The Public Company Accounting Oversight Board announced on Monday that it settled disciplinary order against Randall A. Stone, CPA, of Austin, Texas, a former PricewaterhouseCoopers LLP partner, for violating PCAOB rules and standards in PwC's 2007 audit of ArthroCare Corporation.
Stone was the partner in charge of the 2007 audit. His violations included ignoring or failing to properly address numerous indicators of improperly recognized revenue in significant unusual transactions.
The order bars Stone from associating with a registered public accounting firm — with the right to petition the Board to remove the bar after three years — and imposes a $50,000 civil money penalty and a censure. Stone consented to the order without admitting or denying the findings.
The Board began the disciplinary proceeding in December 2012, but it remained nonpublic until now, as required by the Sarbanes-Oxley Act.
The Board found that Stone ignored or failed to properly evaluate numerous indicators that should have alerted him to the possibility that ArthroCare was improperly recognizing revenue on its 2007 sales of medical devices to DiscoCare, Inc. Such indicators included unusual pricing and payment terms, quarter-end sales spikes, and evidence that ArthroCare may have funded DiscoCare's purchases through monthly service fee payments. Sales to DiscoCare helped ArthroCare meet its revenue forecasts for 2007.
"Revenue often is a key metric for public company investors and is a financial reporting area prone to manipulation by management," said Claudius B. Modesti, Director of PCAOB Enforcement and Investigations.
"When an auditor is confronted with multiple indicators of problematic revenue recognition, as happened here, he or she must get to the bottom of the relevant issues, including digging into management's representations," added Modesti.
The Board also found that Stone violated PCAOB rules and standards in auditing ArthroCare's accounting for its acquisition of DiscoCare in December 2007. Stone failed to exercise due professional care and skepticism when, among other things, he agreed with the company's proposed accounting for the acquisition without adequately assessing whether such accounting treatment complied with generally accepted accounting principles.
In addition, the Board found that Stone violated PCAOB rules and standards in authorizing PwC's consent to incorporate its previously issued 2007 audit report in ArthroCare's June 2008 Form S-8 registration statement without first completing a reasonable subsequent events investigation.
The Board found that when Stone authorized PwC's consent, he was aware of new allegations of impropriety concerning ArthroCare's relationship with DiscoCare in 2007, and he knew that ArthroCare and PwC were continuing to assess those allegations.
Separately, the Public Company Accounting Oversight Board announced the schools of the 102 academic recipients of $10,000 merit scholarships intended to encourage students to pursue an auditing career.
The scholarship program, mandated by Congress in the Sarbanes-Oxley Act, provides awards to one student at each of 102 colleges and universities listed below.
"We are proud of the role this scholarship program plays in recognizing student achievement," said PCAOB Chairman James R. Doty. "We hope to inspire students to become future thought leaders in auditing for the benefit of investors."
This is the Board's fourth year granting scholarships through the PCAOB Scholarship Program.
The Sarbanes-Oxley Act of 2002 requires that monetary penalties imposed by the PCAOB in its disciplinary proceedings be used to fund a merit scholarship program for students in accredited accounting degree programs. The PCAOB Scholarship Program was created to identify eligible students for scholarships and award funds through the students' educational institutions.
Each participating educational institution nominates a scholarship recipient from students enrolled in its accounting degree program. To qualify, students must:
- Be enrolled in a bachelor or master degree program in accounting
- Demonstrate interest and aptitude in accounting and auditing
- Demonstrate high ethical standards
- Not be a PCAOB employee, or a child or spouse of a PCAOB employee
The PCAOB scholarship program is merit-based, and educational institutions are encouraged to give consideration to students from populations that have been historically underrepresented in the accounting profession.
A description of the program, along with information on the nomination process, the selection of nominating institutions, and other details can be found on the scholarship program page of the PCAOB website.
2014-2015 Academic Year Scholarship Recipient Academic Institutions
1. Arizona State University
2. Auburn University
3. Bentley University
4. Binghamton University, State University of New York
5. Boston College
6. Bowling Green State University
7. Brigham Young University-Hawaii
8. Calvin College
9. Cleveland State University
10. College of William and Mary
11. Columbus State University
12. DePaul University
13. DeVry Institute of Technology, New York
14. East Carolina University
15. Eastern Kentucky University
16. Fairleigh Dickinson University, Florham Campus
17. Florida Atlantic University
18. Florida International University
19. Florida State University
20. Georgia State University
21. Governors State University
22. Grand Valley State University
23. Illinois State University
24. Indiana University Bloomington
25. Indiana University-Purdue University Indianapolis
26. Indiana Wesleyan University
27. James Madison University
28. Kaplan University
29. Keiser University
30. Kennesaw State University
31. Liberty University
32. Marist College
33. Marymount Manhattan College
34. Michigan State University
35. Mississippi University for Women
36. Molloy College
37. Northeastern University
38. Northwestern University
39. Nova Southeastern University
40. Ohio State University
41. Oklahoma State University
42. Pace University
43. Queens College, City University of New York
44. Rider University
45. Roger Williams University
46. Roosevelt University
47. Rutgers University, Newark
48. San Diego State University
49. Southern Methodist University
50. Southern New Hampshire University
51. St. John's University
52. Strayer University
53. Suffolk University
54. Temple University
55. Texas A&M University
56. Texas Christian University
57. Texas State University-San Marcos
58. Texas Tech University
59. Tulane University
60. University of Alabama
61. University of Alabama at Birmingham
62. University at Albany, State University of New York
63. University of Arizona
64. University of Central Florida
65. University of Dallas
66. University of Dayton
67. University of Denver
68. University of Great Falls
69. University of Houston
70. University of Houston-Clear Lake
71. University of Kansas
72. University of Mary
73. University of Massachusetts Amherst
74. University of Massachusetts Boston
75. University of Miami
76. University of Michigan
77. University of Mississippi
78. University of Missouri-Columbia
79. University of Missouri-Kansas City
80. University of Nevada, Las Vegas
81. University of North Carolina at Chapel Hill
82. University of North Carolina at Charlotte
83. University of North Carolina at Wilmington
84. University of North Florida
85. University of Northern Iowa
86. University of Pennsylvania
87. University of Phoenix
88. University of South Carolina Columbia
89. University of South Florida
90. University of Southern California
91. University of Tennessee, Knoxville
92. University of Texas at Arlington
93. University of Texas at Austin
94. University of Utah
95. University of Washington
96. University of Wisconsin-Madison
97. University of Wisconsin-Whitewater
98. Virginia Polytechnic Institute and State University
99. Wake Forest University
100. West Texas A&M University
101. Wichita State University
102. Xavier University