SEC Brings Two Proceedings Naming Auditors
The Commission initiated two proceedings involving auditors who improperly and repeatedly signed off on unqualified audit opinions. One action involved audits for a municipality and settled. In the Matter of Domenick F. Consolo, CPA, Adm. Proc. File No. 3-17654 (Oct. 31, 2-16). The other centered on improper payments advanced by a fund to affiliates which were recorded as prepaid management fees. The action will be set for hearing. In the Matter of Adrian D. Beamish, CPA, Adm. Proc. File No. 3-17651 (Oct. 31, 2016).
Respondent Domenick Consolo is a partner in the PCAOB registered public accounting firm of O’Connor Davis, also a Respondent in the proceeding. The firm served as the outside auditors for the Town of Ramapo, New York and the Ramapo Local Development Corporation, established to engage in development projects for the town. Mr. Consolo served as the engagement partner on those audits for fiscal years 2009 through 2014. In each of those years the audit firm issued unqualified audit opinions on the financial statements of the town and the development corporation. Those financial statements were incorporated into municipal securities offering materials beginning in 2010 and continuing through 2015. The offerings raised about $300 million from investors.
Beginning in fiscal year 2009 the town’s financial statements reflected a receivable of $3,080,000 in the General Fund for the sale of land known as the Hamlets. The receivable represented about 75% of the Town’s fiscal year 2009 General Fund balance.
During the course of the audit Mr. Consolo learned that the sale had not been completed. Nevertheless, he permitted the receivable to remain on the books. The next year Mr. Consolo also permitted the receivable to remain on the books despite the fact that the sale had not been completed in December of 2010 as he had been informed. Without the receivable the General Fund would have had a negative balance in each year.
In 2013 senior management at the audit firm learned that the financial statements of the town and the Development Corporation were under investigation by the FBI, the Manhattan U.S. Attorney and the SEC. The inquiries centered on the receivable for the land sale. Despite learning of the investigations the audit firm issue unqualified audit reports on the Town’s financial statements for the fiscal years 2012 – 2014 which contained the receivable. The firm also issued unqualified audit reports on the financial statements of the Development Corporation for the same fiscal years. Those financial statements listed the Hamlets property as an asset. The Order alleged violations of Exchange Act Section 10(b) and Securities Act Sections 17(a)(2) and (3).
To resolve the proceeding the firm agreed to a series of undertakings including: an agreement not to serve as the engagement partner or engagement quality control reviewer in connection with a municipal audit for five years; to conduct a review regarding the adequacy of their quality control procedures; and to retain an independent consultant. The firm also consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and to a censure. It will pay disgorgement of $355,600, prejudgment interest and a penalty of $100,000. Mr. Consolo consented to the entry of a cease and desist order based on Exchange Act Section 10(b), is denied the privilege of appearing or practicing before the Commission and will comply with an undertaking not to serve as the engagement partner or quality control reviewer on a municipal audit for five years. He will pay a penalty of $75,000.
Respondent Adrian Beamish is a partner in the audit firm of PricewaterhouseCoopers. The audit firm issued unqualified opinions on the financial statements of Burrill Life Sciences Capital Fund III, L.P, for the years 2009 – 2012. The fund is a $385 million venture capital fund. Mr. Beamish was the engagement partner on each of the audits.
The Fund is member of a cluster of related entities founded by Steven Burrill. Beginning in 2007 Mr. Burril and his affiliated businesses, including an exempt reporting adviser and other funds, experienced cash flow difficulties. By mid 2008 Mr. Burrill began taking routine advances on management fees. By year end 2009 Mr. Beamish was aware that over $4.9 million in advances had been taken. By the end of the next year the sum had increased to over $9.2 million while by the end of 2011 it was over $13.3 million.
In each instance the fees were characterized as advances on management fees. Little disclosure was provided despite the fact that the transactions were related party transactions. In each year Mr. Burrill and gave little scrutiny to the transactions. Indeed, despite the rapidly growing balances, and the fact that in 2012 the advances exceeded any potential future management fees the Fund might owe, Mr. Burrill authorized the issuance of an unqualified audit opinion. The Order alleges violations of Rule 102(e)(1)(ii). The proceeding will be set for hearing.