SEC Sanctions Firms For Lack of Auditor Independence

On December 8, 2014, the Securities and Exchange Commission (the “SEC”) sanctioned eight firms for violating auditor independence rules when they prepared the financial statements of brokerage firms that were their audit clients.  The SEC determined that the audit firms generally took data from financial documents provided by clients during audits and used it to prepare their financial statements and notes to the financial statements. Under auditor independence rules, firms cannot jeopardize their objectivity and impartiality in the auditing process by providing such non-audit services to audit clients.

By preparing the financial statements, these particular firms essentially put themselves in the position of auditing their own work, and they inappropriately aligned themselves more closely with the interests of clients’ management teams in helping prepare the books rather than strictly auditing them.

“To ensure the integrity of our financial reporting system, firms cannot play the roles of auditor and preparer at the same time,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement.  “Auditors must vigilantly safeguard their independence and stay current on the applicable requirements under the rules.”

The SEC issued orders instituting settled administrative proceedings against the following firms:

       BKD LLP, which is based in Springfield, Mo.

       Boros & Farrington Accountancy Corporation, which is based in San Diego.

       Brace & Associates PLLC, which is based in Londonderry, N.H.

       Robert Cooper & Company CPA PC, which is based in Chicago.

       Lally & Co. LLC, which is based in Pittsburgh.

       Lerner & Sipkin CPAs LLP, which is based in New York City.

       OUM & Co. LLP, which is based in San Francisco.

       Joseph Yafeh CPA Inc., which is based in Los Angeles.

According to the SEC’s orders, these firms were not independent of their broker-dealer audit clients under independence criteria established by Rule 2-01(c)(4)(i) of Regulation S-X, which Rule 17a-5 of the Securities Exchange Act of 1934 makes applicable to the audits of broker-dealer financial statements.  The orders find that the firms (1) violated Rule 17a-5(i) of the Exchange Act, (2) caused their broker-dealer audit clients to violate Section 17(a) of the Exchange Act and Rule 17a-5, and (3) engaged in improper professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.

The SEC’s orders censure each firm and require them to cease and desist from committing or causing any violations of Exchange Act Section 17(a) and Rule 17a-5.  The firms, which consented to the orders without admitting or denying the findings, will collectively pay $140,000 in penalties and must comply with a series of remedial undertakings designed to prevent future violations of these independence requirements.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes. Hamilton & Associates | Securities Lawyers Brenda Hamilton, Securities Attorney 101 Plaza Real South, Suite 202 North Boca Raton, Florida 33432 Telephone: (561) 416-8956 Facsimile: (561) 416-2855 www.SecuritiesLawyer101.com