The Securities and Exchange Commission announced charges against three auditors Tuesday for violating federal securities laws or failing to comply with U.S. auditing standards during audits and reviews of financial statements for publicly traded companies.
As part of the internally designated “Operation Broken Gate” effort to hold gatekeepers accountable for their roles in the securities industry, the Enforcement Division seeks out and identifies auditors who fail to operate within profession standards.
The auditors charged are CPAs Malcolm L. Pollard, who practices in Erie, Penn., and Wilfred W. Hanson and John Kinross-Kennedy, who live in the Irvine, Calif., area. Pollard and Hanson agreed to settle the individual actions against them and will be prohibited from practicing as an accountant on behalf of any publicly traded company or other SEC-regulated entity. Kinross-Kennedy is litigating his action in a proceeding before an agency administrative law judge.
Pollard and his Erie-located firm engaged in improper professional conduct while auditing three companies that are empty shells or in developmental stages, according to the SEC’s order instituting a settled administrative proceeding, which found these audits seriously deficient. The audits failed to: include evidence of procedures performed or conclusions reached, retain required documentation, perform the required engagement quality reviews, and consider fraud risks and obtain written management representations. Pollard and his firm nonetheless represented in each report that they conducted the audits in accordance with the standards of the Public Company Accounting Oversight Board.
“These orders reinforce the importance of the audit process and the critical function the auditor plays,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement, in his statement. “Pollard and his firm repeatedly engaged in unreasonable conduct that resulted in violations of applicable professional standards. Their misconduct demonstrates a lack of competence to audit the financial statements of companies registered with the Commission.”
According to the SEC’s order instituting a litigated administrative proceeding against Kinross-Kennedy, of the 23 public companies for which he has been an independent accountant since 2009, there were significant deficiencies in six of his audit engagements, and he failed to obtain engagement quality reviews for more than 30 others. Kinross-Kennedy falsely represented that he conducted his audits in accordance with PCAOB standards.
Hanson, according to the SEC’s order, conducted engagement quality reviews for five of Kinross-Kennedy’s audits, but was not competent to serve as the engagement quality reviewer and failed to exercise due professional care, in addition to failing to conduct multiple EQRs in accordance with PCAOB standards.
“Engagement quality reviews are intended to be a meaningful check on the audit engagement team’s work, and when conducted properly they improve the reliability of a public company’s financial statements,” stated David Peavler, associate regional director for enforcement in the SEC’s Fort Worth Regional Office. “Kinross-Kennedy failed to exercise due professional care on fundamental aspects of the audits by, for example, using outdated audit templates and failing to adapt to changes in auditing standards. He also retained Hanson to conduct engagement quality reviews when Hanson did not have the recent experience necessary to serve as a competent engagement partner.”
In agreeing to settle the SEC’s charges without admitting or denying the findings, which were that Pollard and his firm violated Securities Exchange Act of 1934 Rule 2-02 of Regulation S-X and Exchange Act Section 10A(a)(1) and (b)(1) by failing to have procedures in place to detect, investigate, and report illegal acts, Pollard and his firm consent to the entry of an order to cease and desist from committing or causing any violations of Exchange Act Section 10A(a)(1) and (b)(1) and Rule 2-02 of Regulation S-X.
The SEC’s order against Kinross-Kennedy alleges violations of Sections 10A(j) and 10A(k) of the Exchange Act and Rules 2-02and 2-07 of Regulation S-X, and improper professional conduct under Rule 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice and Section 4(C) of the Exchange Act.
The SEC order finds that Hanson engaged in improper professional conduct under Rule 102(e)(1)(ii) and Rule 102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice and Section 4(C) of the Exchange Act. Without admitting or denying the SEC’s findings, Hanson consents to an order suspending him from practicing before the Commission as an accountant.
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