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SEC Sanctions Eight Audit Firms for Violating Auditor Independence Rules


Washington D.C., Dec. 8, 2014 —

The Securities and Exchange Commission today sanctioned eight firms for violating auditor independence rules when they prepared the financial statements of brokerage firms that were their audit clients.

SEC investigations found that the audit firms, which agreed to settle the cases, generally took data from financial documents provided by clients during audits and used it to prepare their financial statements and notes to the financial statements.  Under auditor independence rules, firms cannot jeopardize their objectivity and impartiality in the auditing process by providing such non-audit services to audit clients.  By preparing the financial statements, these particular firms essentially put themselves in the position of auditing their own work, and they inappropriately aligned themselves more closely with the interests of clients’ management teams in helping prepare the books rather than strictly auditing them.

“To ensure the integrity of our financial reporting system, firms cannot play the roles of auditor and preparer at the same time,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement.  “Auditors must vigilantly safeguard their independence and stay current on the applicable requirements under the rules.”

The SEC issued orders instituting settled administrative proceedings against the following firms:

According to the SEC’s orders, these firms were not independent of their broker-dealer audit clients under independence criteria established by Rule 2-01(c)(4)(i) of Regulation S-X, which Rule 17a-5 of the Securities Exchange Act of 1934 makes applicable to the audits of broker-dealer financial statements.  The orders find that the firms (1) violated Rule 17a-5(i) of the Exchange Act, (2) caused their broker-dealer audit clients to violate Section 17(a) of the Exchange Act and Rule 17a-5, and (3) engaged in improper professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. 

The SEC’s orders censure each firm and require them to cease and desist from committing or causing any violations of Exchange Act Section 17(a) and Rule 17a-5.  The firms, which consented to the orders without admitting or denying the findings, will collectively pay $140,000 in penalties and must comply with a series of remedial undertakings designed to prevent future violations of these independence requirements.

The SEC’s investigations were conducted by Sarah Allgeier, Carolyn Kurr, Keith O’Donnell, Paul Pashkoff, and Jeffrey Anderson.  The cases were supervised by C. Joshua Felker and Jennifer Leete.  The SEC appreciates the assistance of the Public Company Accounting Oversight Board, which today announced its own enforcement actions related to auditor independence rules violations.


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