Top 200 accounting firm MaloneBailey was fined $400,000 by the Public Company Accounting Oversight Board (PCAOB) on May 21 for what the audit regulator calls “pervasive quality control violations.”

“Effective quality control systems are critical to high-quality audits, and the PCAOB will not tolerate failures to maintain those systems and properly protect investors,” PCAOB Chair Erica Williams said in a statement on Tuesday.

According to the PCAOB, inspections staff reviewed a sample of MaloneBailey audits on three separate occasions between 2018 and 2021, and during each inspection cycle, the PCAOB said it notified the firm of significant deficiencies that raised concerns about the auditor’s engagement performance.

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The PCAOB released inspection reports for the Houston-based audit firm for years 2018, 2019, and 2021, the regulator’s inspection report database shows. Results of those reviews were:

2018: 4 of 10 audits had deficiencies, for an error rate of 40%
2019: 4 of 12 audits had deficiencies, for an error rate of 33%
2021: 6 of 7 audits had deficiencies, for an error rate of 86%

Despite MaloneBailey’s awareness of these deficiencies and concerns, the firm failed to make effective changes to improve its system of quality control, according to the PCAOB.

In the disciplinary order, the PCAOB said:

The Firm’s system of quality control failed to provide reasonable assurance that the Firm would establish engagement performance and monitoring policies and procedures sufficient to provide it with reasonable assurance that its policies and procedures were suitably designed and effectively applied. During the period from 2018 through 2021, PCAOB inspectors repeatedly brought concerns to the Firm’s attention related to significant deficiencies in various audit areas, including auditing accounting estimates and testing revenue, and raised concerns that MaloneBailey’s system of quality control failed to provide reasonable assurance of complying with the related professional standards. Despite the Firm’s awareness of these deficiencies and concerns, the Firm failed to make effective changes to improve its system of quality control, as indicated by the repeated significant engagement deficiencies identified in the 2018, 2019, and 2021 inspections.

Without admitting or denying the findings, MaloneBailey agreed to a settlement with the PCAOB, which includes the $400,000 fine as well as:

Being censured;
Engaging an independent consultant who will review and make recommendations concerning the firm’s quality control policies and procedures; and
Requiring the firm to conduct certain training for all audit staff.

“Today’s order should serve as a stark reminder that firms must have effective systems of quality control,” said Robert Rice, director of the PCAOB’s Division of Enforcement and Investigations. “If they do not, we will hold them accountable for those failures, particularly when the failures have been repeatedly identified during inspections of the firm.”

The PCAOB introduced a new quality control auditing standard last week that, if approved by the Securities and Exchange Commission, would require all PCAOB-registered accounting firms to identify their specific risks that would inhibit audit quality and design a quality control system that includes policies and procedures to guard against those risks.