https://www.sec.gov/news/press-release/2022-180
An audit failure by RSM US LLP. The SEC is charging RSM and 3 Senior-Level employees of
Revolution Lighting Technologies Inc. “According to the SEC’s order, RSM’s planning and
supervision of the audit, as well as the evaluation of audit results and review of Revolution’s
disclosures, all failed to adhere to the Public Company Accounting Oversight Board’s auditing and
quality control standards.” (SEC.gov | SEC Charges Audit Firm RSM and Three Senior-Level
Employees with Failure to Properly Conduct Client Audits, 2022) RSM and Revolution’s senior
leader Michael Piqueira, “… failed to adequately plan, supervise, and execute the audits. Condon
was charged with improperly reviewing and approving RSM’s analysis that inaccurately concluded
Revolution’s errors and inflated revenue were immaterial to investors.” (SEC.gov | SEC Charges
Audit Firm RSM and Three Senior-Level Employees with Failure to Properly Conduct Client Audits,
2022) Over a four-year period failed to audit RSM’s financial statements while revolution was
violating accounting principles by inflating revenue with bill and hold. Ultimately, “RSM agreed to
pay a $3.75 million penalty, to be censured, and to retain an independent consultant to review
and evaluate its audit, review, and quality control policies and procedures.” (SEC.gov | SEC
Charges Audit Firm RSM and Three Senior-Level Employees with Failure to Properly Conduct Client
Audits, 2022)
RSM should have followed PCAOB standards and created a strong audit plan and additional
supervision. Bill and holding of sales should have been something that was found and addressed
during the first audit. Due to the false representation of financial statements, board of directors
and investors had no idea this fraud was taking place. This goes to show how important the
auditing planning process is for the auditing firm, as well as the client.
The internet a recent case that caught my attention. The case of the German public company
"Wire card" who hided they real financial situation, with the blessings of EY, who ignored many
incorrect practices. Incredible but true, unfortunately the Big-4 are in the news worldwide and an
important part of this news are because they bad practice and lack of independence in they
services. By 2016 Wire card acquired a dubious Indian business group paying a lot of money, and
almost immediately many comments that some Wirecard's Directors had gotten rich right after
the transaction. EY was asked to perform the pertinent reviews and under a Project called "Project
Ring" in Wire card, but the management had no explanation as to why they acquired a group of
dubious companies from India in 2016, for a lot of money. In 2017, EY sent a letter to the
president of the administration of Wire card, where they demanded the declarations still absent,
of: what was the reason to this negotiation that involved a huge payment of a lot of money? Even,
EY threatened the company to present a limited opinion of the financial situation of 2016, or do
not present anything if Wire card does not respond this letter. An audit report with the financial
results full of restrictions or limitations would cause serious damage to any company, because
puts into question the reputation and trust that shareholders, investors, and banks, among others,
have had. No one explained how, but a week later after this letter to the president of Wirecard's
administration, the completely clean EY report, without any type of disagreement and within an
environment of control reasonable was presented by EY. Then, in the evaluation of the results of
2019, EY again manifests itself in front of Wire card, questioning the integrity of the
administration. That can be worth mentioning that this is a very serious declaration, especially if it
is coming from auditor; However again EY issued its final report, approving all the financial
information that was being presented. EY only mentioned that some Wire card employees from
another location (Singapore) were under investigation, but without much detail and importance in
this regard. In that exercise, a very stable financial position was shown, but later it was discovered
that they were hiding the real numbers, because counting the trust funds as an available funds,
products of the business. There was not any confirmation letter issued from any financial entity,
and 1,900 million Euros was reflected only in paper. There were only a few confirmations from the
trustees, and it was enough for EY to trust 100% in the figures presented by the management of
Wirecard. Unfortunately, EY ignored all the red flags that were found over the years of its audit
services to Wirecard. The acquisition of the group of Indian companies for a lot of money without
any explanation, or the doubt about the integrity of the board of directors who continued to make
decisions on behalf of the company among other things, unleashed a series of events that has
caused damages in the image and credibility to EY. Companies such as Commerce bank and
Deutsche Telekom (T-Mobile) among others, decided to cancel their contracts with EY, who was
the auditing firm in charge of evaluating annual finances as soon as they knew of the bad practice
they incurred. Lastly, EY decided not to sign Wirecard's 2019 financial statements, and Wirecard
did a bankruptcy. EY's action of not signing Wirecard's financial statements was too late, there was
no longer time to exempt itself from responsibility, having turned a "blind eye" to many alarms
throughout their relationship.
I believe that the problem with EY and many other auditing firms, whether Big4 or not, comes
from a lack of independence. It is contradictory that the same company who advises you, is the
same company that criticizes the internal controls and result of the financial statements. Another
point is the perpetual relationship between company-auditors. As the years go by, independence
is lost, and things that could be detected in field work become "normal" by managers or partners.
