SEC Charges Eight Audit Firms Charged With Independence Violations

The broker windows approach of filing groups of actions together which center on common theme is expanding to auditor independence. The Commission grouped proceedings naming as Respondents eight audit firms. Each Order alleges violations of the independence rules. In each instance the audit firm conducted audits for a number of broker-dealers clients. In each action the Order alleges that in one or more instances the firm assisted in preparing the financial statements which were the subject of the audit. In each instance the audit firm settled, agreeing to implement certain procedures and to the entry of a cease and desist order, a censure and a directive to pay a penalty.

Typical of these actions is the one which names as a Respondent BKD, LLP. In the Matter of BKD, LLC, Adm. Proc. File No. 3-16299 (Dec. 8, 2014). BKD is an accounting and auditing firm registered with the PCAOB. It has 245 partners and approximately 1,200 additional professional staff in 34 offices located in 15 states. The firm is based in Missouri.

During the fiscal years 2010 through 2012 BKD served as the independent public accountant for 21 broker-dealer audit clients. For at least “one audit performed for nine of its broker-dealer audit clients . . . BKD prepared the financial statements and/or notes to the financial statements that were filed with the Commission . . .” according to the Order.

The example in the Order involved Broker-Dealer A. For that client for the fiscal year ending 2011 BKD audited the annual financial statements. During the audit the firm was given financial documents generated by the Broker-Dealer, including a trial balance and FOCUS reports. The firm used these documents and other financial information to create a set of financial statements for filing with the Commission. BKD gave the financial statements it generated to the client for approval.

In February 2012 Broker-Dealer A filed Form X-17A-5 Part III for 2011 with the Commission. It contained an audit report signed by BKD. That report represented that the audit had been in accord with GAAS.

Exchange Act Section 17(e)(1)(A) requires that every registered broker or dealer annually file a balance sheet and income statement with the Commission that has been certified by an independent public accounting firm. The auditor has to be independent under the Commission’s Rules. The audit has to be conducted in accord with GAAS. Rule 2-01(c)(4) of Regulation S-X provides that accountants are not independent if, during the engagement, the accountant provides prohibited non-audit services to an audit client. Those services include preparing the audit client’s accounting records, the financial statements or originating source data underlying the financial statements.

Here BKD violated Exchange Act Rule 17a-5(i) by representing in its audit reports that it had performed the engagements in accord with GAAS because its independence had been impaired by preparing the financial statements. The audit firm also caused its client to violate Exchange Act Section 17(a) because it knew, or should have known, that its conduct contributed violations of Exchange Act Section 17(a) and Rule 17a-5. Under Rule 102(e) the Commission can censure a person who engages in improper professional conduct within the meaning of the Rule. In this case BKD engaged in highly unreasonable conduct that resulted in violations of the applicable professional standards since it knew, or should have know, that heightened scrutiny was required which is always warranted when independence questions are presented.

In resolving the action BKD entered into a series of undertakings. Those include establishing written policies and procedures or revising existing procedures regarding independence requirements; establishing a policy regarding training; providing a copy of the Order to all personnel and broker-dealer audit clients; adopting procedures to provide reasonable assurances that prohibited bookkeeping services are not provided to broker-dealer clients; and certifying to the staff that it has complied with all of the undertakings.

The firm also consented to the entry of a cease and desist order based on Exchange Act Section 17(a) and Rule 17a-5 and a censure. BKD will pay a penalty of $15,000.