Big Four auditors’ affiliates drawing more scrutiny than ever before overseas

28 February 2017. By Neil Haggerty and Neil Roland.

US auditing watchdog is conducting multiple investigations of Big Four firms' foreign affiliates after expanding inspections into different regions in recent years, Public Company Accounting Oversight Board officials said.

Inspections have led to four fines of Big-Four firms' overseas affiliates since December, said PCAOB enforcement chief Claudius Modesti, the first penalties since 2011 against foreign affiliates in the global networks.

The recent actions include a $1 million fine last month of Ernst & Young Indonesia and an $8 million penalty against Deloitte Brazil in December, the biggest ever levied by the watchdog. The Deloitte Brazil case is the regulator's first to allege fraud and coverup by a Big Four foreign affiliate, which is a legally distinct business rather than a subsidiary.

Modesti declined to name the firms under current investigation and said not all active probes were spurred by inspections.

The enforcement unit, he told MLex in an email Tuesday, "is conducting cross-border investigations arising from a variety of other sources."

These sources can include other regulators, whistleblowers, news articles and public disclosures, a PCAOB spokeswoman said.

"The board's Enforcement Division treats investigations involving cross-border audits as a higher priority because of the risks those audits present to investors," she said. Affiliates are distinct businesses rather than subsidiaries, and audit integrity standards vary widely from country to country.

Audit quality

Lynn Turner, who has served on PCAOB advisory panels since 2004, also credited improved inspection quality for the recent step-up in enforcement activity.

"The quality of the PCAOB inspections has improved significantly in recent years and that, in turn, has resulted in very significant findings of audit deficiencies and increased enforcement actions," said Turner, a former US Securities and Exchange Commission chief accountant under Chairman Arthur Levitt.

Daniel Goelzer, a former PCOAB acting chairman and now senior counsel at Baker McKenzie in Washington, said the recent cases show that "non-US firms that audit companies that trade here are playing by the same rules as US firms."

Inspection treaties

PCAOB has entered treaties with other countries allowing it to inspect local firms that audit US-listed companies. Only four countries with audit firms registered with PCAOB — China, Ireland, Portugal and Belgium — don't let the overseer inspect these firms.

That's a significant expansion of PCAOB's reach since former SEC general counsel James Doty became chairman in 2011.

As recently as 2013, the watchdog couldn't inspect firms in 10 countries, including Italy, Greece and Denmark.

PCAOB is a private non-profit created by Congress in 2002 in the wake of accounting scandals at Enron and Worldcom to help oversee publicly traded companies.

Receive MLex Editor's Picks in Your Inbox

Complete this form to receive emails from MLex with selected highlights from our global coverage of regulatory risk and opportunity, as well as upcoming events, special reports and exclusive interviews.