Federal accounting regulators have censured and fined a Buffalo accounting firm for improper work done for three companies in China and Taiwan.
Brock, Schechter & Polakoff LLP was cited for violating government rules and auditing standards. Regulators censured the firm, temporarily revoked its registration to audit public companies and fined it $20,000. And one of the firm's principals -- who was fired -- was banned from public accounting for three years.
The firm, which didn't confirm or deny the violations, said its regular business is not affected.
The Public Company Accounting Oversight Board, or PCAOB, took strong actions against the firm "for the protection of investors and to further the public interest."
The federal agency found that the accounting firm audited three companies based in China and Taiwan without proper experience, policies or oversight of the work, which it did not do itself.
Instead, it hired two other audit firms, one in Taiwan and one in China, to do the work it would sign off on. But it had "minimal contact with the foreign firms and performed an inadequate review of the working papers prepared by the foreign firms," according to the agency's order.
The firm "failed to use due care and to exercise professional skepticism in the course of the audits," the board said.
It cited former partner and director of accounting and auditing James R. Waggoner personally for backdating and falsifying documentation. The agency said he "improperly created, added and altered audit working papers" just before the agency inspected the audits in January 2009, and without justifying the need for them.
"This misleading documentation was provided to the board in connection with the board's inspection," the agency said.
Besides the censure and fine, the agency yanked the firm's authority to audit and approve financial statements of publicly traded companies for at least two years, and barred Waggoner, 54, of Kenmore, from being associated with a public accounting firm for at least three years.
Both can reapply after those periods. But the firm fired Waggoner on July 11, 2011. He could not be reached to comment.
Thomas P. Grogan, a partner at Brock, Schechter & Polakoff, said the firm "immediately implemented corrective measures" after the PCAOB brought the problems to its attention and "worked cooperatively" with the agency during the probe. In an emailed statement, he also said the firm "made the decision to voluntarily exit this area of auditing" and has not done any of that work -- which was less than 1 percent of its client base -- for more than a year.
"BSP does not foresee a return to that area of auditing in the future," Grogan said in the statement. "This agreement has no impact on the firm's ability to service its clients."
Auditors are responsible for reviewing the balance sheet, income statement and other financial statements of companies, and verifying that they are accurate and were prepared in accordance with national or global standards.
The PCAOB was established under the 2002 Sarbanes-Oxley Act, which was passed in the wake of the bankruptcies of companies such as Enron, Worldcom, Global Crossing and Adelphia Communications. The law was designed to ensure that investors could have confidence in companies whose stocks they buy.
Accounting firms must now register with the PCAOB and receive approval before they are allowed to audit publicly traded companies, which can be a big source of annual fee revenue.
The agency found that the Buffalo firm lacked adequate quality control and didn't ensure that its staff, particularly Waggoner, were trained for the duties.
The PCAOB found that the firm's monitoring program, which didn't review any of the public company audits, wasn't sufficient to ensure compliance with professional standards. It also failed to obtain and review documents from the foreign firms certifying that the audits were done before issuing its own reports.
Even so, the firm issued reports that "incorrectly stated" that the audits had been conducted based on PCAOB standards.
In 2006, Brock Schechter & Polakoff began auditing financial statements of Kid Castle Educational Corp., through 2008, as well as the 2007 statements of China Junlian Integrated Surveillance Inc., the 2008 statements of North American Gaming & Entertainment Corp. and North American's internal controls.
Kid Castle is a Taipei, Taiwan-based provider of English-language instruction and educational services to children who primarily speak Chinese. China Junlian, based in Guangzhou, China, specializes in surveillance technology consulting and systems development. North American Gaming, based in Xi'An, China, explores for gold, zinc, lead and other mineral products in China.
The Buffalo firm's involvement came after two foreign audit firms, one in Taiwan and one in China, solicited several U.S.-based firms in May 2006 to work with them in auditing statements of companies in those two countries.
The Brock firm responded despite never having worked with the foreign firms, who said they would do all of the field work, while Brock issued the audit reports. At that time, Brock also had no prior experience auditing public companies under PCAOB standards, nor did it have experience auditing any companies in Taiwan or China. Its staff did not speak Chinese.
Waggoner and the firm's managing partner traveled to China and Taiwan to meet with the foreign firms over a 10-day introductory trip, discussing business opportunities and how they would divide responsibility. The firm then assigned Waggoner to be in charge of the foreign audits but did not provide relevant training to him or anyone else, and did not hire additional experienced staff.
Waggoner also administered the firm's internal review program and was chairman of the firm's Accounting and Auditing Committee. So the same person who was responsible for the foreign audits was also in charge of quality control, the PCAOB said.