SEC Charges CohnReznick LLP and Three Partners with Improper Professional Conduct
Firm’s auditing deficiencies caused misleading disclosures by two clients prior to their bankruptcies and delistings
FOR IMMEDIATE RELEASE
Washington D.C., June 8, 2022 —
The Securities and Exchange Commission today charged audit firm CohnReznick LLP with improper professional conduct on engagements for two clients in 2017. The two clients, Sequential Brands Group, Inc. and Longfin Corp., previously were charged by the SEC for filing fraudulent financial statements prior to their bankruptcies and Nasdaq delisting. The Commission also charged firm partners Stephen M. Wyss, Stephen H. Jackson, and Robert G. Hilbert with improper professional conduct for violating numerous professional standards in their third quarter 2017 interim review and 2017 annual audit of Sequential’s financial statements. All respondents have agreed to settle charges and pay penalties. CohnReznick’s $1.9 million penalty will be returned to investors.
According to the SEC’s order, CohnReznick improperly accepted Sequential’s conclusion that its goodwill, an accounting term for the excess amount paid to acquire a company over its book value, was not impaired or reduced in value, in the third quarter of 2017. Despite CohnReznick’s national office partners and the firm’s own valuation specialists expressing concerns with Sequential’s conclusion, the firm failed to obtain sufficient evidence or conduct additional procedures. The order finds that CohnReznick’s deficient system of quality control led to failures to adhere to professional auditing standards. As to the Longfin audit, the order finds that CohnReznick and its national office failed to address known issues involving related party transactions, which were used by Longfin to fraudulently inflate its revenues.
A second related order finds that on multiple occasions from year-end 2016 through the second quarter of 2017, Wyss accepted Sequential management’s assertions that goodwill was not impaired despite strong indicators of impairment. The order also finds that in the third quarter of 2017, Wyss, Jackson, and Hilbert were confronted with indications that Sequential’s goodwill impairment test was not supported by sufficient evidence, but they still accepted Sequential’s conclusion that goodwill was not impaired even though appropriate additional audit procedures had not been performed.
“Auditors are critical gatekeepers that must employ a robust system of quality control to ensure faithful adherence to professional standards,” said Melissa Hodgman, Associate Director in the Division of Enforcement. “CohnReznick’s deficient system and repeated failures to exercise due professional care at all levels, from the engagement team up through the firm’s national office, not only allowed but were a cause of both Sequential’s and Longfin’s disclosure violations.”
The order against CohnReznick finds that it engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC’s Rules of Practice, violated Rule 2-02(b)(1) of Regulation S-X, and was a cause of Sequential’s violations and Longfin’s violations of Section 13(a) of the Securities Exchange Act of 1934 and related rules thereunder. The order against the individual partners finds that each partner engaged in improper professional conduct within the meaning of Rule 102(e) that was a cause of Sequential’s violations of Section 13(a) of the Securities Exchange Act of 1934 and related rules thereunder, as well as CohnReznick’s violation of Rule 2-02(b)(1) of Regulation S-X.
Without admitting or denying the SEC’s findings, CohnReznick agreed to pay a $1.9 million penalty, to be censured, and to implement undertakings to retain an independent consultant to review and evaluate certain of its audit, review, and quality control policies and procedures, as well as to abide by certain restrictions on retaining new audit clients during the consultant’s review. Without admitting or denying the SEC’s findings, Wyss and Jackson agreed to pay civil penalties of $30,000 and $20,000, respectively, and not appear or practice before the SEC as an accountant with the right to apply for reinstatement after three years and one year, respectively. Finally, without admitting or denying the SEC’s findings, Hilbert agreed to pay a civil penalty of $30,000 and a censure. All respondents also agreed to a cease-and-desist order.
The SEC’s investigation was conducted by Ellen Bortz, Richard Johnston, Paul Gunson, and Eric Hubbs, with support from Christopher Bruckmann and John Bowers, under the supervision of Melissa Hodgman, Paul Pashkoff, Mark Cave, and Frederick Block.