What Happens to Repeat Offenders?

The SEC recently entered an order in a pending administrative proceeding against Grant Thornton, Doeren Mayhew & Co., and three CPAs from the firms that worked on a joint audit of MCA Financial Corporation. They all consented to the entry of the order without admitting or denying the SEC's findings.

The order imposed remedial sanctions against the firms and the three individuals.

Grant Thornton will:

• pay $1.5 million as a penalty;
• require its entire professional staff to undergo fraud-detection training and provide at least $1 million to fund that training; suspend joint audits with other auditing firms other than those required by foreign jurisdictions for a period of five years: and
• be censured and required to pay disgorgement of the audit fees and prejudgment interest of $59,749.
  

Doeren Mayhew, which voluntarily discontinued conducting public audits as of March 19, 2003, will not accept new public company auditing engagements for six months. In addition, if it engages in audits of public companies after the expiration of that period, it will implement policies and procedures that improve the quality of its public company audit practice. Doeren Mayhew also is censured and required to pay disgorgement of the audit fees and prejudgment interest of $115,127.With regard to the three CPAs, they can't appear or practice before the SEC for periods from one to five years.
Here are some other findings of the order: 

• MCA's 1998 annual financial statements were materially false and misleading because MCA utilized related party transactions to inflate and mischaracterize its income, assets, and equity.
• During the audit, the accounting firms knew that MCA failed to disclose several million dollars of material, related party transactions in its 1998 annual financial statements.
• Despite this knowledge, Grant Thornton and Doeren Mayhew jointly issued a report containing an unqualified opinion on MCA's 1998 annual financial statements and consented to the inclusion of their report in MCA's debenture offering materials.
• The respondents failed to inform MCA's Board of Directors that MCA's 1998 annual financial statements didn't disclose millions of dollars of material, related party transactions.
• The two firms didn't adequately plan the 1998 MCA audit, didn't act with sufficient skepticism in conducting the audit, and didn't obtain enough evidence to support their conclusions and thus, engaged in improper professional conduct.
  

Some of the changes that have been made by Grant Thornton to improve its audit procedures since the MCA audit are detailed in the order which also describes exactly what Doeren Mayhew must do if its wants to audit public companies in the future. The text of the order is at www.sec.gov/litigation/admin/34-50148.pdf
This order is in no way a free pass to either accounting firm, but I wonder how much worse the penalties would be if somewhere down the road either firm has trouble with the PCAOB or SEC on another audit. Won't the penalties have to progress in severity because the SEC or PCAOB finds them repeat offenders?

There are going to be many more troubled companies. How does a CPA firm protect itself when a company goes bankrupt?  How does it show the PCAOB and SEC that it met its responsibility in conducting the audit? Even if successful in defending itself from the PCAOB and SEC, it will be costly, time-consuming and of course, many of the investors in that defunct company will be ready to sue whatever the outcome with the PCAOB or SEC.

Although the number of firms that are registered with the PCAOB is approaching 1,000, I expect that number to drop significantly once we see penalties meted out to accounting firms that repeatedly are found to conduct deficient audits in the Sarbanes-Oxley era.