PCAOB Slams Ernst & Young Former Partner, Senior Manager
The Public Company Accounting Oversight Board has settled disciplinary orders against a former Ernst & Young partner and senior manager for altering working papers and providing misleading documents and information to regulators who inspected it.
PCAOB first enforced the disciplinary action against the accounting firm on December 2010 since its assumption of power from the mandate of Sarbanes-Oxley Act.
Regulators claimed Ernst & Young falsified its 2009 audit report of an anonymous company, with Jacqueline Higgins, Ernst & Young Boston office manager, an engagement partner and senior manager, having been accused of tampering the documentations of the company’s financial statements by removing, adding and backdating the audit report.
“These actions threatened to undermine the integrity of PCAOB inspection processes, and the ability of the Board to discharge its mandate to inspect the auditors of public companies,” said James Doty, PCAOB Chairman.
“The Board moved swiftly to address this conduct, having commenced litigation against these respondents within seven months of learning of their conduct. I commend the Board’s Division of Enforcement and Investigations for its timely and effective work,” he added.
PCAOB barred the former partner, Peter O’Toole, from associating with a PCAOB-registered accounting firm. But O’Toole retains the right to petition to remove the bar after three years.
This is the longest bar that the PCAOB has imposed on a partner of a Big Four accounting firm to date. The settlement includes a $50,000 civil money penalty imposed against O’Toole.
PCAOB also barred the former senior manager, Darrin Estella, from associating with a PCAOB-registered accounting firm, with the right to petition to remove the bar after two years.
PCAOB found that, shortly before a PCAOB inspection of an E&Y audit, O’Toole and Estella – acting with O’Toole’s knowledge and authorization – “created, backdated, and added a document to the audit working papers that related to the most significant issue in that audit.”
PCAOB further claimed that O’Toole authorized other members of the audit engagement team, including Estella, to “alter, add, and backdate other working papers in advance of the PCAOB inspection.”
In addition, PCAOB alleged that O’Toole and Estella provided a written document to PCAOB inspectors in which Ernst & Young represented to PCAOB that no changes had been made to the audit working papers following the documentation completion date for the audit.
In fact, “neither O’Toole nor Estella ever disclosed to the PCAOB inspectors that the working papers were altered after the documentation completion date and shortly before the inspection,” PCAOB said.
Accordingly, O’Toole and Estella violated PCAOB Rule 4006 requiring cooperation with PCAOB inspections, as well as PCAOB Auditing Standard No. 3 governing audit documentation.
In December 2010, PCAOB instituted disciplinary actions against O’Toole and Estella in proceedings that were not made public pursuant to the Sarbanes-Oxley Act and related Board rules.
PCAOB determined that good cause had been shown to make the disciplinary hearing public.
As permitted by the Act and by related Board rules, the Division of Enforcement and Investigations consented to making the hearing public, and O’Toole and Estella dissented to the idea. O’Toole and Estella subsequently consented to the disciplinary orders without admitting or denying the Board’s findings.
“Investors rely on auditors, not only to comply with their obligations during the audit, but also when their audits are under PCAOB scrutiny. The Board’s orders today bring into sharp focus for all auditors of public companies, at all levels of audit engagement teams, that providing misleading documents to PCAOB inspectors will be met with decisive action and strong sanctions,” said Claudius Modesti, Director of the PCAOB Division of Enforcement and Investigations.