The Public Company Accounting Oversight Board has disciplined three McGladrey auditors for doctoring an audit file in preparation for a regulatory inspection.

Dale A. Hotz, who was a partner at the firm's Frederick, Md., office, was censured by the PCAOB and has been barred from being associated with any firm registered to do public company audit work in the United States. He can petition the board to rejoin a registered firm after two years. The PCAOB also censured Jyothi N. Manohar, a director at the  firm's Blue Bell, Pa.,office, and suspended her from being associated with a registered firm for one year. The third auditor, Michael J. Fadner, also from the Blue Bell office, was censured by the board. Hotz and Fadner are no longer with McGladrey, but Manohar remains with the firm under restrictions that limit her activity, says firm spokesman Terri Andrews.

According to the disciplinary order, Hotz was the engagement partner on an audit selected for inspection in December 2010. In preparation for the inspection, the auditors reviewed the audit file and determined some documentation was missing. They recreated missing pieces -- including an engagement letter, a cash flow worksheet, and a fair-value memo -- and added them to the audit work papers before handing the file over to PCAOB inspectors, the PCAOB says.

The auditors passed them off as original to the engagement process, not subsequently added after the audit was complete, according to the disciplinary order. In doing so, the auditor violated documentation rules and rules requiring them to cooperate with PCAOB inspectors, the PCAOB said. “McGladrey discovered this situation, immediately notified the PCAOB and concurrently began its own investigation of the facts,” says Andrews, who notes the firm was not named in the enforcement order. “The firm supports the actions by the PCAOB in this matter.”

The settlement is the seventh one issued by the PCAOB in 2012 and the second to involve a major firm, or one that audits at least 100 U.S. registrants each year. In February, the PCAOB fined Ernst & Young and three of its auditors in connection with an accounting problem at Medicis Pharmaceutical Corp. involving product returns. The PCAOB said E&Y failed to adequately challenge the company's sales return reserve, leading to a material departure from Generally Accepted Accounting Principles. 

According to board member Jeannette Franzel, the PCAOB had a total of 19 auditors and auditing firms facing disciplinary and enforcement proceedings, but the board can't discuss those action because of privacy around the process. The PCAOB recently clarified it has nine cases in its pipeline involving the various firms and individual auditors. The board has asked Congress to make its disciplinary and enforcement process more open, but the measure is stalling in Congress.