Accounting Firm Settles SEC Charges Over Flawed Mutual Fund Valuation Audits

An accounting firm settled SEC charges for failing to properly audit a mutual fund's valuation of complex derivative assets and for issuing an inaccurate audit report.

According to the Order, the accounting firm failed to conduct an audit of a mutual fund in accordance with Public Company Accounting Oversight Board ("PCAOB") standards. The SEC said the accounting firm did not obtain a sufficient understanding of the mutual fund's internal controls and processes for hard-to-value Level 3 assets, such as "corridor variance swaps." The SEC said the accounting firm failed to obtain sufficient appropriate audit evidence, did not follow its own audit plan, and inadequately scrutinized the inputs used in the valuation recalculations. The SEC also determined that the firm failed to exercise due professional care and professional skepticism, relying solely on information and representations provided by the mutual fund's investment adviser, who was actively engaged in a mismarking scheme to inflate the fund's performance.

The SEC found the accounting firm engaged in improper professional conduct, violating Securities Exchange Act of 1934 Section 4C ("Appearance and practice before the Commission") and Rule 102(e)(1)(ii) ("Conduct") of the SEC Rules of Practice. Additionally, the SEC found that the accounting firm violated Rule 2-02(b)(1) ("Accountants' reports and attestation reports") of Regulation S-X by falsely stating the applicable professional standards under which the audit was conducted.

The accounting firm agreed to a cease-and-desist order and a censure. The SEC did not impose a civil monetary penalty, citing the firm's prompt remediation efforts, but required the company to certify its compliance with various internal remedial measures and quality control enhancements within 60 days.