The Public Company Accounting Oversight Board has fined New York City-based James Pai CPA PLLC and its sole owner and partner Yu-Ching James Pai a total of $40,000 for failing to perform appropriate risk assessments and obtain sufficient appropriate audit evidence in multiple areas during the audits of an IT-related products and services business.
According to the PCAOB, Pai and his accounting firm violated multiple PCAOB rules and standards in connection with the 2021 and 2022 audits of SUIC Worldwide Holdings. The firm also violated quality control rules, while Pai was found to have directly and substantially contributed to his firm’s violations.
The PCAOB said that during the audits, James Pai CPA PLLC and Pai failed to perform appropriate risk assessments and obtain sufficient appropriate audit evidence in multiple areas, including revenue and related-party transactions.
For example, in regard to revenue, the PCAOB disciplinary order states:
For the SUIC Audits, Respondents failed to establish an overall audit strategy for the engagements and develop an audit plan; failed to appropriately consider materiality in planning the 2021 SUIC Audit, including establishing a materiality level and determining a tolerable misstatement amount; and failed to perform any risk assessment procedures to identify and assess the risks of material misstatement. Respondents also failed to presume that there was a fraud risk involving improper revenue recognition during the SUIC Audits.
SUIC disclosed that it derived its revenues by providing IT services to customers pursuant to sales contracts. As of and for the years ended December 31, 2021, and December 31, 2022, SUIC reported revenues of approximately $379,000 and $221,000, respectively.
In the 2021 SUIC Audit, Respondents failed to obtain sufficient appropriate audit evidence as to SUIC’s reported revenue. To test SUIC’s revenue, Respondents obtained sales contracts and traced the revenue amounts to the Company’s general ledger and to Company-generated invoices. However, Respondents failed to obtain any evidence that SUIC had actually performed the services described in the invoices, that the revenue amounts SUIC recorded were accurate, or that any such amounts were collectible.
In addition, Respondents failed to adequately evaluate (1) the sales contracts under FASB Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers, which became effective for SUIC on January 1, 2018, including whether SUIC identified all separate performance obligations in the contracts, and determined and allocated the transaction price to the performance obligations; and (2) SUIC’s financial statement disclosures, which stated that SUIC was reporting revenue in accordance with ASC 605, Revenue Recognition, which ASC 606 superseded.
In the 2022 SUIC Audit, Respondents also failed to obtain sufficient appropriate audit evidence for the revenue SUIC recognized under the sales contracts, again failing to obtain sufficient evidence that SUIC had met its performance obligations under the contracts. Although Respondents obtained an acknowledgement from a related party of SUIC that the Company had performed services, that acknowledgement was dated April 1, 2022, approximately nine months before year-end, and addressed only a specific portion of services for which SUIC had recorded revenue.
“Performing appropriate risk assessments and obtaining sufficient evidence are fundamental to an audit, and failure to meet these most basic requirements puts investors at risk,” PCAOB Chair Erica Williams said in a statement on March 25.
The PCAOB also found that, in the audits, the accounting firm failed to:
- Have engagement quality reviews performed;
- Obtain written representations from management;
- Comply with requirements concerning critical audit matters, audit committee communications, and audit documentation; and
- Establish and implement a system of quality control to provide it with reasonable assurance that the work performed by engagement personnel met applicable professional standards and regulatory requirements.
The PCAOB said Pai either committed or directly and substantially contributed to the same violations.
Without admitting or denying the findings, Pai and the firm consented to the PCAOB’s order, which:
- Censures both James Pai CPA PLLC and Pai and imposes a joint $40,000 civil money penalty against them.
- Revokes the firm’s PCAOB registration with a right to reapply after three years.
- Bars Pai from being an associated person of a PCAOB-registered accounting firm, with a right to petition the board to terminate his bar after three years.
- Requires the firm to undertake remedial actions to improve its system of quality control and procedures before reapplying for registration.
- Requires Pai to complete 40 hours of additional continuing professional education before seeking to terminate his bar.
“Issuing an audit report stating that the audit was performed in accordance with PCAOB standards is a solemn commitment to the investing public, and serious consequences can follow when an auditor fails to meet that commitment,” said Robert Rice, director of the PCAOB’s Division of Enforcement and Investigations.
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