November 18, 2019

November 18, 2019

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SEC Settles Charges of Auditor Independence Violations for $8 Million

The SEC announced settlements with an auditing firm (the “Firm”) and one of its partners relating to violations of certain auditor independence rules involving nineteen audit engagements with fifteen SEC-registrant issuers.

More specifically, the SEC found the Firm and its partner violated the Commission’s and Public Company Accounting Oversight Board’s (“PCAOB”) auditor independence rules. The alleged conduct involved performing prohibited non-audit services, including exercising decision-making authority in the design and implementation of software relating to one of its issuer client’s financial reporting as well as engaging in management functions for the company. The partner was responsible for supervising the performance of the prohibited non-audit services. Additionally, the SEC charged additional PCAOB-rule violations for failing to notify the clients’ audit committees about the non-audit services. The SEC described these failures as “mischaracterized non-audit services” despite the services involving financial software “that were planned to be implemented in a subsequent audit period and providing feedback to management on those systems—areas outside the realm of audit work.” The partner was also charged with providing material, non-public information concerning an issuer to a software company without the issuer’s consent.

The SEC found that by presenting the non-audit work as audits, the Firm engaged in improper professional conduct because the non-audit work necessitated pre-approval and independence determinations, depriving the company’s audit committee of the opportunity to perform its responsibilities. The SEC also found that the violations were due, in part, to “breakdowns in its system of quality control to provide reasonable assurance that the Firm maintained independence.”

Finally, because of the Firm’s representations to the SEC that it was “independent,” the SEC charged the Firm with violations of Rule 2-02(b) of Regulation S-X and improper profession conduct under Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice. Further, the Firm was charged with causing the issuer’s violations of Section 13(a) and Rules 13a-1 and 13a-13 of the Exchange Act. The partner was also charged with improper conduct in violation of Exchange Act Section 4C, causing the Firm’s violations of Regulation S-X Rule 2-02(b), and causing the issuer’s violations of Section 13(a) and Rules 13a-1 and 13a-13.

Neither admitting nor denying these charges, the Firm and the partner undertook various new quality control measures and settled for $8 million and $25,000. The Firm’s settlement included $3.8 million in disgorgement, over $600,000 in prejudgment interest, and $3.5 million in civil penalties. In addition to his $25,000 penalty, the partner also is suspended from appearing or practicing before the SEC as an accountant for a period of four years, after which he will be able to apply for reinstatement of these privileges.

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About this Author

Mary P. Hansen, White Collar Criminal Defense Attorney, Drinker Biddle Law Firm
Partner

Mary Hansen is a partner on the firm’s White Collar Criminal Defense & Corporate Investigations team, where she focuses her practice on defending clients in regulatory investigations as well as white collar criminal proceedings in the securities industry.  She also assists clients with internal investigations and compliance and prevention strategies.

Prior to joining the firm, Mary was an Assistant Director of the U.S. Securities & Exchange Commission’s Division of Enforcement, where she was a member of the division’s Market Abuse and...

215-988-3317
Antoinette Snodgrass, Drinker Biddle Law Firm, Philadelphia, Corporate Law Attorney
Associate

Antoinette Snodgrass assists clients with various stages of legal proceedings and trial preparation by conducting legal research and drafting legal memoranda, discovery requests and responses, motions, settlements, and briefs.

Antoinette is a contributor to the firm's SEC Law Perspectives Blog, which provides reports, discussions, and analyses on noteworthy trends in enforcement and regulatory activity of the U.S. Securities and Exchange Commission (SEC) and other agencies, such as the U.S. Commodity Futures Trading Commission (CFTC).

While in law school, Antoinette served as a judicial intern for the Honorable Joel H. Slomsky, Eastern District of Pennsylvania; a legal intern for the Pennsylvania Office of Attorney General, Bureau of Consumer Protection; a legal intern for the United States Attorney’s Office, Eastern District of Pennsylvania; and a judicial intern for the Honorable Thomas P. Rogers, Montgomery County Court of Common Pleas.

215-988-2675