A recently retired PwC auditor has settled a disciplinary proceeding with the Public Company Accounting Oversight Board over claims that he paid too little attention to red flags indicating an audit client was fudging revenue figures.

The PCAOB has barred Randall A. Stone of Austin, Texas, from being associated with a registered audit firm for three years and fined him $50,000 in connection with his work as the PwC partner in charge of the 2007 audit of ArthroCare Corp., a maker and supplier of medical devices. Stone oversaw the company's audits from 2005 through 2009. The PCAOB says it began its disciplinary proceedings against Stone in December 2012, but privately as required under Sarbanes-Oxley. Stone retired from PwC in June 2014, the PCAOB says.

The PCAOB's disciplinary order says Stone failed to follow auditing standards to address multiple indicators of improperly recognized revenue through a series of significant unusual transactions, including claims by short-sellers of possible wrongdoing. In addition, the PCAOB says Stone authorized issuance of PwC consent to a Form S-8 registration statement filing in which ArthroCare registered 1.2 million shares for its employee incentive stock plan while he was aware of the allegations. The board also says Stone violated PCAOB rules and standards in auditing ArthroCare's accounting for its acquisition of DiscoCare in December 2007. The PCAOB recently issued a new standard that compels auditors to look more closely at related parties and significant unusual transactions

PwC points out in a statement that the disciplinary proceedings are focused on allegations against Stone and not the firm. “But the firm respects his decision to resolve the matter and put it behind him,” the firm said through a spokesman. “PwC takes seriously the actions of the PCAOB and will continue to support and cooperate with the PCAOB in furtherance of our joint commitment to improving audit quality.”

The disciplinary order says Stone ignored or failed to properly evaluate numerous indicators -- including unusual pricing and payment terms, and quarter-end sales spikes -- that should he should recognized as possible evidence that ArthroCare was improperly recognizing revenue on its 2007 sales of medical devices to its newly acquired DiscoCare unit. The PCAOB says it also found evidence that ArthroCare may have funded DiscoCare's purchases through monthly service fee payments to help ArthroCare meet its revenue forecasts for 2007.

"Revenue often is a key metric for public company investors and is a financial reporting area prone to manipulation by management," said Claudius B. Modesti, director of PCAOB enforcement and investigations, in a statement. "When an auditor is confronted with multiple indicators of problematic revenue recognition, as happened here, he or she must get to the bottom of the relevant issues, including digging into management's representations.”

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