PCAOB Imposes a $400,000 Fine and Sanctions MaloneBailey, LLP for Pervasive Quality Control Violations

Less than a month after one of the biggest auditing firms in the public markets, BF Borgers, and its owner, Benjamin Borgers, were permanently banned and fined a combined $14 million by the Securities and Exchange Commission (the “SEC”) for massive quality control issues, another large auditing firm involved in the public markets is facing fines and sanctions, this time from the Public Company Accounting Oversight Board (PCAOB).  On May 21, 2024, the PCAOB announced it was imposing a $400,000 fine and sanctions against MaloneBailey LLP (“MaloneBailey” or the “Firm”) for violations of PCAOB rules and quality control standards. 

MaloneBailey is a public accounting firm headquartered in Houston, Texas. It is licensed to practice public accounting by the Texas State Board of Public Accountancy (License No. P05522), among other states. 

According to the Disciplinary Order issued by the PCAOB, from 2018 to 2021, PCAOB inspection staff conducted three inspections of MaloneBailey. During each of these inspections, the PCAOB notified the firm of significant audit deficiencies that raised concerns about the firm’s engagement performance. Despite the firm’s awareness of these deficiencies and concerns, it failed to make effective changes to improve its system of quality control.

In 2018, PCAOB inspection staff conducted an inspection of the Firm. In connection with the inspection, between September 2018 and October 2018, PCAOB inspection staff informed the Firm of its findings regarding significant audit deficiencies in MaloneBailey issuer audits related to revenue testing, auditing accounting estimates, including fair value measurements, and audit committee communications.

In 2019, PCAOB inspection staff conducted another inspection of the Firm. In connection with the inspection, between November 2019 and December 2019, PCAOB inspection staff informed the Firm of its findings regarding significant audit deficiencies in numerous MaloneBailey issuer audits related again to revenue testing, auditing accounting estimates, including fair value measurements, and audit committee communications. In addition, the inspection staff also identified audit deficiencies related to EQRs. With respect to the EQR deficiencies, in several audits inspected, the EQR partner did not identify a deficiency in an area identified by the engagement team as a significant risk, including in some cases a fraud risk. Inspection staff also identified deficiencies related to the Firm’s internal inspection program and state practice qualification requirements.

In 2021, PCAOB inspection staff conducted an inspection of the Firm. In connection with the inspection, between September 2021 and December 2021, PCAOB inspection staff informed the Firm regarding significant audit deficiencies in numerous MaloneBailey issuer audits related again to revenue testing, auditing accounting estimates, including fair value measurements, audit committee communications, and EQRs. With respect to the EQR deficiencies, PCAOB inspection staff identified one or more deficiencies in areas that the EQR partners were required to evaluate, such as the engagement teams’ assessment of and audit responses to areas of significant risk, including, in some cases, a fraud risk. Inspection staff also identified deficiencies related to state practice qualification requirements.

Despite the Firm’s awareness that PCAOB inspectors had found repeated engagement performance deficiencies in specific audits, including deficiencies that the Firm failed to identify during its Internal Inspections, the Firm did not consider and evaluate the adequacy of its monitoring policies and procedures in light of these findings. The Firm failed to make changes to, or sufficiently improve, its policies and procedures to address the failures of its procedures to identify these deficiencies.

As a result, the Firm violated PCAOB rules and quality control standards by failing to have monitoring policies and procedures, taken as a whole, that enabled the Firm to obtain reasonable assurance that its system of quality control was effective, such that the policies and procedures for each of the elements of its system of quality control were suitably designed and being effectively applied, including engagement performance.

Without admitting or denying the findings, the firm settled with the PCAOB and consented to a disciplinary order that:

• Censures the firm;
• Imposes a $400,000 civil money penalty on the firm;
• Requires the firm to engage an independent consultant who will review and make recommendations concerning the firm’s quality control policies and procedures; and
• Requires the firm to conduct certain training for all audit staff.

Prior to its most recent PCAOB sanctions, MaloneBailey has also faced some fines and sanctions in the past. 

On December 22, 2022, MaloneBailey was one of six firms censored and fined for violating PCAOB reporting requirements.  In that case, the PCAOB cited MaloneBailey’s repeated failures since 2018 to timely disclose to the PCAOB Oversight Board on Form 3 that multiple former clients had not filed required Forms 8-K with the U.S. Securities and Exchange Commission (“Commission”) following the termination of MaloneBailey’s relationship with those clients and failed to timely disclose to the PCAOB Oversight Board on Form 3 a number of changes to its licensing status since 2020. By failing to make these disclosures as required, MaloneBailey violated PCAOB rules and was censored and fined $25,000.

On May 2, 2016, the SEC charged MaloneBailey and one of its engagement partners, Jay Phillip Norris, with engaging in improper professional conduct while auditing the fiscal year 2011 financial statements of Left Behind Games Inc., a penny-stock company that sold religious-themed video games.  An SEC investigation found that MaloneBailey and Norris violated Rule 2-02(b)(1) of Regulation S-X because they issued an audit report stating that they had conducted the audit in accordance with PCAOB Standards when they had not. MaloneBailey agreed to settle the charges by paying more than $160,000 to settle the SEC’s charges, including a $100,000 penalty, disgorgement of the $54,000 in fees collected from the audit, and interest of $7,519.35. MaloneBailey was also censured and must retain an independent consultant and agreed to a number of other undertakings outlined in the SEC’s order. Norris agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order permits Norris to apply for reinstatement after three years. Norris also agreed to pay a $10,000 penalty.

For further information about this securities law blog, please contact Brenda Hamilton, Securities Attorney, at 200 E. Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. 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 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.

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