News
Julia Irvine 27 Sep 2017 02:55pm

BDO Spain fined over porn company audits

The US audit watchdog has fined BDO Spain $40,000 (£29,870) and banned two partners for up to three years for repeatedly failing to exercise due professional care and professional scepticism over the audits of an American porn company

Under the Public Company Accounting Oversight Board (PCAOB) order, the firm has been given three months to put systems in place that provide “reasonable assurance” that in future it only undertakes engagements it “can reasonably expect to be completed with professional competence”, and that its quality controls are effective.

It will also have to ensure that staff on audits are up to the job; they must have been trained to acceptable levels technically and they must comply with continuing professional education. Their work must also meet applicable professional standards.

Not only will BDO Spain’s managing partner Marino Sánchez-Cid have to sign a certification to that effect but he will also have to supply a separate certification that “all professionals considered audit seniors or team leaders, managers, directors and partners” who are working on PCAOB audits have received 40 hours of training on US GAAP (generally accepted accounting principles), PCAOB rules and standards and Securities & Exchange Commission (SEC) rules and regulations.

The two partners who have been sanctioned, Santiago Sañé Figueras and José Ignacio Algás Fernández, were both based in the firm’s Barcelona office.

Sañé was the engagement partner on the 2010, 2011 and 2012 audits of Private Media Group (PMG), a Nevada company headquartered in Barcelona and listed in the US.

At the relevant time it was a holding company with subsidiaries “engaged in the acquisition, refinement and distribution of branded adult media in digital and physical formats”.

The PCAOB’s inspectors found that the firm and Sañé had repeatedly broken PCAOB rules and standards during the 2011 and 2012 audits, while the firm had also breached PCAOB quality control standards.

Sañé and the firm did not perform sufficient procedures to test journal entries for the existence of fraud, despite identifying these as a risk factor because of potential management override of controls. As a result, they failed to obtain reasonable assurance that the financial statements were free of material misstatement.

They also failed to address a departure from US GAAP in the 2012 financial statements relating to outstanding fees owed to external lawyers that were forgiven. These were included in the financial statements even though they were not forgiven until 2013, after the company’s 31 December year end.

Another violation related to failure to evaluate PMG’s reporting of stock transactions with a related entity. The audit work papers included an unexecuted copy of the preferred share agreement with additional elements that, were they included in the executed agreement, would push the related entity’s holding above 50% of the aggregated voting power of PMG’s capital stock.

This would have led to a change in control but neither Sañé nor the firm evaluated whether the unexecuted copy matched the final terms of the transaction.

Even though the auditors identified a fraud risk involving the valuation of PMG’s library of two million plus photographs and 1,000 videos – a significant accounting estimate given that the library represented 40% of the company’s total assets at the 2012 year end, they failed to evaluate the reasonableness of this valuation.

They also failed to evaluate whether certain estimated costs related to the library and if so whether they were reasonable, despite the fact that they substantially exceeded planning materiality and equalled around 20% of PMG’s reported net loss for 2012.

Other breaches including failing to perform sufficient procedures to test PMG’s broadcasting and internet sales revenue during the audits.

Following the 2012 audit, the firm and Sañé missed the deadline for completing the audit documentation. Sañé and the engagement team then compounded the problem by adding several work papers to the audit file after the completion date and without identifying when they were added, who added them and why.

Sañé was also found to have inadequately supervised and documented his supervision of the audits. He was censured, fined $7,500 and banned from being associated with a registered public accounting firm for three years.

Fellow partner Algás was the engagement quality reviewer for PMG’s 2011 and 2012 audits.

The PCAOB inspectors found that he had failed to identify multiple violations of the board’s rules and standards in the engagement team’s work on the audits which, had he paid due care and attention, he would have done.

Furthermore, he didn’t evaluate the significant judgments made by the engagement team. Nor did he ask for the missing documents that he needed to perform the evaluation.

He was censured and banned for a year.

In June 2013, PMG filed a form 10-Q in the US for the six months to end June 2013 which revealed a net loss of more than $1.38m. In 2016, the SEC revoked the registration of each of PMG’s registered securities after it had failed to file any more financial statements.

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