The Public Company Accounting Oversight Board delivered its first enforcement blow to a small New York firm that apparently violated auditor independence rules, then tried to conceal the fact from Board inspectors.
The Board deregistered Goldstein and Morris CPAs and barred managing partner Edward Morris from associating with a PCAOB-registered firm. The Board also censured two other partners, Alan Goldberger and William Postelnik, both of whom resigned from the firm.
According to the PCAOB account, the firm prepared financial statements for two public companies—New York Film Works and RTG Ventures—then audited those same statements in violation of auditor independence rules. When the Board came knocking at inspection time, the three partners tried to conceal their violation by doctoring audit documents.
The PCAOB said it notified the firm in September 2004 that it would be conducting an inspection in November. The inspection division asked for some preliminary information and documentation to prepare for the audit, including an accounting of the number of hours the firm logged for its public company clients.
Morris, Goldberger and Postelnik carried out a plan to alter time reports so as to conceal its services in both preparing and auditing financials, then created and back-dated documents to add to the in-house files in preparation for the inspection, the Board said.
After answering the document request but before the inspection began, Goldberger and Postelnik contacted the Board through their attorneys to inform inspectors of the phony records, according to the PCAOB.
SOX 105
The following excerpt is from Section 105 of The Sarbanes-Oxley Act of 2002, which empowered the PCAOB to establish "fair procedures for the investigation and disciplining of registered public accounting firms and associated persons of such firms":
(c) DISCIPLINARY PROCEDURES-
SANCTIONS—If the Board finds, based on all of the facts and circumstances, that a registered public accounting firm or associated person thereof has engaged in any act or practice, or omitted to act, in violation of this Act, the rules of the Board, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including the rules of the Commission issued under this Act, or professional standards, the Board may impose such disciplinary or remedial sanctions as it determines appropriate, subject to applicable limitations under paragraph (5), including
Temporary suspension or permanent revocation of registration under this title;
Temporary or permanent suspension or bar of a person from further association with any registered public accounting firm;
Temporary or permanent limitation on the activities, functions, or operations of such firm or person (other than in connection with required additional professional education or training);
A civil money penalty for each such violation, in an amount equal to
Not more than $100,000 for a natural person or $2,000,000 for any other person; and
In any case to which paragraph (5) applies, not more than $750,000 for a natural person or $15,000,000 for any other person;
Censure;
Required additional professional education or training; or
Any other appropriate sanction provided for in the rules of the Board.
Source: Section 105 of The Sarbanes-Oxley Act of 2002, "Investigations And Disciplinary Proceedings."
The revocation of registration for the firm and the bar against Morris means neither is allowed to work for a public company subject to Securities and Exchange Commission regulations. The censure against Goldberger and Postelnik is the equivalent of a reprimand, according to PCAOB spokeswoman Christi Harlan.
Representatives for the firm and the three accountants didn’t respond or weren’t available to discuss their status and their plans going forward. The phone number listed for Goldstein and Morris is now answered by an automated answering system that identifies the firm as “Morris and Company.” The operator who ultimately answered live said Goldstein and Morris was “out of business” and would not answer questions about the name change.
Goldberger provided a phone number to reach him at another New York accounting firm, and his name appears on a list of pending registration applications with the PCAOB, which came as a surprise to Harlan.
She said the firm, Goldberger and Postelnik are free to apply for registration with the PCAOB again, but “the Board would certainly take note of the de-registration, and it would be a matter for consideration at that point.” The bar on Morris is permanent, she said.
The trio of accountants and the firm also could be subject to additional disciplinary actions by their state licensing board, the American Institute of Certified Public Accountants, and their state society of CPAs, said Lillian Ceynowa, director of the Center for Public Company Audit Firms, an arm of the AICPA.
The enforcement action is drawing big attention not necessarily because of its impact on financial reporting but because it’s the first by the PCAOB, Ceynowa said. “What they did was not truthful,” she said. “The fact that they owned up to it and confessed is a good thing. In this type of environment, this will not be tolerable. We’re trying to restore investor confidence.”
Jack Ciesielski, owner of R.G. Associates, says the punishment fits the misdeed, but the case is significant for other reasons. “Observers and critics of the PCAOB will probably hoot at the punishment being meted out to such a tiny firm,” Ciesielski wrote in his AAO Weblog.
The enforcement could represent a policing approach in which the PCAOB goes after the “low-hanging violator fruit” to set an example, he said. “Their credibility will suffer though if they’ve focused solely on small-fry firms and problems erupt later at the big ones.”
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