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How the PCAOB Uncovers Altered Work Papers

May 6th 2016
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The staff of the Public Company Accounting Oversight Board (PCAOB) recently released Audit Practice Alert No. 14, Improper Alteration of Audit Documentation. The staff issued the practice alert to “emphasize that improperly altering audit documentation in connection with a PCAOB inspection or investigation violates PCAOB rules requiring cooperation with the board’s oversight activities and can result in disciplinary actions with severe consequences.”

PCAOB auditing standards permit an auditor to change work papers at any time. AS 1215 (currently Auditing Standard No. 3) sets forth the rules an auditor must follow when making changes to audit documentation after the documentation completion date:

Audit documentation must not be deleted or discarded after the documentation completion date, however, information may be added. Any documentation added must indicate the date the information was added, the name of the person who prepared the additional documentation, and the reason for adding it. (AS 1215.16)

Changing work papers without following these requirements runs afoul of AS 1215. Doing so in connection with an inspection also violates PCAOB Rule 4006, while doing the same in connection with an investigation violates Rule 5110. In a recent Enforcement Spotlight, the board noted that 18 disciplinary orders have involved violations of Rule 4006, while 16 have implicated Rule 5110.

During my time in the PCAOB enforcement division, evidence of altered work papers was not uncommon. In many instances, we could prove that work papers were altered in advance of an inspection or investigation. In other cases, we had strong suspicions. In most cases, the alteration of audit documentation was the most severe violation, far worse than any audit failure. As they say, the cover-up is worse than the crime.

4 Types of Common Alterations

Improper work-paper alterations tend to follow one of several common patterns. They are also uncovered by regulators in several typical ways.

1. Sign-offs. For some reason, auditors feel a need to add missing sign-offs to work papers in advance of an inspection or investigation. It’s interesting to note that AS 1215 doesn’t require an auditor to sign off on any work paper. Rather, audit documentation must “contain sufficient information to enable an experienced auditor, having no previous connection with the engagement [t]o determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of such review.” (AS 1215.06(b))

Further, you’ll find no settled or litigated enforcement order in which the only issue was this provision of the audit documentation standard. Yet, auditors still jeopardize their careers by adding sign-offs in advance of an inspection or investigation without complying with AS 1215.16.

2. Conclusions. Audit documentation should include the conclusions reached (AS 1215.02). In some cases, auditors will add short conclusions on the substantive work papers in advance of an inspection or investigation. These additions, while attempting to comply with the technical requirements of the auditing standards, often add little value to the audit documentation.

3. Checklists. Standard audit documentation includes numerous checklists – from planning, to substantive audit procedures, to disclosures. It’s not uncommon for an auditor to complete these checklists when he or she knows an inspection or investigation of the audit is imminent.

4. New work papers. In extreme cases, auditors have prepared and added work papers wholesale. This usually follows an audit where little, if any, audit documentation was prepared.

How the PCAOB Finds Out

1. Tips and self-reporting. In some cases, junior auditors will inform the PCAOB that an audit partner has altered the work papers. In other cases, a firm will self-report that a partner or staff member made improper changes to audit documentation.

2. Engagement quality review work papers. Many small firms engage outside auditors to perform the engagement quality review (EQR). During an investigation, the staff will obtain the work papers and other relevant material from the EQR. In some cases, the EQR produces copies of audit documentation that are inconsistent with the work papers produced by the principal audit firm.

3. Work papers collected by inspections. During the inspection process, the staff typically obtains copies of relevant work papers. If the audit eventually results in an investigation, the enforcement staff will review the work papers collected by the inspection staff, as well as require the firm to reproduce the work papers. If changes have been made to the work papers after the inspection but before the investigation, a simple comparison will reveal the changes.

4. Metadata. The enforcement staff routinely requests work papers in both physical and electronic form. In some instances, the metadata available with electronic files will show that changes were made long after the document completion date. In those cases where the changes occurred after the staff has issued an accounting board request or demand, PCAOB Rule 5110 comes into play.

5. Initials and signatures. One of the most common forms of alterations appear with initials and signatures. When an auditor realizes that the work papers do not reflect who performed the work and when it was performed, or who reviewed the work, he or she can be tempted to add this information to the work papers, even for other auditors. While the standards do not prohibit an auditor from indicating in the work papers that another auditor performed the work, it can raise two critical issues.

First, it may suggest that the initials or signatures were added after an inspection or investigation was underway. The staff will certainly be focused on this issue. A second issue arises when the work papers do not indicate that the initials or signature were added by a different auditor. Electronic work papers often address this issue by reflecting who added the initials of the auditor. This is often not clear, however, with hard-copy work papers.

There are many legitimate reasons to change work papers. If an auditor is aware of an upcoming inspection or pending investigation, however, great care should be taken to avoid even the appearance of improper alterations to the work papers. One approach is to make a copy of the relevant work paper, make changes to the copy while carefully following the requirements of AS 1215.16.

Related article:

PCAOB Warns Auditors Against Audit Document Tampering


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