The Securities and Exchange Commission sanctioned eight audit firms for violating auditor independence rules and the Public Company Accounting Oversight Board announced settled disciplinary orders Monday against seven other audit firms for violating independence rules in audits of broker-dealers.
The SEC investigations found that the audit firms, which agreed to settle the cases, generally took data from financial documents provided by clients during audits and used it to prepare their financial statements and notes to the financial statements.
The SEC issued orders instituting settled administrative proceedings against BKD LLP, based in Springfield, Mo.; Boros & Farrington Accountancy Corporation, of San Diego, Brace & Associates PLLC, of Londonderry, N.H.; Robert Cooper & Company CPA PC, of Chicago; Lally & Co. LLC, of Pittsburgh; Lerner & Sipkin CPAs LLP, of New York City; OUM & Co. LLP, of San Francisco; Joseph Yafeh CPA Inc., of Los Angeles.
The seven firms that consented to the PCAOB's disciplinary orders are Alexander Thompson Arnold PLLC, of Dyerburg, Tenn., and Murray, Ky.; Dean Dorton Allen Ford, PLLC, of Lexington, Ky.; Goldman & Company CPAs PC, of Marietta, Ga.; Lederman Zeidler Gray & Co., CPAs, LLP, of Beverly Hills, Calif.; Leonard Rosen & Company, P.C., of New York; Raines and Fischer LLP, of New York; and Raphael and Raphael LLP, of Boston, Mass.; and Point Pleasant, N.J.
Under auditor independence rules, firms cannot jeopardize their objectivity and impartiality in the auditing process by providing such non-audit services to audit clients, the SEC noted. By preparing the financial statements, the eight firms sanctioned by the SEC essentially put themselves in the position of auditing their own work, and they inappropriately aligned themselves more closely with the interests of clients’ management teams in helping prepare the books rather than strictly auditing them.
“To ensure the integrity of our financial reporting system, firms cannot play the roles of auditor and preparer at the same time,” said Stephen L. Cohen, associate director of the SEC’s Division of Enforcement, in a statement. “Auditors must vigilantly safeguard their independence and stay current on the applicable requirements under the rules.”
The SEC’s orders censure each firm and require them to cease and desist from committing or causing any violations of Exchange Act Section 17(a) and Rule 17a-5. The firms, which consented to the orders without admitting or denying the findings, will collectively pay $140,000 in penalties and must comply with a series of remedial undertakings designed to prevent future violations of these independence requirements.
PCAOB Orders
According to the PCAOB’s orders, each of the seven firms that it disciplined prepared the broker-dealer financial statements that they audited. Under SEC independence rules, which apply to audits of broker-dealers whether or not they are public companies, preparation of the financial statements filed with the Commission is a non-audit service that impairs the auditor's independence from the audit client.
“The bedrock of audit quality is independence,” said PCAOB chairman James Doty in a statement. “When an auditor's independence is impaired, the auditor's responsibility to exercise professional skepticism, and to serve the public trust, is also put at risk. Adhering to independence requirements is critically important."
Each firm prepared the financial statements, or portions of the financial statements, by drafting them outright or by some combination of aggregating, revising, classifying, or supplementing financial information obtained from their audit clients.
In today's settlements, in addition to a censure, each firm agreed to undertake significant remedial measures, including to establish or revise its policies and procedures governing compliance with independence requirements; to establish a policy to ensure training concerning independence requirements on at least an annual basis; to ensure training concerning independence requirements on at least one occasion within 90 days and before the commencement of an engagement with a broker-dealer client; to provide a copy of the PCAOB's disciplinary order to broker-dealer audit personnel, existing broker-dealer clients, and future broker-dealer clients engaged within the next three years, and to certify compliance with the terms of the settlement.
In addition, each settling firm will pay a $2,500 civil money penalty. The settling firms neither admitted nor denied the PCAOB’s findings.
“Preparation of the very financial statements that the auditor is examining is a textbook example of an impairment of independence," said PCAOB director of enforcement and investigations Claudius B. Modesti. “The SEC's rules regarding independence have been in effect for many years and prohibit the auditor's preparation of financial statements, including preparation based on client-provided information, such as schedules or reports. Auditor independence is an area of high importance for the PCAOB.”
In determining appropriate sanctions in these cases, the PCAOB noted that it considered the settling firms' willingness to resolve these matters early in the PCAOB's investigative process.
