In a settlement with the board, BDO Magyarország Könyvvizsgáló Kft agreed to pay $20,000 (£15,940), overhaul its audit independence policies and procedures and establish a training scheme for staff relating to the audit independence standards required by the PCAOB.
The problem arose because the firm went ahead with the audits of two companies even though there were audit and other fees outstanding from the previous year and no agreement had been reached with the clients over payment.
This was in breach not just of PCAOB rules but those of the US Securities & Exchange Commission (SEC) on auditor independence.
As the PCAOB settlement states, “The commission has noted that if unpaid fees owed to an accountant for an extended period become material in relation to the fee expected to be charged for the current audit, ‘there may be a question concerning the accountant’s independence…because the accountant may appear to have a direct interest in the results of operations of the client’.”
In the first case, BDO had acted as auditor for iGlue, a US online content manager with principal executive offices in Budapest.
The firm audited iGlue’s financial statements for 2012, 2013 and 2014. The audit fee for 2012 was approximately $23,100: although iGlue paid some of the bills, by the time it filed the Form 10-K with the SEC, the total unpaid billed and unbilled audit fees amounted to some $10,600.
The fee for the 2013 audit was $4,200. However, by the time BDO started work on the 2013 financial statements, there was still around $6,100 outstanding from the 2012 audit. This was “material” in relation to the 2013 audit fee.
The same problem arose when it came to iGlue’s 2014 audit (fee $4,200). At the time the firm started the fieldwork, there was around $10,300 in billed and unbilled audit fees for both the 2012 and 2013 audits still outstanding. Once more there was no payment agreement in place.
The problem was compounded by the fact that in all three audit reports the firm had included an explanatory paragraph indicating that there was substantial doubt about iGlue’s ability to continue as a going concern.
A similar situation arose with the second company, PDV, which also had principal executive offices in Budapest. BDO audited PDV’s 2013 financial statements and by the time PDV had filed its Form 10-K with the SEC, none of the $37,000 audit fees had been paid.
Nevertheless, the firm agreed audit fees of $27,000 for the 2014 audit and went ahead with the fieldwork.
As well as being in clear breach of the rules over auditor independence, the firm also failed to inform the two companies’ audit clients about the outstanding fees as required by the PCAOB and the SEC.
The PCAOB also found that the firm was aware of the unpaid fees and the lack of a payment agreement, and that it would be breaking not just the PCAOB rules but its own system of quality control if it went ahead with fieldwork on the next year’s audit in those circumstances.