Here’s a thing I know: South Carolina doesn’t require vehicle inspections. Dumb, right? If your car is properly registered, you can drive it there all you want no matter how dangerous it is. Here’s a thing I think I know: The state abandoned those inspections a long time ago because everybody had a “guy,” somebody who would pass them no matter how dangerous the car was. The custody rule for investment advisers who have custody of their clients’ assets is sort of the same way, except you’re not allowed to have a “guy.”
One of the requirements of the custody rule is that those investment advisers must undergo an annual surprise examination by an independent public accountant that verifies client funds and securities. See Rule 206(4)-2(a)(4). And given the potential consequences of mishandling client assets, you can see why. Actual people’s actual money could get stolen. You certainly can’t have a “guy” do the “surprise examination” and pretend you’re good. It looks like that may have happened with Santos, Postal & Co., though.
The SEC had previously announced charges against the Brian Ourand, the president of SFX Financial Advisory Management Enterprises, who was later found to have misappropriated funds from client accounts. In the course of the SFX investigation, the SEC apparently turned to the CPAs assigned to conduct the surprise exams under the custody rule: Santos, Postal and its partner Joseph A. Scolaro. In a settled administrative order on April 29th, the SEC found that Santos and Scolaro conducted deficient surprise custody examinations of SFX and did not adequately consider fraud risk factors. They allegedly twice filed paperwork with the SEC that contained untrue statements. In one instance they said that they complied with certain procedures to verify client assets when they actually had not. In the second instance they stated that client assets were held with a qualified custodian when in fact they were not.
Without admitting or denying the findings, Santos and Scolaro agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order lets Santos apply for reinstatement after one year and Scolaro after five years. Santos agreed to disgorgement of $25,800 in profits that the firm obtained for performing the exams plus interest and a penalty of $15,000. Scolaro also agreed to pay a $15,000 penalty.
If you’re a CPA being asked to conduct such a surprise exam, don’t do what these guys allegedly did! You can’t rent out your license to paper over what could be real problems. The SEC hates it and may well punch you in the mouth for doing it.