on, areas of potential independence violations.

Many independence-related issues can be avoided through strong firm processes and a tone at the top that emphasizes auditor independence. Firms that are not sufficiently proactive in guarding against independence lapses risk enforcement action,’ he warned.

Ceresney’s SEC speech is here