SEC Settles Charges with Accounting Firm for Quality Control Deficiencies

Who may be interested: Audit committees, Compliance professionals

Quick Take: The SEC recently settled charges against an accounting firm for alleged systemic quality control failures and violations of audit standards, primarily in connection with audit work performed for hundreds of special purpose acquisition companies (SPACs).

The SEC Order details the rapid growth of the accounting firm over a three-year period in which it more than tripled its number of public company clients, the majority of which were SPACs. The accounting firm completed the audit work for nearly half of the over 860 SPAC initial public offerings that occurred in 2020 and 2021. According to the SEC Order, the “exponential growth” of the accounting firm’s public company practice, primarily for SPACs, revealed “substantial, widespread, and pre-existing deficiencies” in quality control processes, which the firm failed to remediate. Some of the issues had been identified in the accounting firm’s internal inspections going as far back as 2018.  

The SEC Order stated that the accounting firm lacked sufficient policies and procedures to provide reasonable assurances that engagements were conducted in accordance with professional standards. The SEC Order further stated that the accounting firm failed to sufficiently monitor the effectiveness of its policies and procedures and to communicate those policies and procedures to its engagement teams. According to the SEC Order, some of these failures were due to failure in overseeing and training personnel to perform services necessary for the SPAC audits.  

The SEC Order highlighted quality control and audit standard violations throughout the accounting firm’s engagement work stages, including client acceptance, risk assessments (including risks of management overrides), audit committee communications (including communications about changes in significant risks), audit documentation, engagement quality reviews and engagement partner supervision. Depending on the audit standard at issue, violations were found in 25-50% of the audits reviewed, with notable violations of certain audit standards in the accounting firm’s SPAC practice.

The SEC Order found that the accounting firm violated professional conduct standards under Section 4C of the Exchange Act and Rule 102(e) of the SEC’s Rules of Practice, multiple audit standards across numerous engagements, and Rule 2-02(b)(1) of Regulation S-X (relating to applicable professional standards for audits).  Without admitting or denying the findings in the SEC Order, the accounting firm agreed to a censure, to pay a $10 million penalty, and to certain remedial actions, including the retention of an independent consultant to review and evaluate its policies and procedures and restrictions on its ability to accept new audit clients. In a concurrent settled disciplinary order with the Public Company Accounting Oversight Board (PCAOB), the accounting firm agreed to pay a $3 million penalty to the PCAOB and to make functional changes to its supervisory structure related to the firm’s quality control system.

The SEC Order can be found here.

The PCAOB Order can be found here.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.