The PCAOB Staff Audit Practice Alert No. 14 (April 21, 2016)begins with comments about auditors’ judgments and decisions aroundimproper altering of audit documentation:

The PCAOB staff has prepared this practice alert toemphasize that improperly altering audit documentation inconnection with a PCAOB inspection or investigation violates PCAOBrules requiring cooperation with the Board’s oversight activitiesand can result in disciplinary actions with severe consequences.Improperly altering audit documentation is also inconsistent withan auditor’s professional duty to act with integrity and as agatekeeper in the public securities markets. Evidence identified inconnection with certain recent oversight activities has heightenedthe staff’s concern about such misconduct.

It is important to note that PCAOB standards around auditdocumentation acknowledge and allow for making additions to auditdocumentation after the audit report release date (AS 1215,paragraph 16):

Audit documentation must not be deleted or discarded afterthe documentation completion date, however, information may beadded. Any documentation added must indicate the date theinformation was added, the name of the person who prepared theadditional documentation, and the reason for adding it.

Further, there exist rules about cooperating with PCAOBinspectors. For example, PCAOB Rule 4006 states that every firm andany associated employee of every accounting firm must cooperatewith the Board as its inspectors work to complete their inspectionprocesses. Unfortunately, what has happened repeatedly is thatfirms and personnel involved in interacting with PCAOB inspectionteams have made poor judgments and decisions once they realize thata particular engagement has been chosen by the PCAOB forinspection.

In the simplest description, what sometimes happens is that theengagement team, upon learning of an impending inspection of aparticular engagement, “freaks out!” and alters audit documentationto shore up any potential areas that the team believes might besubject to criticism by the PCAOB inspectors. When the PCAOBdiscovers instances of altered documentation, it has takenenforcement actions, including revoking the Firm’s registrationwith the PCAOB and barring relevant firm personnel from beingassociated with the registered firms.

In Staff Audit Practice Alert No. 14, the PCAOB reminds auditorsabout the implications of such actions:

Improper alteration of audit documentation in connectionwith an inspection undermines the integrity of the Board’sinspection processes and, as a result, impedes the Board’s effortsto improve audit quality and fulfill its mission to protectinvestors and further the public interest in the preparation ofinformative, accurate, and independent audit reports. Changes andadditions to audit documentation, if any, following thedocumentation completion date must be made strictly in accordancewith AS 1215.13. To reduce the risk of improper alteration of auditdocumentation in connection with a PCAOB inspection, it isimportant for registered firms to take actions to assure that (1)work papers are properly archived; (2) work papers, once archived,are not improperly altered; and(3) the documentation provided toPCAOB inspectors for an audit is the originally-archiveddocumentation for that audit (supplemented, as appropriate, inaccordance with AS 1215).

1. Speculate as to why altering audit documentation underminesthe integrity of the Board’s inspection processes. Why is it fraudto alter audit documentation inaccurately and in a manner designedto appear that the audit engagement team did a “better job” than itactually did?

2. Put yourself in the place of an audit engagement partner ormanager who has just learned that his/her client engagement isgoing to be the subject of inspection by PCAOB inspectors. Do youthink you might be a bit anxious and worried about the outcome ofthe inspection? Imagine and articulate the pressure that anindividual in that position might feel.

3. Think about the professional and ethical decision-makingframeworks presented in Chapter 1. Where in the process might anindividual auditor “go wrong” when realizing that his/herengagement is going to be scrutinized by a PCAOB inspection team,thereby resulting in fraudulently altering audit documentation?

4. The PCAOB encourages auditors who become aware of improperalteration of audit documentation to inform them (Staff AuditPractice Alert No. 14):

The staff urges registered firms or individuals that becomeaware of any improper alteration of audit documentation that hasoccurred in connection with a Board inspection or investigation toreport that information to the Board. They can do so by directlycontacting staff in the Division of Registration and Inspections orthe Division of Enforcement and Investigations, or by contactingthe PCAOB Tip and Referral Center, including anonymously

Put yourself in the place of an audit staff or senior. Whatfactors would influence your decision to inform the PCAOB of asituation in which you realize that your superiors have altereddocumentation in anticipation of a PCAOB inspection? What concernsmight you have in doing so, i.e., what would be the risks to you?What motivation would you have to do as the PCAOB requests?