Audit Firms Sanctioned by the SEC

Eight audit firms spanning across the U.S. were recently sanctioned by the Securities and Exchange Commission (“SEC”) for failing to adhere to the auditor independence rules set forth in Rule 17(a)-5 of the Securities Exchange Act of 1934 during their annual financial audits of certain broker-dealer firms.

Rule 17(a)-5 mandates that broker-dealers obtain financial audits that are performed in accordance with Public Company Accounting Oversight Board (PCAOB) standards, which state in part, “A member in public practice shall be independent in the performance of professional services…” and further outlines activities that would impair such independence.

The SEC investigations revealed that the audit firms had retrieved “data from financial documents provided by clients during audits and used it to prepare their financial statements and notes to the financial statements,” which caused the lack of independence and created a failure by each broker-dealer firm to file the required annual report audited by an independent accountant.

“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 ordered the firms to “cease and desist from committing or causing any violations of Exchange Act Section 17(a) and Rule 17a-5.”, along with requiring them to comply with a number of undertakings and paying fines that collectively total $140,000. Additionally, PCAOB announced that they will be taking action against seven of the eight audit firms.

The increased number of enforcement cases against auditing firms that fail to comply with federal regulations brings to light the SEC’s efforts to hold “gatekeepers” accountable for the important roles they play in the securities industry.

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