On Sept. 19, 2016, the SEC announced that a national accounting firm, without admitting or denying the findings, agreed to pay $9.3 million to settle first-of-its-kind charges that two of its former audit partners had “close personal relationships” with public company clients in violation of auditor independence rules. In addition to violating Rule 2-02(b)(1) of Regulation S-X, the SEC found that the accounting firm caused the public companies involved to violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder.
The SEC alleged that the audit partner maintained an “inappropriate close personal relationship” with the chief financial officer of a public company client when, among other things, the partner and the chief financial officer overnighted at each other’s homes and traveled together with their families on overnight trips that had no apparent business purpose. The partner also spent excessive amounts on frequent entertainment of the chief financial officer and his family. The SEC also alleged that certain accounting firm partners became aware of the excessive entertainment spending but took no action to confirm that the partner was complying with his independence obligations.
In a separate case, the SEC alleged that a different audit partner was romantically involved with the chief accounting officer of another public company client, while serving on the company’s audit engagement team. Additionally, the SEC charged the coordinating partner on the engagement team, alleging that he was “aware of facts suggesting a possible romantic relationship” but failed to investigate or raise concerns.
“These are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. The accounting firm “did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors.”
In addition to the accounting firm, the three former audit partners and the chief accounting officer involved in the alleged violations each consented to the SEC’s order, without admitting or denying the findings, and agreed to pay penalties. Each was suspended from practice before the SEC.