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Auditors face increasing scrutiny over clients' problematic returns


The U.S. Securities and Exchange Commission's announcement earlier this month that auditor Grant Thornton L.L.P. will pay a $3 million settlement in connection with its audit of two firms reflects the agency's ongoing “Operation Broken Gate,” policy, announced in 2013, under which it plans to pursue the auditors that sign off on firms that file fraudulent returns.

Observers say more such announcements can be expected. They say also it is significant that the settlement involving Grant Thornton is the second time recently in which audit firms have admitted wrongdoing.

Earlier this month, the SEC announced that Chicago-based Grant Thornton had admitted wrongdoing and agreed to pay a $3 million penalty, plus $1.5 million in audit fees and interest, to settle charges it ignored red flags and fraud risks while conducting deficient audits for two publicly traded firms: Menomonee Falls, Wisconsin-based Assisted Living Concepts Inc. and Cicero, Illinois-based Broadwind Energy Inc.

In addition, without admitting or denying guilt, the engagement partner — the partner responsible for the audit — on the deficient audits of both companies, Melissa Koeppel, agreed to pay a $10,000 penalty and be suspended from practicing before the SEC as an accountant for at least five years.

Another partner, Jeffrey Robinson, who was a partner on one of the audits, also agreed to pay a $2,500 penalty and be suspended from practicing before the SEC as an accountant for at least two years, also without admitting or denying guilt.

In February, the SEC had charged Broadwind Energy, its former CEO and its chief financial officer for accounting and disclosures with violations that allegedly prevented investors from knowing that reduced business from two significant customers had caused substantial declines in the company's long-term financial prospects. Broadwind agreed to pay a $1 million penalty without admitting or denying guilt in the case.

And in December 2014, the SEC announced fraud charges against the two top former executives of Assisted Living, accusing them of listing fake occupants at some senior residences in order to meet the requirements of a lease to operate the facilities.

Grant Thornton said in a statement, “We are pleased to have these several years-old matters resolved, and we maintain a strong commitment to continually improving the quality of our work.”

In a September 2013 speech, Andrew Ceresney, now director, and then co-director, of the SEC's division of enforcement, said the agency plans to continue to focus on auditors.

“If there is a significant restatement, or if we learn about improper accounting from a whistleblower, our proactive efforts or the media, then you can expect that we will scrutinize not only the CEO, CFO and controller, but also the engagement partner, engagement quality reviewer and the auditing firm as a whole. We are going to probe the quality of the audit and determine whether the auditors missed or ignored red flags, whether they have proper documentation and whether they followed professional standards,” said Mr. Ceresney, in the speech before the American Law Institute's Continuing Legal Education group in Washington.

Among other actions against auditors, the SEC in September of this year charged national audit firm BDO USA L.L.P. with dismissing red flags and issuing false and misleading unqualified audit opinions about the financial statements of staffing services company General Employment Enterprises Inc., based in Oakbrook Terrace, Illinois.

Chicago-based BDO agreed in September to admit wrongdoing, pay disgorgement of its audit fees and interest totaling about $600,000 and pay a $1.5 million penalty. Charges were also filed against General employment's then-chairman Stephen B. Pence, against whom litigation continues, according to the SEC's statement in September.

Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio, said, “it's pretty clear” the SEC is targeting auditors for public companies “where there were significant accounting reporting problems, and if they look and see there were audit deficiencies, they're trying to go public about it.”

Mr. Lacroix said one interesting aspect of the Grant Thornton case was the naming of the partners involved. Generally, audits are signed by the firm itself, and not by individuals, he said.

An attorney who asked to not be identified said these audit cases “seem to be low-hanging fruit for them. If issues with registered companies come up, it's very easy for them to look at auditors” to see if there are any red flags they may have missed that would warrant action.

Pursing auditing firms is “clearly a priority” for SEC Chair Mary Jo White and appears to be a core part of the agency's enforcement approach, said another attorney, who asked not to be identified.

Observers also note that in both the BDO and Grant Thornton cases, the SEC solicited an admission of wrongdoing. A 2-year-old SEC policy requires companies in some cases to admit wrongdoing to settle agency charges.