Accounting and auditing cases have long been a staple of SEC enforcement. While the PCAOB has had jurisdiction over matters relating to registered audit firms and their members, the Commission has continued to focus on proceedings involving these critical gatekeepers. The most recent case brought in this area by the agency is a good example of the importance of these cases – the engagement partner ordered that an unqualified audit opinion be issued despite the fact that the field work had not been completed and critical procedures had not been conducted. The audit work papers were filled in later. Essentially the audit work was “backdated.” In the Matter of Richard J. Bertuglia, CPA, Adm. Proc. File No. 3-18868 (October 12, 2018).
The proceeding center on the audit by BDO USA, LLP of the financial statements of AmTrust Financial Services, Inc., an underwriter of casualty insurance, to be included in the 2013 Form 10-K, filed in March 2014 with the Commission. Named as Respondents: are Richard J. Bertuglia, CPA, the engagement partner; John W. Green, CPA, the engagement quality review partner; and Lev Nagdimov, CPA, a senior audit manager.
BDO was engaged by AmTrust to conduct an integrated audit of the firm’s 2013 consolidated annual financial statements and ICFR in accord with PCAOB standards (“Consolidated Audit”). The audit firm was also engaged to audit many of the individual subsidiaries’ financial statements. Engagement partner Brtuglia supervised the work of the audit team. Portions of the work were delegated to Mr. Nagdimov.
In the fourth quarter of 2013 the engagement team was behind schedule. Specifically, in mid-December 2013 the team estimated that it was about 14 weeks behind. In the first week of January the SEC staff issued a subpoena to BDO, requesting copies of the firm’s work papers and audit files related to AmTrust.
Mr. Bertuglia focused on substantially completing the work on all major financial statement audit areas prior to the time AmTrust issued its earnings release on February 13, 2014. Accordingly, he directed the audit team to complete work on the consolidated audit of the firm but delay work on the subsidiaries. To implement this approach a manual review was conducted to identify accounts that exceeded the Consolidated Audit’s tolerable misstatement threshold and ensure that any untested balanced did not exceed consolidated materiality. This constituted a deviation from the audit plan.
Subsequently, on February 21 Engagement Partner Bertuglia met with the audit team. He instructed them to finish their incomplete audit work for journal entry and internal control testing as well as for material account balances for the Consolidated Audit before AmTrust filed its Form 10-K. Mr. Nagdimov then instructed the team to ensure that all their work papers and audit programs were loaded and singed in APT – the firm’s software which required work papers be loaded and recorded the signature dates but permitted later updating – regardless of whether the work was complete. Several days later the team was instructed to load everything, including signed blank papers to serve as placeholders if the work was not done. The instructions were implemented.
The audit team expected AmTrust to file its Form 10-K on Friday, February 28, 2014 Messrs. Bertuglia and Green reviewed the work papers in APT, noting that several were blank. Mr. Bertuglia stated that during a call he and Mr. Green were informed by Mr. Nagdimov that the audit team had completed its work but there were technical problems with loading the updated work papers. The review of the work papers continued. Messrs. Bertuglia and Green collectively signed off on over 2,000 work papers, including some which they did not review. The audit opinion was released on February 28, 2014. When AmTrust decided to delay issuing the report and filing the Form 10-K until March 3, 2014, the auditors continued reviewing the work papers and re-dated the audit report to March 3, 2014.
On March 7, 2018 the audit staff members emailed Messrs. Bertuglia and Nagdimove noting that the team needed more time to complete the Consolidated Audit of the firm. The audit team continued with its work, completing it over the next month. For the incomplete, predated work papers, including those that were placeholders, the team generally overwrote the documents thereby replacing the prior documentation with new papers reflecting the work done and evidence obtained. The new documentation did not indicate that the work had been done after the report was released. Mr. Bertuglia reviewed the completed work and concluded that the omitted procedures did not affect BDO’s previously issued audit report. Mr. Green also reviewed the work and reached the same conclusion. There were no work papers assessing the omitted procedures. Messrs. Bertuglia and Green did not document their own assessment or review.
The audit team did not, based on these facts, have sufficient audit evidence to support BDO’s audit opinion that was included in the AmTrust Form 10-K on March 3, 2014, according to the Order because:
· Journal entries: There was incomplete journal entry testing which had been identified as a fraud risk factor related to managements’ potential override of internal controls during the planning of the engagement.
· Control testing: There was incomplete control testing for premium underwriting, treasury and investments, entity-level controls and share-based compensation since the team failed to complete the necessary work in these areas prior to the second report release date.
· Substantive tests, material accounts: There was incomplete testing for material accounts identified in the audit plan concerning premium revenue, premium receivables, and share-based compensation.
· Other fraud risk areas: While the audit plan identified areas related to fraud risk, including vendor fraud, the engagement team failed to complete the work in these areas.
As a result Messrs. Bertuglia and Nagdimov violated PCAOB standards by failing to properly supervise and exercise due professional care. Mr. Bertuglia also failed to properly examine journal entries for evidence of possible material misstatement due to fraud or to perform sufficient tests of internal controls. Both accountants failed to appropriately respond to the risks of material misstatement by not completing certain audit procedures and to prepare and retain required audit documentation. Mr. Green failed to perform an appropriate engagement quality review.
To resolve the proceedings each Respondent consented to the entry of an order based on Rule 102(e)(1)(ii) denying them the privilege of appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after: as to Mr. Bertuglia, three years; as to Mr. Green, after one year; and as to Mr. Nagdimov, after five years.