On July 1, 2015, the SEC announced that it had agreed to settle enforcement proceedings brought against the auditor, the administrator and a board member of three registered funds for violations of the independent auditor requirements contained in Rule 2-01 of SEC Regulation S-X. Rule 2-01 sets forth restrictions on an auditor’s financial and business relationships with audit clients and is designed to ensure that an auditor is independent from its audit clients. According to the SEC settlement order, the auditor’s independence from the funds was impaired because a member of the funds’ board of trustees had provided business consulting services to an affiliate of the auditor.
In the settlement order, the SEC noted that, as required by SEC rules, the auditor had stated in each of the funds’ audit reports (over a period of several years) that the funds’ financial statements were prepared in accordance with generally accepted auditing standards (“GAAS”). GAAS requires that an auditor maintain its independence from the audit client and, therefore, the SEC concluded that the auditor reports did not comply with GAAS. The SEC found that the funds violated federal securities laws each time audit reports, or information concerning its “independent” auditors, was provided in annual reports or proxy statements, and that these violations were caused by the board member and the auditor. In addition, the SEC determined that the funds violated 1940 Act Rule 38a-1 because the funds’ policies and procedures governing auditor independence, and more generally, the selection, retention, and the engagement of the auditor, were inadequate. In this regard, the SEC noted that, although the trustee questionnaires circulated by the administrator covered the trustee’s business relationships with the auditor, they did not request information concerning business relationships with the auditor’s affiliates. The SEC also faulted the administrator for not providing sufficient training to assist the funds’ board members in the discharge of their responsibilities concerning auditor independence. Because the administrator contracted to assist the funds in discharging their responsibilities under Rule 38a-1 and had written the funds’ policies and procedures, the SEC found that the administrator should have known that its conduct would cause the Rule 38a-1 violations by the funds.
As part of the settlement, the accounting firm agreed to disgorge $613,916 in fees (including prejudgment interest) and pay a civil monetary penalty of $500,000. In addition, the funds’ administrator agreed to a civil penalty of $45,000, and the board member agreed to disgorge $35,328.71 (including prejudgment interest) and to pay a civil monetary penalty of $25,000.