Risk Mitigation Steps After PCAOB Auditor Disqualification : Cherry Bekaert

On May 3, 2024, the Securities and Exchange Commission (SEC) barred audit firm BF Borgers from appearing or practicing before the SEC for deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews of more than 1,500 SEC filings from January 2021 through June 2023. According to the SEC’s order, at least 75 percent of the filings did not comply with PCAOB standards.

This SEC action highlights the risk associated with a registrant’s selection of an independent registered public accountant, commonly known as a PCAOB auditor. While BF Borgers made national headlines because of well-know clients, this SEC action is not unprecedented. In fact, it is not the first action in 2024, and the SEC takes action against firms each year.

If your PCAOB auditor is impacted by such a ruling, each impacted registrant will need to file a Form 8-K for the dismissal of the audit firm. Additionally, issuers that engaged a firm subject to audit or review financial information for filings to be made on or before the administration action date will need to engage a new qualified, independent, PCAOB-registered public accountant. Issuers that are currently in the registration or Reg A process will need to file a pre-effective amendment with a new auditor before their registration statements can be declared effective.

Registrants that require additional time to file their periodic reports following the termination of BF Borgers should file a Form 12b-25 no later than one business day following the filing deadline to obtain an extension. If additional time beyond the applicable Rule 12b-25 grace period is needed, issuers should proactively communicate this to the SEC staff.

Key Steps To Mitigate Your Risk Exposure

Here are some other proactive steps that management can take to mitigate risk exposure:

1. Technical Review of Financial Statements: Management should comprehensively review the previously audited financial statements for completeness and accuracy to ensure that the financial statements meet the requirements of U.S. GAAP (or other reporting requirements) and comply with PCAOB standards. Ensuring the appropriate treatment of high-risk audit areas − including revenue, debt and equity, mergers and acquisitions, and other significant transactions − will be imperative to appropriately document and disclose prior to the appointment of a successor auditor.
2. Revisit Internal Controls: Regulators have emphasized Internal Control over Financial Reporting (ICFR) after crises such as Enron, the 2008 financial crisis and the COVID-19 pandemic. Each challenge has led to new processes and practices to mitigate the risks over financial reporting through an effective internal control function.
3. Organize Audit Support: Gathering audit support will create a more efficient transition to a new audit firm. If documentation is missing or unsubstantiated, consider bolstering your reconciliations, footnote support and bank statements to be used going forward.
4. Assess Accounting Talent: The company’s accounting function should be prepared for a more rigorous audit going forward. Having experience, capability and capacity available will be critical to navigate the challenges of upscaling the audit. A co-sourced provider can provide bench strength to support your internal team.
5. Outline Communications with Audit Committee: Maintaining transparency with the audit committee and board of directors will keep all parties informed of the ongoing process and timelines towards issuing subsequent annual and quarterly filings.

How Cherry Bekaert Can Help

Cherry Bekaert’s Accounting Advisory Services practice offers deep advisory experience in assisting registrants with all facets of public filings and PCAOB audit readiness/support. Our experienced professionals provide financial reporting, technical accounting, and internal audit co-sourcing and outsourcing. Our team can supplement your business’ internal capabilities and effectiveness over the financial reporting function by working as a co-sourced resource in tandem with your accounting department. Most importantly, our accounting team mobilizes quickly to provide agile solutions tailored to your unique needs in challenging situations such as these.

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