Enforcement News: The Importance of Supervision, Documentation and Due Care

• Posted on: Jan 22 2024

By: Jeffrey M. Haber

The objective of an auditor is to supervise the audit engagement, including supervising the work of engagement team members so that the work is performed as directed and supports the conclusions reached.¹

The engagement partner is responsible for the engagement and its performance.² Accordingly, the engagement partner is responsible for the supervision of the engagement team and for compliance with PCAOB standards,³ including standards regarding using the work of specialists, other auditors, internal auditors, and others who are involved in testing controls.⁴ 

The engagement partner and, as applicable, other engagement team members performing supervisory activities, should inform engagement team members of their responsibilities, including, among other things, the objectives of the procedures that they are to perform; the nature, timing, and extent of the procedures they are to perform; and matters that could affect the procedures to be performed or the evaluation of the results of those procedures, including relevant aspects of the company, its environment, and its internal control over financial reporting, and possible accounting and auditing issues.⁵

Those in a supervisory role are also required to review the work of engagement team members to determine whether the work was performed and documented; the objectives of the procedures were achieved; and the results of the work support the conclusions reached.⁶

In addition to supervision, an auditor is required to exercise due professional care in the planning and performance of an audit and preparation of the audit report.⁷ Due professional care requires an auditor to exercise “professional skepticism,” which includes “a questioning mind and a critical assessment of audit evidence.”⁸ Negligent conduct by an auditor violates the duty of due care.⁹

The generally accepted method for engagement partners to document their supervision of an audit in compliance with PCAOB auditing standards, and their review of the work performed by engagement team members, is by signing and dating (or “signing off”) work papers when they perform or review work. Historically, sign offs occurred on hard copies of work papers but, in recent years, many audit firms moved to electronic sign offs. Whether a sign off occurs in hard copy or electronic form, it provides evidence of who performed or reviewed audit work and the date on which such work or review occurred. By signing off on work papers, an engagement partner documents his or her supervision of the audit.

When conducting an audit, the auditor is required to provide a written record of the basis for the auditor’s conclusions. Audit documentation facilitates the planning, performance, and supervision of the audit engagement.¹⁰ 

An auditor must prepare audit documentation in connection with each audit engagement conducted pursuant to PCAOB auditing standards.¹¹ The audit documentation should demonstrate, among other things, that the engagement complied with the standards of the PCAOB.¹² 

The foregoing accounting standards, among others, are the subject of an administrative and cease-and-desist proceeding brought by the Division of Enforcement of the Securities and Exchange Commission (“SEC”) against an engagement partner (“Respondent”) at a national accounting and advisory firm (the “Firm”) for allegedly violating PCAOB audit standards, including those related to supervision, audit documentation, and due professional care, in audits for which Respondent was the lead engagement partner.¹³

According to the SEC’s Order (here), from 2012 through 2022, Respondent served as the engagement partner for at least 240 audits of public companies, including both operating companies and special purpose acquisition companies. For at least 204 of those audit engagements (or approximately 85%), Respondent allegedly failed to supervise the work of the engagement team as shown by, among other things, his purported failure to review the work of the engagement team and to document his review by the report release date.¹⁴ 

Respondent also allegedly failed to assemble complete and final audit documentation within 45 days of the report release date for 126 (or approximately 53%) of the audit engagements. These failures, alleged the SEC, violated PCAOB auditing standards. 

Further, in connection with the 2018 through 2020 audits of a public company, where Respondent served as the engagement partner, Respondent allegedly violated PCAOB auditing standards, including the exercise of due professional care.

The SEC charged Respondent with engaging in improper professional conduct within the meaning of Section 4C(a)(2) of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the SEC’s Rules of Practice and causing the Firm’s violations of Rule 2-02(b)(1) of Regulation S-X.¹⁵

Footnotes

1. AS 1201.02.
2. Id. at .03.
3. The Public Company Accounting Oversight Board (“PCAOB”) was created as part of the Sarbanes-Oxley Act of 2002. The PCAOB oversees audits of public companies that are subject to the securities laws in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB established Auditing Standards for registered public accounting firms to follow in the preparation of audit reports for public companies, other issuers, and broker-dealers.
4. AS 1201.03.
5. Id. at .05.
6. Id.
7. AS 1015.01.
8. Id. at .07.
9. Id. at .03.
10. AS 1215.02.
11. AS 1215.04.
12. Id. at .05.a.
13. The administrative summary from which the description of the proceeding comes can be found here.
14. The report release date is the date on which an audit firm grants permission to use its audit report in connection with the issuance of its client’s financial statements.
15. It is important to remember that the Order is merely an allegation of wrongdoing. Nothing has been proven by the SEC and no findings have been made before a trier of fact.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. 

This article is for informational purposes and is not intended to be and should not be taken as legal advice.