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From Securities Regulation Daily, December 2, 2015

SEC obtains admission of wrongdoing in second case against a major audit firm

By Jacquelyn Lumb

The SEC has announced its second non-independence related enforcement action against a major auditing firm in the last three months, and its second admissions case against a major auditing firm. In a settled enforcement action against Grant Thornton, LLP and two of its engagement partners, the firm admitted to the facts in the SEC’s order and admitted that its conduct violated the federal securities laws. The two auditors agreed to suspensions of five and two years, respectively. (In the Matter of Grant Thornton, LLPRelease No. 34-76536, December 2, 2015; In the Matter of Melissa K. KoeppelRelease No. 34-76537, December 2, 2015).

Multiple failed audits. Enforcement Director Andrew Ceresney said the proceedings involved multiple failed audits by the same two auditors. During engagements as the auditor of Assisted Living Concepts, Inc. (ALC) and Broadwind Energy, Inc., the firm repeatedly ignored red flags and fraud risks, which resulted in the filing of numerous reports with the SEC that were materially false and misleading.

The firm failed to identify a fraud perpetrated by ALC’s CEO and CFO that masked defaults on revenue and occupancy covenants for the assisted living facilities that ALC operated. In the Broadwind audit, the firm’s failure to exercise due professional care and skepticism contributed to the omission from the company’s financial statements of a $58 million impairment charge. Broadwind also conducted a public offering while concealing the impairment charge from investors. The company filed multiple financial statements that materially overstated its revenue.

According to the SEC’s order, one of the engagement partners had been placed on the firm’s monitoring list due to negative quality indicators, which included audit clients that had restated their financial statements or interim financial information four times in the preceding two years. The PCAOB had also found deficiencies in one of her engagements because of a failure to gather sufficient audit evidence. She was eventually removed from all of her public company engagements except for ALC.

The order also noted that the engagement manager for the ALC audit had not completed the amount of public company engagement hours under Grant Thornton’s policy and lacked the appropriate level of experience and understanding about the SEC’s requirements.

Issuer fraud and auditors. Ceresney was asked during a news conference if the SEC learned of this matter through a PCAOB inspection. He would not comment on this particular case, but said whenever the SEC is investigating an issuer for fraud, it will also look at the actions by the auditors. The SEC brought cases against both companies and certain of their employees.

Remedial actions. Ceresney was also asked about the level of remedial actions imposed on the firm and whether a fine of $3 million was adequate against a firm with more than a billion dollars in revenue. He said the firm will be subject to extensive requirements, including an evaluation of the adequacy of its quality controls and its policies and procedures for audits and interim reviews. The firm is required to provide a detailed written report summarizing its review and any changes to its policies.

The firm also is required to retain an independent consultant to perform a review of its policies to ensure that they are adequate to comply with SEC regulations and the PCAOB’s standards and rules. In addition, Ceresney noted that the CEO must certify to the SEC in writing that the firm has adopted and will implement all of the independent consultant’s recommendations. The firm also agreed to require its audit professionals to complete additional training. For the next two years, the firm must certify that it has assessed its policies to ensure that they will provide reasonable assurance of compliance with SEC regulations and PCAOB standards and rules.

In addition to the $3 million fine, Grant Thornton also was censured and ordered to disgorge $1.3 million, plus over $231,000 in prejudgment interest, which represents the profits gained as a result of the conduct outlined in the SEC’s order.

Engagement partners. The first engagement partner was ordered to cease and desist from committing any future securities violations and to pay a penalty of $10,000 in addition to her five-year suspension. The second engagement partner, who took over the ACL engagement, was ordered to pay $2,500 in addition to his two-year suspension.

Both orders contain extensive details about the firm’s and the engagement partners’ conduct. Ceresney said the SEC wants the public to know what justified the order and to demonstrate how the conduct fell short of the required standards. He believes the case will have an impact based on the required undertakings, the firm’s admission, and the impact on the firm’s reputation.

The releases are Nos. 34-76536 and 34-76537.

Companies: Grant Thornton, LLP

MainStory: TopStory AccountingAuditing Enforcement

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