The Public Company Accounting Oversight Board (PCAOB) announced that KPMG Netherlands and Deloitte affiliates Indonesia and Philippines have been fined for violations of PCAOB rules and quality control standards relating to the firms’ internal training programs.
KPMG Netherlands has been sanctioned for a $25 million civil money penalty, which is the largest fine the watchdog has ever imposed. Meanwhile, Deloitte’s affiliates have been fined $1 million each by PCAOB. Additionally, key KPMG and Deloitte senior management have been penalized. KPMG Netherlands’ former head of assurance, Marc Hogeboom, has been fined $150,000 and permanently barred from practice. Deloitte’s national professional practice director, Wifredo Baltazar, has been fined $10,000, censured, and barred from being an associated person of a registered public accounting firm but has a right to apply to terminate his bar after three years.
Public accounting firms’ internal training programs for continuing professional education (CPE) involve examinations that keep accountants educated in their areas of expertise. The Association of International Certified Professional Accountants (AICPA) and the National Association of State Boards of Accountancy (NASBA) provide recommendations for state CPEs and set the standards for CPE courses.
In each of these cases, PCAOB found a failure by firm leadership to “effectively promote an ethical culture among the firms’ personnel with respect to improper answer sharing and monitoring of the firms’ systems of quality control,” according to the releases. At KPMG Netherlands, it was found that from 2017 to 2022 hundreds engaged in “improper answer sharing — either by providing access to test questions or answers, or by receiving such access without reporting it — in connection with tests for mandatory firm training courses.” It was found that Deloitte Indonesia had more than 200 professionals engaged in answer sharing from 2021 to 2023. Deloitte Philippines, from 2017 to 2019, was found to have audit partners and personnel engaged in the same.
Erica Williams, Chair of the PCAOB, posted on her LinkedIn profile a video and text message, noting the seriousness of the misconduct and the nature of the fines. Williams stated that exam cheating “erodes trust and threatens investor confidence our system relies on... Let today’s news be a clear warning to those who break the rules — if you put investors at risk, there will be consequences.”
Williams’ statement comes on the heels of her repeated assertion that the PCAOB is “laser-focused” on investor protection and actively pursuing auditing firms that are reckless or negligent, as she stated recently at the Baruch College auditing conference in December. As recently as March, Williams noted that the PCAOB has used “sweeps” to collect information from multiple firms at the same time to uncover potential violations, which snagged Baker Tilly, Grant Thornton Bharat, Mazars, and SW Audit.
Of note, Chris Vanover, president of CPAClub, said regarding these sweeps in a recent edition of The Accounting Podcast, “There is great temptation for partners who are incentivized to tie compensation to revenue growth, and the result in the case of Withum was to take on significantly more business than the firm could handle,” and that the PCAOB is “starting to hammer firms with respect to whether they actually have the resources to execute the audits.”
Earlier this year, Paul Munter, the SEC’s top accountant, called on auditors to reverse the “troubling trendline” in audit deficiency rates, where management “may be under pressure to meet earnings expectations in the face of declining revenue or increased costs.”
The challenge for auditors, and perhaps the reason for the exam cheating, is that public accounting firms are facing a crisis of qualified talent. The licensing standards for CPAs, which include 150 hours on would-be accountants, plus an aggregate amount of CPE courses that typically need to be completed over a course of years, have increased the barriers to entry for young finance and accounting professionals. According to a recent AICPA study, the number of college students who completed accounting degrees in 2022 fell 7.8%, a downward trajectory that began in 2016.
Coupled with the high CPA licensing standards, which will undergo a more stringent upgrade in 2024 (it will require deeper expertise in the areas of information systems and controls, tax compliance and planning, and business analysis and reporting), the industry has a relatively low base starting salary of $50,000 in 2022, according to the AICPA. The BLS reported the median pay for all accountants and auditors as of 2022 was $78,000.
Amid the higher standards stated by Williams and Munter, public accounting firms continue to face the challenge of finding and keeping the talent they need, but with an increased degree of difficulty and a stronger sense of ethical propriety.