SEC and PCAOB fine Marcum $13M and force changes in structure

The Securities and Exchange Commission charged Top 25 Firm Marcum LLP with systemic quality control failures and violations of audit standards, mainly in connection with its audits of SPAC clients, and imposed a $10 million penalty Wednesday. 

The Public Company Accounting Oversight Board simultaneously levied a $3 million penalty against the New York-based firm for violating its rules and quality control standards, its largest ever penalty against a firm that isn't part of a global network like the Big Four. The PCAOB also required Marcum in a settled disciplinary order to make functional changes to its supervisory structure related to the firm's quality control system. 

Several of Marcum's violations of PCAOB rules and quality control standards were the result of the firm accepting a substantial number of audit clients, including hundreds of audits of special purpose acquisition companies, resulting in a dramatic increase in its issuer audit practice between January 2020 through October 2021. Marcum's quality control system did not provide reasonable assurance that it could execute these audits with competence. (SPACs have become a significant new source of audit clients recently — see our story.)

"If firms put profits ahead of PCAOB standards that protect investors, there will be consequences," said PCAOB chair Erica Williams in a statement. "Today's order makes clear, the PCAOB will use every tool at our disposal, including requiring a firm to change its supervisory structure, in order to ensure compliance with PCAOB standards."

According to the SEC's order, over a three-year period, Marcum more than tripled its number of public company clients, the majority of which were SPACs, including auditing more than 400 SPAC initial public offerings in 2020 and 2021. The strain of this growth, however, exposed substantial, widespread and pre-existing deficiencies in the firm's underlying quality control policies, procedures and monitoring. 

The deficiencies spread across nearly all stages of the audit process and were exacerbated as Marcum took on more SPAC clients. In hundreds of SPAC audits, Marcum failed to comply with audit standards related to audit documentation, engagement quality reviews, risk assessments, audit committee communications, engagement partner supervision and review, and due professional care. Depending on the audit standard at issue, violations were found in 25-50% of audits reviewed, with even more frequent, nearly wholesale violations found as to certain audit standards across Marcum's SPAC practice.

Marcum agreed to make changes in response to the charges. "This process with the SEC and PCAOB identified critical areas for improvement in the firm's internal quality control and documentation processes," a Marcum spokesman said in an email. "We are working closely with an independent consultant to ensure that we fully meet PCAOB audit standards, and we remain committed to maintaining the full confidence of our clients, regulators, and investors."

The SEC and the PCAOB have been cracking down more on auditing firms in recent years, but the Marcum case goes further than most.

"Public company auditors occupy positions of trust that are critical to protecting investors and our capital markets more broadly," said SEC Chair Gary Gensler in a statement. "Marcum neglected its essential gatekeeper function in service to its own growth. Marcum took on more than 600 new SPAC clients for a nearly six-fold increase in just one year, churning out audits at an unsustainable pace, causing widespread quality control and audit standard violations that put its clients and the investing public at risk."

The SEC's order found that Marcum failed to design, implement and monitor an adequate system of quality control in connection with certain audit standards, as well as in relation to other key quality control components, including client acceptance and technical consultations.

The PCAOB order found that Marcum's system of quality control failed to provide reasonable assurance that the firm would undertake only those issuer engagements that it could reasonably expect to complete with professional competence and appropriately consider the risks associated with providing professional services in the particular circumstances. The firm also failed to:

1. Ensure that partner workloads were manageable to allow enough time for both engagement partners and engagement quality review partners to discharge their responsibilities with professional competence and due care;
2. Timely assemble complete and final sets of audit documentation;
3. Timely and accurately file Form APs;
4. Perform procedures to identify and assess the risks of material misstatement at the assertion level with respect to SPAC audits;
5. Ensure its engagement teams were consulting with individuals within or outside the firm, when appropriate, when dealing with complex issues;
6. Perform sufficient procedures to determine whether certain matters were critical audit matters; and,
7. Make all required communications to issuer audit committees.

Without admitting or denying the findings, Marcum settled with the PCAOB and consented to a disciplinary order. Along with the civil money penalty on the firm and a censure, the order requires the firm to engage an independent consultant who will review and make recommendations concerning its QC policies and procedures and to implement all those recommendations.

Beyond requiring certain training for all audit staff, the order, among other things, requires Marcum to make functional changes to its supervisory structure related to the firm's QC system. This is the first time a PCAOB settled disciplinary order has ever required functional changes to the quality control supervisory structure of a registered firm. The changes — requiring the firm to create a new role and hire an individual to serve as head of the firm's quality control system ("chief quality officer") and to create a committee responsible for the oversight function for the audit practice ("audit oversight committee") — were felt to be important and necessary measures to address the significant quality control violations identified in the PCAOB's investigation.