It is difficult to objectively examine the company if the auditors fear of losing the service
relationship to them. Political influences or the hiring of ex-big 4 to managerial positions within
companies, normally guarantees a safeguard pass at the time of the review, since there is that
fear of the field examiner, in front of the investiture of an ex-manager from the same firm, an in
many times it will not matter what they find... if at the end of the day some auditors would
become "external employees of the company".
This has been an interesting and unexpectedly tough term for me - but I made it with the skin of
my teeth it seems!
The article that I chose was one from KPMG where their chief audit strategy officer was
interviewed on the trends shaping the future of audit. One of the key words that stuck out to me
in his excerpt was where he said that clients are ready and waiting for us to become next-gen
auditors. This hare and turtle race between becoming this level of auditor and keeping up with the
technology that surpasses us daily is scary.
It is no surprise that the pandemic brought in new ways of navigating the workforce and creative
new paths to getting the audit process completed. The top trends that Fuller pointed out that are
here to stay are:
technology and data
operating models
a total upskills of the audit professional
demand for assurance services
This article confirmed my beliefs on where audit is headed. I fear technology to the extent that
this article brings up, us having to compete/keep up with technologies advancements in our fields.
While technology can be and is a huge help in data retrieval, larger sample sizing, and faster
research it can also be what is working against us in understanding it quick enough. The amount of
information that technology can process is loads beyond what the human brain can at any point,
so how do we keep up? There will always be the need to apply real time logic and economic
factors to scenarios that technology will not always be able to do. That is where an auditor I
believe can make a real difference long term. Link to article listed in references.
The case of Kangmei Pharmaceutical and their audit failure found from the Shapiro Library.
On October 15, 2018, the media started to raise questions on Kangmei Pharmaceutical’s double
high deposit loan, abnormal gross margin, and high pledge ratio of major shareholders. On
December 28, the China Securities Regulatory Commission (CSRC) announced that it would
investigate the company based on their alleged information disclosure. On April 30, 2019, Kangmei
Pharmaceutical released an accounting error correction announcing, admitting that in 2017, they
overstated their operating revenue of 8.898 billion yuan and increased their cost by 7.662 billion
yuan over their actual. The auditor in this case, Chenggong Pearl River, who had been auditing the
company for 19 years, said they could not obtain effective audit evidence and issued an audit
report with its opinion reserved for the first time. This caused the value of Kangmei
Pharmaceutical’s stock to plummet and 22 people responsible for the error were punished
accordingly. They had concealed accounting bookkeeping, faked accounting content, forged large
certificates of deposit and bank statements. They also constructed inconsistent transactions and
non-existent virtual transactions, and forging things like sales vouchers. One of the largest fraud
cases in China in modern history.
There were several audit failures that occurred here. There were several internal control failures
such as the two largest shareholders, Ma Xingtian and Xu Dongjin, holding shares that dwarfed all
other shareholders. The existence of a dominant share phenomenon is not conducive to the
sustainable development of Kangmei Pharmaceutical’s future. This is since these two shareholders
may have a more invested interest in increasing their share size rather than helping the business
grow properly. The audit failure that was the most prevalent was a lack of the auditor’s
independence from the organization. They lacked this professional quality, and this resulted in the
final audit failure. One way to avoid this is to have strict implementations of recusal systems in the
organization so that it ensures that the CPA and the audited entity have no conflict of interest.
This increases the auditor’s impartiality and allows them to provide more accurate audits. They
must also learn new auditing methods and standards to help them improve the auditing process.
This confirms my opinion on the current climate of auditing as no matter how skilled an auditor
you are, there will always be other auditors or companies that will forgo independence in Favor of
mutual benefits.
References:
X. Wei and X. Li, "Research on the impact of audit failure on corporate performance based on
multiple regression model: Take Kangmei Pharmaceutical as an example," 2021 2nd International
Conference on Big Data Economy and Information Management (BDEIM), 2021, pp. 140-143, Doi:
10.1109/BDEIM55082.2021.00037.
https://www.bbc.com/news/world-europe-55004864
https://www.ft.com/content/bcadbdcb-5cd7-487e-afdd-1e926831e9b7
https://www.reuters.com/article/us-germany-wirecard-inquiry-timeline/timeline-the-rise-and-fall-
of-wirecard-a-german-tech-champion-idUSKBN2B811J
https://www.france24.com/es/20200626-escandalo-wirecard-alemania-dax-quiebra
https://www.nytimes.com/2020/06/26/business/wirecard-collapse-markus-braun.html
https://www.losrecursoshumanos.com/avanza-megademanda-contra-ernst-young-por-la-quiebra-
del-gigante-wiredcard/
SEC.gov | SEC Charges Audit Firm RSM and Three Senior-Level Employees with Failure to Properly
Conduct Client Audits. (2022, September 30). https://www.sec.gov/news/press-release/2022-180
Farrell, J. (2021, March 19). Trends shaping the future of Audit. KPMG US. Retrieved October 24,
2022, from https://info.kpmg.us/news-perspectives/advancing-the-profession/trends-shaping-the-
future-of-audit.html
