Back in September 2009, I blogged on the impact of the SEC’s enforcement action against Moore & Associates Chartered, and more specifically, the impact on issuers who were relying on Audit Reports issued by Moore. You can read that blog here.
Last week, I sat in on a webinar about the PCAOB’s inspection and enforcement programs. You can watch an archive of the webinar here.And I have to tell you, it scared me a little. Not because auditors were being inspected, or that enforcement actions were being brought against unscrupulous auditors. Those things are, of course, good for the industry. I couldn’t help but continue to think about the impact on one of our issuers if their independent auditor was the subject of a PCAOB enforcement action.
First, the cost to the auditing firm is tremendous. This can result in distractions, reduced staffing, and an overall degredation in the level of service to the issuer. Some audit firms will have an insurance policy that covers this type of enforcement action, which might be short term relief until the renewal cost comes on that policy and is passed on to the issuer.
Second, the reputation of the issuer, and specifically of the issuers financial statements, might be brought into question by investors. This could cause a financing transaction to be cancelled, or the cost of financing to increase.
Third, and most dramatically, the financial statements filed by the issuer with the SEC could be deemed to be unreliable. This triggers an immediate 8-K filing, and potentially renders the issuer out of compliance with its reporting obligations under the Securities Exchange Act.
The impact that a PCAOB enforcement action has on the issuer raises the question. Are these enforcement actions helping, or hurting investors? The PCAOB’s Mission Statement says they are to, among other things, “protect the interests of investors.” Are they doing so by bringing an enforcement action against an auditor that is extremely expensive and potentially damaging to the issuer?
As a result of these and other potential risks, you should periodically check up on your auditor. You can read the PCAOB’s inspection reports on their website. Don’t be afraid to start an open dialogue with your auditor about their standing with the PCAOB.
Finally, I have blogged several times about the United States Supreme Court’s still-pending case questioning whether the PCAOB is constitutional. Again, I raise the question, or they doing more harm than good?
