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From Securities Regulation Daily, September 9, 2015

BDO fined over lax audits, civil case looms for ex-politician who was U.S. attorney

By Mark S. Nelson, J.D.

The SEC said it obtained admissions from BDO USA, LLP that the firm’s lax procedures led it to override its own recommendation that a company it had audited explain seemingly bizarre transactions related to a bank certificate of deposit and instead issue the company an unqualified audit opinion. BDO and five of its senior auditors, plus two of the audited company’s ex-CEOs, will pay nearly $2.5 million to settle the SEC’s administrative charges. The SEC separately filed a law suit in Manhattan against Stephen B. Pence, another key player in the matter, who is a one-time Kentucky lieutenant governor and U.S. attorney (In the Matter of BDO USA, LLP, Release No. 34-75862, September 9, 2015; SEC v. Pence, September 9, 2015).

Andrew Ceresney, director of the SEC’s Division of Enforcement, told reporters during a late morning conference call that the auditor conduct in the BDO matters was “particularly egregious” given the red flags. He said one theme that emerged from the BDO experience is that auditors’ regional and national offices must follow core audit standards. Ceresney said another message is that the SEC remains focused more generally on financial reporting issues and will take action when individuals “step over the line.”

The BDO matter also highlights the key role independence plays in audits. Ceresney said that today’s action was the first in which the SEC required an audit firm to make admissions as part of a settled enforcement action. It also is the first time in several years that the agency has taken aim at an auditor’s lack of independence and professional skepticism.

Independence is key. According to the SEC, BDO initially raised questions about a bank CD worth $2.3 million during its audit of General Employment Enterprises, Inc., an Illinois-based professional placement and temporary staffing firm. BDO learned from GEE’s CFO that the CD had gone “missing” when the bank involved failed to pay off the CD upon maturity (a bank employee told GEE’s CFO the CD did not exist). Pence was GEE’s chairman and, via a holding company called PSQ, also was GEE’s major owner. Several transactions by unaffiliated companies tried to deposit funds at GEE equal to the amount of the CD, which GEE’s CEO told BDO were part of an assignment of the CD.

BDO then sent a five page letter detailing its concerns about the “missing” CD and telling GEE’s audit committee to conduct an independent investigation. But GEE’s then-CEO abruptly resigned and BDO retracted its demand and instead issued an unqualified audit opinion, which became part of GEE’s 2009 Form 10-K filed with the SEC. Two months later, BDO learned that the president of the bank involved with the CD had been criminally charged (the bank president later pleaded guilty to charges tied to a wider conspiracy).

The SEC said BDO failed to take renewed action as events developed at GEE that implied a need to revisit its prior unqualified audit opinion. Ultimately, BDO gave a second unqualified opinion that became part of GEE’s 2010 Form 10-K.

Ceresney emphasized in a press release that BDO failed at its highest levels to take needed action to ensure that GEE’s financials were accurately portrayed in its SEC filings. “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.”

Adding up the penalties. The over $2.5 million price tag for the settled administrative actions derives from four separate agency proceedings, but does not include the potential fines in the SEC’s court case against Pence. BDO was censured, ordered to conduct its own review, and agreed to be reviewed by an independent consultant, while also paying total disgorgement of $612,000 and a civil money penalty of $1.5 million.

BDO auditors Sean C. Henaghan, John E. Rainis, James J. Gerace, Leland E. Graul, and Wendy M. Hambleton were ordered to stop violating the applicable securities regulations and ordered pay between $10,000 and $30,000 apiece, with Henaghan, the BDO engagement partner, paying the highest amount, and Rainis, the BDO concurring reviewer, paying $15,000. Henaghan, Raines, Gerace, and Graul also were banned from practicing before the Commission as accountants for between one and three years each, with Henaghan once again getting the longest practice bar.

As for GEE’s ex-CEOs, Ronald E. Heineman and Salvatore J. Zizza both were charged by the SEC with making false statements or omissions related to an audit and will each pay $150,000. Pence has been civilly charged with securities fraud and misleading auditors. The SEC did not specify the amount of any disgorgement or civil money penalties it may seek against Pence, but the agency did say it wants to bar Pence from serving as an officer or director of companies that have stock registered under the Exchange Act.

The release is No. 34-75862; the case is No. 15-cv-7077.

Attorneys: Andrew M. Calamari, director, Securities and Exchange Commission, New York Regional Office, for the SEC in the federal court case.

Companies: BDO USA, LLP; General Employment Enterprises, Inc.; PSQ

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