Foreign affiliates of major global accounting firms are under scrutiny from the Public Company Accounting Oversight Board (PCAOB).
In the space of two weeks, the Board has enforced settlement actions against the foreign affiliates of Deloitte, PricewaterhouseCoopers, Ernst & Young, KPMG, Nexia and Grant Thornton, involving firms based in Spain, Argentina, South Korea, Brazil and Colombia.
The PCAOB suspended the former chairman of Deloitte’s Brazilian affiliate for at least five years, and permanently barred the firm’s former CEO. The Board actions against the Brazilian firm executives follow on the heels of an action at the end of 2016 in which the PCAOB levied a record $8 million fine on Deloitte Brazil. These actions arose in connection with an alleged scheme by senior officials at Deloitte Brazil to conceal auditing errors from oversight authorities.
The fines imposed on all Big Four firms as well as Nexia and Grant Thornton were relatively minor, ranging from $10,000 to $25,000, on allegations that the foreign affiliates failed to disclose home country civil or criminal enforcement actions brought against the firms or their personnel.
Foreign audit firms whose audit reports are included in SEC filings must register with the PCAOB. Currently, more than 900 foreign audit firms are registered with the Board. Affiliates of global audit networks can be a source of particular concern to both regulators and investors. Despite the fact that these affiliates operate under the banners of some of the most recognised financial firms in the world, these companies are separate and distinct legal entities from the umbrella organisation. Foreign firms are often organised as limited liability entities that are regulated by home country oversight authorities, and the umbrella organisation will often have little control of the day-to-day operations of these firms.
Board member Steven B. Harris recognised in December 2016, that it is critical for “regulators around the world to work increasingly collaboratively to address improper behaviour.” He characterised the violations seen in the Deloitte Brazil cases “as extremely serious violations which raise fundamental issues relating to global firm governance, culture and tone at the top.”
Even though securities fraud liability is unlikely from a securities law standpoint, global accounting firms would be well-advised to review their relationships with their foreign affiliates and the firm governance structures of these operations. While the small fine amounts imposed in the failure to report cases cited are hardly material to the operations of a major international accounting firm, the reputational harm can be significant. In addition, as the $8 million fine imposed on Deloitte Brazil suggests, both local firms and global accounting networks have a vested interest in minimising their exposure to PCAOB inquiries.