SEC Whistleblowers Lead to $2 Billion in Enforcement Actions

The Securities and Exchange Commission (SEC) has released the annual report from its Office of Enforcement that confirms that the whistleblower reward program is helping protect investors from fraud.

The report says the SEC whistleblower law:

  • Is very successful and that whistleblowers have made meaningful contributions to significant cases;
  • Has resulted in high-quality SEC enforcement actions and led to more than $2 billion in financial remedies;
  • The SEC has paid whistleblowers about $387 million in rewards.

“Without whistleblower-insiders, the vast majority of frauds would go undetected, and investors would lose billions of dollars to those given by criminal greed,” says Stephen Kohn, SEC whistleblower attorney, in a statement. Kohn has represented corporate whistleblowers for over 35 years and worked with Congress in drafting the Dodd-Frank Act whistleblower protections.

“The SEC has confirmed that a well-placed whistleblower is the ‘goose that lays the golden egg.’ The SEC program has been highly successful, and we hope that the new regulations under consideration by the Commission will build on this substantial progress,” Kohn says.

AICPA Offers Guidance on Working With New Clients in Cannabis Industry

The cannabis industry offers CPAs a bevvy of prospective new clients. But the nature of the industry also opens to door to several potential challenges and pitfalls, the AICPA says.

Several states have legalized marijuana use for recreational or medical reasons, creating a burgeoning industry of growers, distributors and retailers. Revenue from medical and recreation cannabis is estimated to reach $12 billion this year. The accounting profession, similar to the legal profession, can offer its expertise to clients in the cannabis industry, such as auditing and taxation services, as well as expert guidance for avoiding fraud or theft.

With these opportunities come serious downsides, as marijuana remains illegal at the federal level. As a result, few banks are willing to deal with players in the industry, leaving it largely a cash operation. CPAs providing business advisory or other accounting services to clients in the cannabis industry need to navigate the nuances of federal and state law and to avoid being charged criminally, potentially resulting in fines, jail time or the loss of their license.

The American Institute of CPAs details the risks and opportunities for CPAs working in the cannabis industry in the latest Eye on Fraud report. It offers a review of many of the State Boards of Accountancy positions on working in the cannabis industry and highlights some of the issues and challenges facing both the cannabis industry and CPAs supporting it.

More news from the AICPA

SEC Charges PwC for Improper Professional Conduct, Violating Auditor Independence

The Securities and Exchange Commission (SEC) has charged Big 4 firm PwC with improper professional conduct in 19 engagements and for conducting non-audit services for 15 audit clients, which is prohibited. PwC will pay over $7.9 million to settle the charges.

The SEC also charged PwC partner Brandon Sprankle with causing the firm’s independence violations. PwC and Sprankle consented to the SEC’s order without admitting or denying the findings.

Sprankle agreed to pay a $25,000 penalty and to be suspended from appearing or practicing before the SEC, with a right to reapply for reinstatement after four years. PwC agreed to be censured and to pay disgorgement of $3.8 million, plus prejudgment interest of over $600,000 and a civil penalty of $3.5 million.

PwC also agreed to perform a detailed review of its quality controls for complying with auditor independence rules and for evaluating its non-audit services.

The SEC found that the non-audit services included engaging in management functions and designing and implementing software relating to an audit client’s financial reporting. Also, the firm failed to notify the PCAOB, which requires the firm to inform the audit committee of the scope of work, discuss the potential effects on independence, and document the substance of the independence discussion.

According to the order, PwC’s actions deprived numerous audit committees of information necessary to assess the firm’s independence.

“Auditors play a fundamental role in protecting the reliability and integrity of financial reporting and must ensure that non-audit services do not come at the cost of their independence on audits of public companies,” says Anita B. Bandy, associate director of the SEC’s enforcement division. “PwC repeatedly provided non-audit services without having effective quality controls in place for monitoring whether the services impaired its independence on audit engagements and were properly disclosed to audit committees.”

PCAOB Sanctions Marcum LLP for Auditor Independence Violations

The PCAOB has settled disciplinary proceedings against New York-based Marcum LLP (FY18 net revenue of $549.7 million), Marcum Bernstein & Pinchuk and Alfonse Giugliano, the senior partner responsible for Marcum’s independence policies and procedures.

Marcum has a 50% ownership interest in Marcum Bernstein & Pinchuk, provider of SEC audit, accounting and consulting services to Chinese companies listed in the U.S. capital markets.

The violations involve the firms’ annual Microcap Conference and China Conference, which is designed to bring together investors and companies looking for investment. According to the PCAOB, “from 2012 through 2015, Marcum and two senior partners made public statements advocating the investment potential of the companies presenting at its annual Microcap Conference, 62 of which were the firm’s issuer audit clients.”

Also, in 2013 and 2014, Marcum Bernstein & Pinchuk advocated the investment potential of the companies participating in its China Conference, seven of which were the firm’s issuer audit clients. Giugliano approved Marcum LLP’s conference “without performing any substantial independence analysis,” PCAOB says.

