Accounting Firm and Owner Censured and Fined for Falsifying Audits

An accounting firm and its owner settled SEC charges for failing to, and falsely representing that they had complied with PCAOB standards. The fraudulent work impacted more than 500 public company SEC filings.

According to the Order, the firm's owner instructed audit staff and contractors to copy workpapers from previous engagements as the final workpapers for new engagements. The SEC found that the audit staff updated the balance sheet date and date of completion on the workpapers, but all of the other information indicating the substantive work done on the engagement was copied from the corresponding workpaper from the previous audit or quarterly review.

The SEC found that the firm represented, in engagement letters to their clients, that the audits and quarterly reviews of their financial statements would be conducted in accordance with PCAOB standards, and, with respect to the audits, issued reports falsely certifying that the audits were completed in accordance with those standards. The SEC found that the firm failed to engage a reviewer to provide a concurring approval for at least 75% of their clients’ Public Filings and Disclosures.

The SEC said that the owner provided staff members with different usernames to access the firm's audit management software to create the false appearance of separate sign offs by the staff auditor, the engagement partner and the reviewer on individual workpapers. The SEC found that all of those sign offs were done by the same staff person within seconds of each other.

The SEC found that the owner failed to adequately review or supervise audit engagements, including (i) failing to hold audit planning meetings in relation to any of the firm's audit engagements; (ii) failing to interact with the staff level auditors; and (iii) failing to inform audit team members as to the objectives, nature, timing and extent of the auditing procedures they were to perform as well as relevant information regarding the particular client that could affect those procedures. The SEC said the firm also failed to preserve emails, including by permitting those emails to be auto-deleted due to purported storage-size limitations on the firm’s computer systems.

As a result, the SEC found that the firm and its owner violated PCAOB Auditing Standards 1220 ("Engagement Quality Review"), 1201 ("Supervision of the Audit Engagement") and 1215 ("Audit Documentation"); Securities Act Section 17(a) ("Fraudulent Interstate Transactions"); SEA Sections 10(b) ("Regulation of the Use of manipulative and deceptive devices"), 13(a) ("Periodical and other reports"), 15(d) ("Registration and regulation of brokers and dealers"), 17(a) and 17(e) ("Records and Reports"); and Rule 2-06 and Rule 2-02(b)(1) of Regulation S-X.

The SEC further found that (i) certain issuer clients of violated SEA Section 13(a) and Rules 13a-1 and 13a-13, or Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 when they filed with the SEC annual and quarterly reports that included financial statements which had not been audited or reviewed by the firm in accordance with PCAOB standards; and (ii) certain registered broker-dealer clients violated SEA Sections 17(a) and 17(e) and Rule 17a-5 when they filed with the SEC annual financial statements that had not been audited by the firm in accordance with PCAOB standards.

To settle the charges the firm and owner agreed to (i) a censure, (ii) a cease and desist from committing or causing any violations and any future violations, (iii) pay a $12 million- and $2 million-dollar civil money penalty, respectively and (iv) permanent suspensions from appearing and practicing before the SEC as accountants.

In an accompanying statement, the SEC encouraged all issuers that have previously engaged the firm as their independent auditor to consider the findings and sanctions discussed in the Order, taking into account their disclosure obligations under the federal securities laws.