BDO to Pay $1.1 Million to Settle SEC Charges

The SEC has charged Chicago-based BDO USA (FY15 net revenue of $1.05 billion) with dismissing red flags and issuing false and misleading unqualified audit opinions about the financial statements of staffing services company General Employment Enterprises, the agency announced.

The SEC on Sept. 9 also charged five of the firm’s partners for their roles in the deficient audits, and filed fraud charges against the client company’s then-chairman of the board and majority shareholder Stephen B. Pence, who is a former U.S. attorney.

BDO agreed to admit wrongdoing, pay disgorgement of its audit fees and interest totaling approximately $600,000, and pay a $1.5 million penalty in addition to complying with undertakings related to its quality controls. The five partners also agreed to settle the charges against them. Two former CEOs of General Employment agreed to settle separate charges, and the litigation continues against Pence.

“Audit firms must train their audit and national office professionals not only to recognize red flags but also to have the resolve to refuse signing off on an audit if there are unresolved material issues,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said in a statement. “BDO failed to do that here, even though these issues were elevated to the highest levels of its audit practice.”

According to the SEC’s orders instituting settled administrative proceedings against BDO and the partners:

  • Near the end of BDO’s 2009 audit of General Employment, BDO was advised by the company that $2.3 million purportedly invested in a 90-day nonrenewable CD wasn’t repaid by the bank upon its maturity date. BDO also learned that a bank employee indicated there was no record of a CD being purchased from the bank.  The $2.3 million represented approximately half of the company’s assets and substantially all of its cash.
  • BDO then received multiple conflicting stories from company management and board members about the status of the purported CD, and the company received a series of deposits totaling $2.3 million from three entities unaffiliated with the bank. One entity was purportedly owned by Pence.
  • After BDO raised more questions, the company claimed the deposits were proceeds of an agreement to assign the purported CD to an unrelated party in return for the value of the CD. But BDO never received reasonable and coherent explanations about why the $2.3 million went missing and why an equivalent amount was later received by the company under suspicious circumstances.
  • BDO’s engagement partner on the audit Sean C. Henaghan and concurring reviewer John E. Rainis subsequently consulted with senior BDO partners including regional technical director James J. Gerace, national director of accounting Leland E. Graul, and national SEC practice director Wendy M. Hambleton.
  • BDO then issued a five-page letter to the company highlighting the conflicting information and demanding an independent investigation overseen by the audit committee.
  • But just days later despite no reasonable explanation from the company, BDO withdrew its demand and subsequently issued unqualified opinions on the financial statements included in General Employment’s 2009 and 2010 annual reports.

Without admitting or denying the SEC’s findings, Henaghan, Rainis, Gerace and Graul agreed to be suspended from practicing public company accounting for varying periods, the SEC reported. Henaghan agreed to pay a $30,000 penalty, Rainis agreed to pay a $15,000 penalty, and Gerace, Graul and Hambleton each agreed to pay $10,000 penalties.