This is the first time the board has sanctioned a CPA firm and its head of independence for publicly advocating its audit clients as investment opportunities. Another first is the PCAOB’s mandating of an independent consultant to evaluate auditor independence at the two firms.

The PCAOB orders say that success of the two conferences depended on companies perceiving them as good ways to connect with potential investors, and on potential investors perceiving them as a good opportunity to find high-quality investment opportunities. And yet, at the same time, the firms had issued audit reports on the financial statements of some of the presenters.

In the case of the MicroCap conference, the PCAOB says Giugliano approved the conference, and gave “limited advice” that Marcum should not be involved in company presentations or one-on-one meetings with investors. He also advised that Marcum should not make positive statements about individual presenting companies. PCAOB, however, says Giugliano failed to consider how an investor relations firm, brought in to market the conference, would tout the investment potential of the presenting companies as a group.

Marcum’s own public statements and marketing also included laudatory statements about the companies, as “some of the most promising emerging growth companies out there today,” in one example.

PCAOB alerted Marcum to possible independence issues with respect to the conference in 2015. The firm removed some positive language about the companies from promotional materials, added a disclaimer to its conference website and changed quality control policies. Marcum subsequently failed to evaluate the effectiveness of those measures, the PCAOB order says.

“As a result, Marcum failed to identify, evaluate or appropriately address a number of issues concerning the 2016 and 2017 conferences that, at the very least, raised questions about the firm’s independence.” PCAOB reported that Marcum sold one of its audit clients a “sponsoring” presenting company designation in 2016 and another client was sold a “premium” presenting company designation the next year without performing an independence review.

Additionally, Marcum provided press release templates to presenting companies, including the audit clients. “A number of Marcum’s issuer audit clients issued press releases that included Marcum’s suggested language, thereby using the conference’s reputation and association with their auditor to promote themselves to investors,” according to the PCAOB order.

Penalities are $450,000 for Marcum, $50,000 for Marcum Bernstein & Pinchuk and $25,000 for Giugliano. Marcum LLP and Marcum Bernstein & Pinchuk must additionally hire an independent consultant to review its policies, procedures, staffing and training related to auditor independence.

SEC Awards Overseas Whistleblower $500,000

An overseas whistleblower has been awarded $500,000 for helping the Securities and Exchange Commission (SEC) bring a successful enforcement action, the SEC reported.

“The commission’s whistleblower award program has reached an important milestone,” Jane Norberg, chief of the SEC’s Office of the Whistleblower, says of the July 23 decision. “With recent actions, more than $2 billion in monetary sanctions have been ordered against wrongdoers based on actionable information received by whistleblowers. This represents the direct and important role that whistleblowers, like the overseas whistleblower being awarded today, have in enforcement actions and the protection of investors.”

The SEC says that it has awarded approximately $385 million to 65 individuals since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.

Whistleblowers may be eligible for an award when they voluntarily provide the SEC with “original, timely and credible” information that leads to a successful enforcement action. Awards can range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million.

As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers.

Deloitte, Partner Fined Over Serco Geografix Audit Failures

Deloitte and a senior partner in the U.K. have been fined and reprimanded for misconduct over the audit of Serco Geografix (SGL), an outsourcing firm, in a July 4 settlement, according to Reuters.

The settlement ended a six-year investigation into fraud and accounting errors. The Financial Reporting Council, the audit watchdog in the U.K., fined Deloitte 4.23 million pounds ($5.32 million) and audit engagement partner Helen George 97,000 pounds after they admitted misconduct for audits in 2011 and 2012.

A subsidiary of Serco (SGL) had been awarded government contracts for GPS satellite-tracking tags to enforce curfews on more than 100,000 offenders each year. A London judge said the company committed “deliberate fraud” between 2010 and 2013.

The judge approved a deferred prosecution agreement (DPA) between SGL and the UK Serious Fraud Office. The company will pay a fine of 19.2 million pounds and costs of 3.7 million pounds.

“SGL engaged in quite deliberate fraud against the Ministry of Justice in relation to the provision of services vital to the criminal justice system,” the judge said.

SGL’s parent Serco Group, one of Britain’s largest government contractors, has said the fraud and false accounting offenses related to how the company reported the profitability of its electronic monitoring contract.

The penalty on Deloitte, one of the Big 4 accounting firms, comes amid a backdrop of serious discussion among British government officials about whether the profession needs a shakeup after the failures of retailer BHS and construction company Carillion.

Deloitte, in a statement, says it regretted that its audit work on Serco Geografix had been below the expected standards.

“We have a program of continuous improvement for our audit quality processes … We have also specifically agreed with the FRC certain actions focused on learning lessons from the shortcomings in this audit work,” Deloitte’s statement says.

Both Deloitte and Helen George qualified for fine reductions after cooperating with the investigation.

More news from Deloitte

SEC Finalizes Change to Auditor Independence Rules

The Securities and Exchange Commission (SEC) has finalized its revision of auditor independence rules in response to concerns by investment managers that the rules were too restrictive, Compliance Week reported.

The move changes the threshold around lending relationships with clients. Fidelity, in particular, raised concerns about the rules, saying they were so far-reaching that the investment firm could not identify an audit firm qualified to audit its financial statements.

