The Public Company Accounting Oversight Board (PCAOB) has announced settled disciplinary orders against a former Ernst & Young (E&Y) partner and senior manager for their roles in providing misleading documents and information to PCAOB inspectors and altering working papers.
"These actions threatened to undermine the integrity of PCAOB inspection processes, and the ability of the Board to discharge its mandate to inspect the auditors of public companies," said James R. Doty, PCAOB chairman.
"The Board moved swiftly to address this conduct, having commenced litigation against these respondents within seven months of learning of their conduct. I commend the Board's Division of Enforcement and Investigations for its timely and effective work," Doty added.
The Board barred the former E&Y partner, Peter C. O'Toole, from associating with a PCAOB-registered accounting firm, with the right to petition to remove the bar after three years. This is the longest bar that the PCAOB has imposed on a partner of a Big 4 accounting firm to date. The Board also imposed a $50,000 civil money penalty against O'Toole.
The Board barred the former senior manager, Darrin G. Estella, from associating with a PCAOB-registered accounting firm, with the right to petition to remove the bar after two years.
The Board found that, shortly before a PCAOB inspection of an E&Y audit, O'Toole and Estella -- acting with O'Toole's knowledge and authorization -- created, backdated, and added a document to the audit working papers that related to the most significant issue in that audit. The Board also found that O'Toole authorized other members of the audit engagement team, including Estella, to alter, add, and backdate other working papers in advance of the PCAOB inspection.
Additionally, the Board found that O'Toole and Estella provided a written document to PCAOB inspectors in which E&Y represented to the Board that no changes had been made to the audit working papers following the documentation completion date for the audit. Neither O'Toole nor Estella ever disclosed to the PCAOB inspectors that, in fact, the working papers were altered after the documentation completion date and shortly before the inspection.
The Board found that O'Toole and Estella's actions violated PCAOB Rule 4006, which requires cooperation with Board inspections, as well as PCAOB Auditing Standard No. 3, which governs audit documentation.
In December 2010, the Board instituted disciplinary proceedings against O'Toole and Estella and, pursuant to the Sarbanes-Oxley Act and related Board rules, those proceedings were not public. The Board determined that good cause had been shown to make the disciplinary hearing public. As permitted by the Act and by related Board rules, the Division of Enforcement and Investigations consented to making the hearing public, and O'Toole and Estella did not consent to making the hearing public. O'Toole and Estella subsequently consented to the disciplinary orders without admitting or denying the Board's findings.
"Investors rely on auditors, not only to comply with their obligations during the audit, but also when their audits are under PCAOB scrutiny. The Board's orders today bring into sharp focus for all auditors of public companies, at all levels of audit engagement teams, that providing misleading documents to PCAOB inspectors will be met with decisive action and strong sanctions," said Claudius B. Modesti, Director of the PCAOB Division of Enforcement and Investigations.
The PCAOB investigation and litigation were conducted by PCAOB Enforcement staff members Jarett Decker, Kyra Armstrong, Michael Rosenberg, Michael Plotnick, John Abell, and Mark Zebrowski.