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Warren, Wyden urge PCAOB to crack down on crypto auditors
On January 25, Senators Elizabeth Warren (D-MA) and Ron Wyden (D-OR) sent a letter to the chair of the Public Company Accounting Oversight Board (PCAOB) urging the board to make sure it was taking sufficient measures to hold registered audit firms accountable for their work with cryptocurrency clients. The letter highlighted the recent turmoil in the crypto market following the collapse of a major crypto exchange last November, and inquired about “the role that auditors may have played in misleading the public about the financial soundness and safety of crypto companies.” Referring to reports of “scandalous accounting practices” within the industry, the senators urged the PCAOB to take action to ensure accountability. “When PCAOB-registered auditors perform sham audits—even for firms that may lay outside of the PCAOB’s jurisdiction—they tarnish the credibility of the PCAOB and undermine confidence in the PCAOB-registered auditors that investors and the public rely on when making investment decisions,” the senators wrote, adding that “misleading financial reports shake our confidence in the entire auditing industry.”
The senators asked the PCAOB to respond to several questions concerning alleged misleading auditing practices related to the exchange’s collapse, including whether the PCAOB is taking steps to mitigate risks facing retail investors, whether it was aware of any potential conflicts of interest or other concerning behavior, and whether it has “the authority to strip auditors of their PCAOB-registered status if they provide services or engage in conduct that fall short of PCAOB standards and rules, even if those actions are taken in relation to private, non-SEC registered companies.” The senators also asked the PCAOB to describe the standards that auditors must comply with “when evaluating the risk of exposure to crypto firms or validating the valuation of crypto investments.”
SEC orders global accounting firm’s Chinese affiliate to pay $20 million for auditing failures
On September 29, the SEC issued a cease and desist order against the Chinese affiliate of a global accounting firm for allegedly failing to comply with U.S. professional auditing requirements when conducting component audits of U.S. issuers and auditing foreign companies listed on U.S. exchanges. According to the SEC, during the course of numerous audits, personnel at the Chinese affiliate allegedly, among other things, asked clients to choose their own samples for testing and complete required audit documentation purportedly showing that the Chinese affiliate had obtained and assessed supporting evidence for certain clients’ accounting entries. This was allegedly done in order to create the illusion that the required testing of clients’ financial statements and internal controls had been conducted when there was allegedly no evidence that it had in fact happened. The SEC noted that the alleged misconduct involved both junior and senior audit team members and demonstrated a lack of supervision by audit partners. Moreover, the Chinese affiliate’s alleged failure to follow required Public Company Accounting Oversight Board (PCAOB) auditing standards created a significant threat to U.S. investors.
“While the SEC’s action today does not implicate a violation of the Holding Foreign Companies Accountable Act, the action does underscore the need for the [PCAOB] to be able to inspect Chinese audit firms,” SEC Chair Gary Gensler said in the announcement. “A fundamental goal of the PCAOB’s inspection regime is to identify weaknesses in the firms’ quality control processes—the very weaknesses at issue in this case.”
Without admitting or denying the allegations, the Chinese affiliate agreed to settle the charges by paying a $20 million civil money penalty and implementing extensive remedial measures, including completing a review and assessment of its policies and procedures by an independent consultant and implementing a course of action to address identified deficiencies. Audit professionals at the Chinese affiliate who serve U.S. public company audit clients are also required to undertake additional training.
GAO Report Evaluates "Permanent Funding Authorities"
On December 9, the GAO released a report detailing the results of its audit of “permanent funding authorities”—a term it defines as “entities with authority to collect and obligate funds without further congressional action.” The report, entitled Permanent Funding Authorities: Some Selected Entities Should Review Financial Management, Oversight, and Transparency Policies: (i) describes the different types of authorities for entities funded by fines and penalties and for regulatory entities; (ii) assesses the policies and procedures related to agencies’ and other entities’ management of their permanent funding authorities; and (iii) makes recommendations to ensure efficient use of resources.
In conducting its audit, the GAO examined five case studies that illustrate the variation in permanent funding authorities: the Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS); the CFPB; the DOJ’s Crime Victims Fund (CVF); the Gulf Coast Restoration Trust Fund (Trust Fund); and the Public Company Accounting Oversight Board (PCAOB), overseen by the SEC. Based on its review, the GAO recommended that in order to “ensure efficient resource use,” APHIS, the CFPB, and the SEC—in its oversight of PCAOB—should review reserve targets. To facilitate oversight, the SEC should establish time frames for PCAOB’s annual report. According to the report, the Department of Agriculture, CFPB, PCAOB, and SEC agreed with GAO’s recommendations.
- Keisha Whitehall Wolfe to discuss “Tips for successfully engaging your state regulator” at the MBA's State and Local Workshop
- Max Bonici to discuss “Enforcement risk and trends for crypto and digital assets (Part 2)” at ABA’s 2023 Business Law Section Hybrid Spring Meeting
- Jedd R. Bellman to present “An insider’s look at handling regulatory investigations” at the Maryland State Bar Association Legal Summit