SEC Charges Audit Firms With Unprofessional Conduct
When Congress created the PCAOB many commentators thought that actions against accounting firms and their professionals would be handled by the Board rather than the SEC. While the Board does conduct investigations and bring enforcement actions, the Commission has continued to bring cases involving audit firms and their personnel as illustrated by three recent SEC enforcement actions.
In the Matter of PMB Helio Donovan, LLP, Adm. Proc. File No. 3-17691 (Nov. 21, 2016) is a proceeding which names as Respondents: PMB Helio, a PCAOB registered audit firm; Christopher Bauer, CPA, the lead engagement partner for work on Uni-Pixel, Inc. engagements from the 2008 audit through the second quarter review of 2013 and the CFO of the audit firm from 2011 through 2013; and Jeffrey Jamieson, the engagement quality review partner for Uni-Pixel’s 2012 audit and 2012 first and second quarter reviews as well as the managing partner of PMB Helio’s Dallas office.
The proceeding centers on independence violations. Specifically, the Order alleges that the firm failed to comply with the partner rotation requirements with respect to seven issuer clients in connection with work done for the 2010 through 2013 reporting periods. This resulted in the issuance of audit reports which incorrectly stated that that the audit firm had conducted the engagements in accord with PCAOB standards. In addition, the firm failed to conduct quarterly reviews and an annual audit relating to Uni-Pixel for the year ended December 31, 2013 in accord with applicable professional standards. The Order alleges violations of Exchange Act Sections 10A(j) and 13(a) as well as the related Rules.
To resolve the proceedings the firm agreed to implement a series of undertakings. Those include the retention of a consultant who will conduct a review and make recommendations related to the violations alleged. The recommendations will be implemented by the firm. In addition, each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also consented to a censure and will pay a penalty of $160,000. Each individual Respondent is denied the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after one year. Each will pay a penalty of $15,000.
In the Matter of Grassi & Co., CPAs, P.C., Adm. Proc. File No. 3017694 (November 21, 2016) is a proceeding which names as a Respondent the PCAOB registered audit firm. ClearPath Wealth Management, LLC is a Commission registered investment adviser. The adviser is the manager of several LLCs that were the general partners of five private funds. It is also the adviser to those funds under management agreements. Patrick Churchville is the principal of ClearPath. The Commission previously filed an enforcement action against the adviser and its principal. ClearPath is now run by a court-appointed receiver.
Grassi was the independent auditor for several of the funds advised by ClearPath. The audit firm issued nine audit reports on the financial statements of four different funds for the years ended 2009 through 2011. Each audit report was issued in 2012. Each was unqualified.
Beginning in 2010 ClearPath and Mr. Churchville defrauded the funds, according to the Order. Specifically, the adviser and its principal misappropriated investor funds and then misrepresented to value of fund assets. The audit firm failed, however, to heed indications of the fraudulent conduct, violating professional standards. This permitted the adviser and its principal to continue their wrongful conduct. The Order alleges unprofessional conduct in violation of Rule 102(e) and Advisers Act Sections 206(2) and 206(4).
To resolve the proceeding the audit firm agreed to implement certain undertakings. Those undertakings include the retention of an independent consultant who will review certain policies and procedures of the firm and compile a report. The recommendations will be adopted by the firm. The audit firm also consented to the entry of a cease and desist order based on the Advisers Act Sections cited in the Order and to a censure. In addition, Grassi will pay disgorgement of $130,000, prejudgment interest and a civil penalty of $260,000. See also In the Matter of Gary R. Purwin, CPA, Adm. Proc. File No. 3-117695 (November 21, 2016)(proceeding naming the engagement partner on the ClearPath audits; resolved with a cease and desist order based on the same Advisers Act Sections cited in the Order against the firm, an order denying the auditor the privilege of appearing and practicing before the Commission with a right to apply for reinstatement after one year, and the payment of a $20,000 penalty).
Program: On December 1, 2016 Dorsey will present it Third Annual Federal Enforcement Forum featuring panels discussing enforcement issues relating to the SEC, CFTC, FERC, EPA and CFPB. The program is live in Washington, DC. and video cast. No charge for registration (here).