Operation Broken Gate is a critical part of the new “get tough” enforcement approach of the SEC. In an effort to leverage resources and achieve omnipresence in the market, the initiative is designed to hold gatekeepers, such as accounts and lawyers, responsible as a way to halt other violations. Accordingly, in the wake of the announcement the Commission has brought several proceedings against auditors.
The most recent is In the Matter of Eugene M. Egebert III, CPA, Adm. Proc. File No. 3-15680 (January 17, 2014). Mr. Egebert is a sole proprietor in Baltimore, Maryland who does largely tax work. He has little auditing training or experience. Nevertheless, he executed unqualified audit opinions on the financial statements of Fox Petroleum, Inc., for the fiscal years ended February 28, 2010, 2011 and 2012 and for RPM Advantage, Inc. for the fiscal years ended December 31, 2006 through December 31, 2010. Both firms were public companies whose shares were registered with the Commission under Section 12(g) of the Exchange Act.
The Order essentially alleges a complete audit failure as to each issuer for each year. Specifically, as to Fox Petroleum Respondent:
Ø Failed to properly plan the engagements;
Ø Failed to properly document the engagements;
Ø Failed to exercise the appropriate due professional care or skepticism by not obtaining sufficient evidential matter as to, for example, the large accounts payable balance and instead accepting management’s representations;
Ø Failed to follow up on an observation that the unrecorded liabilities had a potential fraud risk other than to note that his concerns were allied by the company’s unexplained “overhauled financials;”
Ø Failed to contact the prior auditor for 2010 as required despite the fact that the engagement was re-audit conducted because the registration of the prior auditor with the PCAOB had been revoked;
Ø Claimed to have conducted an audit of two acquired subsidiaries for which there is no documentation in less than forty hours – a point the Order calls “implausible;” and
Ø Did not obtain the required engagement quality reviews;
The Order contains similar allegations regarding the engagements as to RPM Advantage since Respondent failed to:
Ø Adequately plan the engagements;
Ø Properly document the engagements;
Ø To contact his predecessor as required;
Ø Apparently failed to conduct any audit since the financial statements were not even arithmetically correct; and
Ø Failed to obtain engagement quality reviews.
The Order alleges violations of Section 102(e)(1) of the Commission’s Rules of Practice. The proceeding will be set for hearing.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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