1. Primary audit risk factors that were evident within Powder River’s operations are:
• Fraudulent Financial Reporting Risk for Revenue
• Other Areas of Fraud Risk.
From year-end 2004 through the first-quarter 2008, defendant Brian Fox misled the investing public by fraudulently inflating the revenue and assets and fraudulently omitting major liabilities, of Powder River Petroleum International, Inc. (“Powder River” or the “company”) in the company’s Commission filings, and by making other false and misleading public disclosures. From year-end 2004, Powder River conveyed working interests in oil and gas leases to investors in Asia for over $43 million. Because Powder ...view middle of the document...
The company’s improper recording of the proceeds as revenue from year-end 2004 through the first quarter of 2008 was attributable to Fox, who repeatedly characterized the conveyances as “sales” to outside accountants retained as consultants by the company (“the outside consultants”) to assist Fox in preparing the company’s financial statements. And relevant to (b) guaranteed payments were, in substance, loan principal repayments, Fox told the company’s outside consultants and external auditor that they were “prepaid production payments.” The consultants and auditor relied on Fox’s false characterization in recognizing the payments as an offset against the company’s oil-and-gas production revenues. As a result, Powder River recorded the working interest conveyance proceeds as revenue in the company’s annual and quarterly filings from year-end 2004 March 2008, and improperly recorded the minimum guaranteed payments as an asset – prepaid production payments – in the company’s quarterly filings for the first, second and third quarters.
4. In my opinion CBN failed to perform sufficient audit procedures in connection with the issuance of these audit reports in violation of PCAOB rules and auditing standards, and failed to appropriately supervise the work of audit assistants. They failure to ensure that sufficient audit procedures were performed on the audits resulted from a poor system of quality control, including inappropriate reliance on inexperienced audit assistants, excessive partner workload and deficient audit documentation practices. In addition CBN violated PCAOB rules by failing to cooperate with a Board inspection of the Firm in 2007 by adding, and directing the Firm's assistants to add, audit documentation to audit files in advance of the Board inspection.
5. Relying on only a few pages from each of the specialists' reports. Further, Chisholm and the Firm took no steps to evaluate the professional qualifications of the specialists to determine if they’d possessed the necessary skill or knowledge to perform the work; nor did they obtain an understanding of the nature of the specialists' work, including the objectives and scope of that work. Chisholm and the Firm failed to evaluate the specialists' relationship...