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As part of a settlement with the Securities and Exchange Commission, auditing company CohnReznick agreed to pay $1,9 million for unlawful behaviour at two of its customers that the SEC had previously accused with submitting fake financial statements.
The deal, which was announced on Wednesday, covers claimed shortcomings in CohnReznick's fiscal year 2017 audits of Sequential Brands Group and accused cryptocurrency company Longfin Corp. After declaring bankruptcy, Sequential avoided a fine by settling with the SEC in November over allegations that it violated accounting principles by failing to properly acknowledge goodwill impairment, whereas a federal court ordered Longfin to pay $6.8 million in penalties and disgorgement in September 2019 for conducting a fraudulent public offering and falsifying revenue from sham commodities transactions. Longfin ceased operations in November 2018.
In addition to the fine, which the SEC stated will be refunded to investors, CohnReznick agreed to be censured, engage an independent consultant to analyse and assess certain policies and processes, and adhere to limits on retaining new audit clients during the consultant's examination. Three partners at the company audited by Sequential also reached settlements with the SEC for unlawful professional conduct.
The specifics: According to the SEC's ruling, CohnReznick valuation professionals were among those who raised concerns about Sequential's fair value estimations. These concerns were sufficient to halt the interim review process at CohnReznick, but the engagement team "ultimately accepted Sequential's conclusion that goodwill was not impaired without obtaining sufficient relevant and reliable evidence to support management's assertions or performing sufficient additional contemporaneous procedures."
Stephen Wyss was the engagement partner for CohnReznick on the audit, while Stephen Jackson was the engagement quality review partner. As managing partner of assurance and national director of accounting, Robert Hilbert served as the connection between the firm's auditors and its internal group of valuation specialists, according to the SEC.
Wyss agreed to pay a $30,000 civil penalty and be barred from appearing before the SEC as an accountant for at least three years for allegedly failing to sufficiently evaluate and resolve the issues highlighted by his colleagues prior to adopting Sequential's conclusions. According to the SEC, proper testing would have revealed that Sequential's goodwill was likely affected. The regulator noted that CohnReznick "was the cause of Sequential's breach of the Exchange Act's reporting and books and records rules."
The SEC stated that Jackson agreed to pay a civil penalty of $20,000 and be suspended for at least a year for failing to fairly analyse whether appropriate discussions had occurred about Sequential's goodwill determination. Hilbert agreed to pay a $30,000 civil penalty and be reprimanded for alleged shortcomings in his position.
All three individuals consented to a cease-and-desist order without acknowledging or rejecting the SEC's conclusions.
According to the SEC, comparable weaknesses in CohnReznick's system of quality controls prevented the company from applying professional scepticism or performing audit procedures commensurate with the recognised risk at Longfin. Audit planning, revenue and receivables, linked party activities, and intangible assets were among the specific concern areas. Approximately at the same time as Longfin began receiving document demands from the SEC's Division of Enforcement, these claimed problems occurred.
The agency determined the audit conducted by CohnReznick did not exceed professional standards.
“CohnReznick’s deficient system and repeated failures to exercise due professional care at all levels, from the engagement team up through the firm’s national office, not only allowed but were a cause of both Sequential’s and Longfin’s disclosure violations,” said Melissa Hodgman, associate director at the SEC’s Enforcement Division, in a press release.
As part of the settlement, CohnReznick neither accepted nor rejected the SEC's conclusions.
“Over the past five years, we have significantly expanded our national assurance team and implemented a continuous improvement initiative to monitor and enhance our quality control structure,” the firm said in an emailed statement. “These important actions ensure we are delivering the highest quality services and upholding the firm’s long-standing reputation for excellence and integrity.”
By fLEXI tEAM