Accounting Firm and Partner Charged with Audit Failures
Jan. 31, 2019
File No. 3-18967
January 31, 2019 - The Securities and Exchange Commission today announced an administrative proceeding alleging that a Houston-based audit firm and its managing partner failed to properly audit the financial statements of a technology company the agency previously charged with fraud.
According to the order instituting administrative proceedings, during the 2012 audit of Behavioral Recognition Systems, Inc., LBB & Associates, Ltd., LLP and Carlos Lopez repeatedly failed to comply with auditing standards regarding the identification of related party transactions and the audit procedures required when examining known related party transactions. Rather, as the SEC's Division of Enforcement alleges in the order, Lopez relied exclusively on BRS management to disclose related party transactions to him despite being aware of red flags indicating that additional audit steps in this area were required, including the fact that management's representations regarding related party transactions were not accurate. As a result, Lopez allegedly failed to identify that approximately $1.5 million in payments, comprising approximately 9.2% of BRS's total operating expenses for the year, were to an entity owned and controlled by BRS's then-CEO, Ray Davis. LBB and Lopez also allegedly failed to comply with PCAOB standards on the 2013 and 2014 BRS audits by having Lopez serve as the engagement quality review partner for those audits when he had served as the engagement partner on the 2012 BRS audit. The matter involving LBB and Lopez will be scheduled for a public hearing before the SEC, which will issue a decision stating whether the Enforcement Division has proven the allegations in the order and what, if any, remedial actions are appropriate.
The SEC's investigation was conducted by Joseph Griffin and Bertram Braganza and was supervised by Peter Rosario, George Bagnall and Antonia Chion. The Enforcement Division's litigation will be conducted by Nicholas Margida and Paul W. Kisslinger and supervised by Cheryl Crumpton.