“The issue focuses on the ‘loan provision’ in the SEC’s auditor independence rules, which generally prohibits auditors from having lending relationships with shareholders of audit clients. More specifically, the SEC’s Rule 2-01 said auditors are not considered independent of their clients if the firm, any auditors on the engagement team and those in its line of command, or any of their immediate family members had a loan with the client, the client’s officers and directors, or any owners of more than 10% of the client’s equity securities,” according to Compliance Week.

The SEC determined that due to consolidation in the industry, it has become difficult for large entities, such as Fidelity, to find an independent audit firm under the rules. The SEC says, “In recent years, the commission has become aware that, in certain circumstances, the existing loan provision may not have been functioning as it was intended. The commission has become aware of circumstances where the existing rules capture relationships that otherwise do not bear on the impartiality or objectivity of the auditor.”

The new rule focuses the analysis solely on “beneficial owners,” or those who actually get benefits of ownership, who can be determined through “reasonable inquiry.” It also replaces a 10% shareholder ownership test with a more flexible “significant influence” standard.

The new rules become effective 90 days after they are published in the Federal Register.

Using Stolen PCAOB Data to Cost KPMG $50 Million

Big 4 accounting firm KPMG LLP will pay $50 million to settle SEC allegations that it altered past audit work after receiving stolen information from the PCAOB, which the SEC oversees, Bloomberg reported.

According to a June 17 statement, KMPG admitted wrongdoing and agreed to hire an independent consultant to review its internal controls. “KPMG’s ethical failures are simply unacceptable,” SEC Chairman Jay Clayton said in the statement. “The resolution the enforcement division has reached holds KPMG accountable for its past failures and provides for continuing, heightened oversight to protect our markets and our investors.”

The fine stems from what was called a “steal the exam” scheme, from 2015 to 2017, in which KPMG professionals and former PCAOB employees worked together to help the firm, which had suffered a high rate of deficiencies. In the end, six KPMG professionals were dismissed after an investigation found they tried to obtain confidential information that would reveal which audits the PCAOB planned to review in its annual inspections. “With the data, the former employees oversaw a program to revise certain audits to reduce the likelihood government inspectors would find shortfalls,” Bloomberg reported.

The investigation resulted in January 2018 criminal charges against three former PCAOB officials, who went on to work for KPMG, of stealing information tied to PCAOB exams.

In an email statement, a company spokesperson said KPMG has learned important lessons and is a stronger firm because of steps taken to improve its culture, governance and compliance program. The SEC says its probe is continuing.

More news from KPMG

Former KPMG Partner, PCAOB Staffer Found Guilty of Inspection Scheme

A former KPMG partner and a former PCAOB employee found guilty on March 11 of taking part in a scheme to give confidential information to the Big 4 firm to help it pass inspections, according to Reuters.

KPMG’s David Middendorf and the PCAOB’s Jeffrey Wada were both convicted of wire fraud and conspiracy to commit wire fraud by a jury in federal court in Manhattan. They were both acquitted of one count, conspiracy to defraud the U.S. government.

Middendorf’s lawyer said in an email to Reuters that they were disappointed with the result and would appeal. A lawyer for Wada declined to comment.

The case emerged from what’s been termed a “steal the exam” scheme that resulted in the dismissal of six KPMG professionals who tried to obtain confidential information that would reveal which audits the PCAOB planned to review in its annual firm inspections.

The PCAOB reports problems revealed in its audit inspections to the SEC. Prosecutors say Wada leaked confidential information about upcoming PCAOB inspections to people at KPMG, including Middendorf, between 2015 and 2017. Also charged was Cynthia Holder and Brian Sweet, two former PCAOB staffers who joined KPMG during that period, bringing confidential information with them to their new jobs. Wada was angling to make a similar move, according to prosecutors, Reuters reported.

Former KPMG executive Thomas Whittle was also charged. Holder, Sweet and Whittle all pleaded guilty before trial.

WSJ: Former Partner at KPMG Faces Trial in PCAOB Scandal

An ex-partner at Big 4 firm KPMG faces trial Monday for his part in an effort to obtain confidential information that would reveal which audits the PCAOB planned to review in its annual firm inspections.

Prosecutors have termed the scandal a “steal the exam” scheme, as it would give KPMG more time to prepare for the inspections, the Wall Street Journal reports. The PCAOB inspections are seen as a report card on a firm’s audit performance. KPMG, whose audits of GE and Wells Fargo were widely criticized, had not performed well on past inspections.

David Middendorf, who was fired as a partner in 2017, is charged with conspiracy and wire fraud in federal court in Manhattan, as is Jeffrey Wada, a former PCAOB inspections leader. They have pleaded not guilty. Middendorf had served as the firm’s national MP for audit quality and professional practice.

The PCAOB says two yearly inspections were compromised by KPMG’s advance knowledge.

It replaced some KPMG audits it initially reviewed with new ones, which had “a much higher rate of problems, illustrating the extent to which the advance access to information could have helped KPMG,” the Journal reported.

The trial, expected to last about four weeks, will include testimony from PCAOB and SEC officials.