Accounting firm BDO has agreed to a $2 million penalty as part of a settlement with the Public Company Accounting Oversight Board (PCAOB), resolving alleged deficiencies in BDO's audit work for the now-defunct healthcare services provider AAC Holdings. Additionally, two BDO partners faced disciplinary action in connection with this matter.
The PCAOB's penalties stem from violations of its rules and audit standards in BDO's 2017 audit of AAC. The regulator's order noted that during its 2016 inspection cycle, the PCAOB had already identified shortcomings in BDO's 2015 audit of AAC, particularly related to the valuation of accounts receivable.
Despite receiving a warning from the PCAOB, BDO allegedly did not adequately assess AAC's accounts receivable allowance during its 2017 audit. The engagement team reportedly failed to comprehend how AAC's management formulated its allowance estimate and key assumptions. They also didn't appropriately test AAC's process for developing the estimate and related assumptions.
Instead, the PCAOB stated that the engagement team relied primarily on a flawed "hindsight analysis" developed by AAC, which inappropriately compared gross and net numbers to conclude that the 2017 allowance was a reasonable estimate.
Subsequently, AAC restated its 2017 annual financial statements and prior-year statements, reducing reported accounts receivable by 32% and 47%, respectively. AAC filed for bankruptcy in June 2020.
In response to the PCAOB's actions, BDO Partner Kevin Olvera, who served as a focused consulting reviewer on the 2017 AAC audit, was fined $35,000 and agreed to a one-year limitation on his audit activities for failing to properly evaluate AAC's estimates. Michael Musick, the engagement quality review partner, was ordered to pay $25,000 for failing to exercise due professional care in his role.
A spokesperson for BDO commented, "At BDO, we adhere to the highest standards of excellence across all areas of our business and fully support the PCAOB’s goal of protecting investors and furthering the public interest. We are pleased to have resolved this matter. We remain dedicated to performing audits in accordance with professional standards."
It's worth noting that BDO neither admitted nor denied the PCAOB's findings as part of the settlement.
By fLEXI tEAM