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The top U.S. accounting firm regulator has sanctioned Vancouver-based Smythe LLP for using unregistered international firms to help work on its audits.
The Public Company Accounting Oversight Board, or PCAOB, said Tuesday in its enforcement order that Smythe knowingly used firms in Malta and Argentina that were unregistered with the regulator for a significant amount of work on four audits for two companies – one of them Canadian. The two companies list their shares in the U.S. and filed financial statements with the Securities and Exchange Commission.
Without admitting or denying the PCAOB’s findings, Smythe consented to the PCAOB’s order, which censured the firm and imposed a US$175,000 civil money penalty and a remedial plan to review and evaluate its quality-control policies and procedures.
In a written statement, Smythe managing partner Bob Sanghera said there was no impact to the clients’ financial statements or audit opinions.
“We have since clarified and addressed this issue moving forward. We respect the importance of our regulators, and have implemented several measures in the last 18 months to improve the quality of our public company audits,” he said.
PCAOB’s action is the second disciplinary problem for Smythe this year. In May, the Canadian Public Accountability Board (CPAB) banned Smythe from taking on any new public company clients after it found problems in the firm’s work. This made Smythe the first Canadian accounting firm to be censured by CPAB. According to S&P Global Market Intelligence, Smythe has 84 Canadian-incorporated audit clients that trade in Canada and the U.S.
For some time, the PCAOB has been concerned with accounting firms that audit a company with a headquarters in the U.S. or other developed market, but have substantial international operations. The worry is that to get an audit done, the company’s outside accounting firm will rely on auditors in foreign jurisdictions that do not adhere to PCAOB rules and standards.
In a statement accompanying the order, the regulator’s chair, Erica Williams, said “improper use of unregistered firms puts investors at risk, and the PCAOB will take action to hold firms accountable.”
The PCAOB says Smythe used Argentina-based PKF Audisur SRL and PricewaterhouseCoopers Malta Ltd., both unregistered with the regulator, in audits of the 2020 and 2021 financial statements of Vancouver-based, B.C.-incorporated Tower One Wireless Corp. and Hong Kong-based, Cayman Islands-incorporated Scully Royalty Ltd.
During the audits, the PCAOB says, PKF Audisur audited Tower One subsidiaries constituting between 88 per cent and 97 per cent of Tower One’s assets, and between 80 per cent and 90 per cent of its revenues. PwC Malta audited Scully subsidiaries constituting between 21 per cent and 23 per cent of Scully’s assets, and between 17 per cent and 24 per cent of its revenues, the PCAOB says.
The unregistered firms’ portion of the total audit hours and total audit fees exceeded the 20-per-cent level, which the PCAOB uses to decide whether a supporting firm had “substantial participation” in an audit.
The PCAOB says Smythe knew PKF Audisur and PwC Malta were not registered with the regulator and that they needed to do so. The PCAOB says Smythe decided, inappropriately, to try to fix the problem by performing additional audit procedures to confirm the other firms’ work.
Tower One was known as Pacific Therapeutics Ltd. until 2017, when it embarked on a new business model that has seen it build wireless-phone towers in Argentina, Colombia and Mexico. In its news releases, the company describes its headquarters as being in Bogata, Colombia. The company is listed on the Canadian Securities Exchange and, in 2022, planned a listing on the Nasdaq. However, the company failed to file its annual report, and the SEC in September declared its recent registration statement of stock as “abandoned.”
In CPAB’s censure of Smythe in May, the board said it had nine “significant inspection findings” in the four Smythe audits from 2021 and 2022 that it examined, including at least one in every audit. CPAB records a significant finding when a firm falls short of accepted auditing standards for a material part of a company’s financial statements and has to go back and do additional work to support its audit opinion.
CPAB said that after the 2021 inspection, it imposed requirements on Smythe that were designed to improve the firm’s performance.
“The results of the 2022 inspection indicate that concerns over audit quality have not been sufficiently addressed,” CPAB said in its order.
The order remains in place, CPAB spokesperson Susan Schutta said Tuesday.
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