The Securities and Exchange Commission has announced sanctions against a New York-based audit firm, its founder, two other partners, and an audit manager for their roles in the failed audits of three China-based companies publicly traded in the U.S.
An SEC investigation found that Sherb & Co. LLP and its auditors falsely represented in audit reports that they had conducted the audits in accordance with U.S. auditing standards when in fact they were riddled with failures and improper professional conduct. One of the companies they audited—China Sky One Medical Inc. —has since been charged by the SEC with financial fraud.
To settle the SEC’s charges, the firm and the four auditors agreed to be barred from practicing as accountants on behalf of any publicly traded company or other entity regulated by the SEC. The firm agreed to pay a $75,000 penalty.
“Auditors are critical gatekeepers in the financial reporting process, but Sherb & Co. and its auditors failed to live up to their professional obligations in multiple audits during a five-year period,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement, in a statement.
According to the SEC, the flawed audits involved China Sky One Medical, China Education Alliance Inc., and Wowjoint Holdings Ltd. The individuals responsible for the audits were the firm’s founder, Steven J. Sherb, his fellow partners Christopher A. Valleau and Mark Mycio, and audit manager Steven N. Epstein.Attempts to contact the firm were unsuccessful.
They failed to properly plan and execute the audits, and they did not obtain sufficient competent evidential matters concerning sales, revenue, or bank balances. They ignored clear red flags and failed to exercise professional skepticism and due care. They also failed to maintain complete audit work papers.
According to the SEC’s order, Sherb engaged in improper professional conduct as the concurring partner for the China Sky audit and as concurring partner and engagement quality review (EQR) partner for the Wowjoint audits. Valleau engaged in improper professional conduct as the engagement partner for the China Sky audit and four of five Wowjoint audits, and as the EQR for the China Education audit. Mycio engaged in improper professional conduct as the engagement partner for the China Education audit and one of the Wowjoint audits. Epstein engaged in improper professional conduct as the senior audit manager on the China Sky audit, China Education audit, and four of five Wowjoint audits.
The SEC order finds that Sherb & Co., Sherb, Valleau, Mycio, and Epstein violated various securities laws. Sherb & Co. and Mycio were ordered to cease and desist from committing or causing any violations of the securities law. Sherb, Valleau, and Mycio were also prohibited from practicing before the SEC as an accountant for at least five years, while Epstein was barred for at least three years.