Published on Jun 30th, 2022 |

Brief Introduction

On Tuesday, June 28th, the SEC announced that they charged a well known Audit Firm for employees cheating on the CPA Ethics Exam and withholding evidence of this misconduct from the SEC’s Enforcement Division during the subsequent investigation.

As a result of this charge, the Audit Firm agreed to pay a $100 million penalty to settle the SEC charges and to retain two independent consultants to remediate its shortcomings. The $100 million penalty is the largest penalty ever imposed by the SEC against an audit firm.

How Did The Issue Occur?

  • Over multiple years, a significant number of the Audit Firms’ audit professionals were cheating on the ethics component of their CPA exams and on other professional education courses that are required to maintain the CPA license.
  • While the SEC Enforcement Division was investigating the Audit Firm for potential cheating, they claimed that the firm did not have any issues with cheating, despite the fact that they had been informed of potential cheating on the CPA exam.
  • Following this claim, the Audit Firm launched an internal investigation into cheating on the CPA ethics and other exams, and confirmed the occurrence of cheating.
    • Regardless of the Audit Firm confirming that cheating occurred at their firm, they still failed to correct their SEC submission that claimed otherwise.
  • The SEC’s Order finds that the Audit Firm failed to cooperate with the SEC’s investigation regarding its materially misleading submission.

What were the Findings and Final Conclusion?

  • The SEC Order finds that the Audit Firm violated a Public Company Accounting Oversight Board (PCAOB) rule that requires the firm to maintain integrity in their services, failed to maintain a feasible system of quality control, and committed discreditable acts to the accounting profession.
    • The Audit Firm acknowledged that its conduct violated the integrity standard and provides basis for the SEC to impose remedies against the firm pursuant to Sections 4C (a)(2) and (a)(3) of the Exchange Act and Rules 102 (e)(1)(ii) and (iii) of the Commission’s Rules of Practice
  • The final conclusion and result was a $100 million charge, as well as the required implementation of two independent consultants to oversee the Audit Firms’ conduct regarding its disclosure failures and the firm’s policies and procedures regarding ethics and integrity.

Vigilant’s Final Conclusion

The Director of the SEC’s Enforcement Division, Gurbir Grewal, provided a statement regarding the action that this breached the trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies and called the action outrageous.

He added, stating that the SEC will not tolerate integrity failures and that they were shocked that the Audit Firm hindered their investigation of the misconduct.

The SEC has clearly described throughout the order that they will not allow such actions like this to occur and they were appalled by the findings in their investigation. This should serve as a warning to the industry as this was the largest penalty ever imposed by the SEC against an Audit Firm.

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