Audit Firm Fails To Register with or Apply the Standards of the PCAOB

Commission administrative proceedings naming auditors as respondents typically focus on a failure to properly conduct the audit in accord with PCAOB standards. Many are essentially audit failures where so little work was done that it is questionable if the firm even drove by the issuer’s business. Virtually all of the cases are settled prior to filing.

The latest proceeding brought by the agency is different. In this case the auditor failed to even complete the application process to register with the PCAOB. Nevertheless, the auditor attempted to perform the audit but failed to comply with Board standards. The matter will be set for hearing. In the Matter of Christopher E. Knauth, CPA, Adm. Proc. File No. 3-20256 (April 5, 2021).

Respondent Knauth is the founder and principal of Audit Firm A, a Texas firm formed in 2017. Mr. Knauth is a certified public accountant but had never audited a public company. The firm was not registered with the PCAOB. The proceedings centers on work to be done at Issuer A, a firm whose shares were listed on the OTCQB tier of the OTC Markets until they were delisted by the Commission in 2019.

Respondent Knauth executed an engagement agreement with Issuer A to audit the firm’s 2018 year-end financial statements and perform the interim quarterly reviews for the same year. The letter represented that the firm was registered with the PCAOB and that Mr. Knauth would serve as the engagement partner.

Subsequently, Mr. Knauth filed Form 1 with the PCAOB to register in September 2018. Although Audit Firm A had a second partner, he was not consulted or informed. The Board sent a letter requesting clarification of certain points and additional information. Although follow-up requests were sent no response was made. Finally, Respondent sent a letter stating that he would file a new application. He did not.

Nevertheless, Respondent proceeded with the audit of the year-end 2018 financial statements as well as the interim reviews. The year-end audit opinion represented the firm was registered with the Board and that the work had been performed in accord with its standards. It was not.

In doing the work Respondent failed to plan the year-end audit in accord with the applicable PCAOB requirements. Those standards require that the auditor prepare a plan describing the nature, timing and extent of the risk assessment procedures for the work. Similarly, the standards applicable to conducting a review of interim financial statements require that the auditor conduct procedures to understand the business and its internal controls. No meaningful process was undertaken.

In performing the audit and undertaking the reviews Respondent disregarded key PCAOB standards. For example, the audit work papers lacked sufficient documentation to determine what work was done. During the engagement Respondent failed to exercise due professional care and exercise professional skepticism or to properly evaluate the risks. In fact, Respondent failed to obtain sufficient appropriate audit evidence. And, no engagement quality reviews of Respondent’s work were done.

The Order alleges violations of SOX Section 102(a) since the firm was not registered; Rule 2-02(b)(1) regarding the improper report and the applicable standards; Exchange Act Section 13(a) and the applicable rules requiring the issuer to file certain reports; and Rule 102(e)(1)(ii) regarding professional standards.

The proceedings will be set for hearing.