US firm Crowe has agreed to pay a penalty of $1.5m (£1.18m), after the Securities and Exchange Commission (SEC) identified significant failures in audits of Corporate Resource Services, which went bankrupt in 2015 after the discovery of $100m in unpaid federal payroll tax liabilities
The firm has also agreed to be censured, and retain an independent compliance consultant to review its audit policies and procedures
The SEC alleged that Crowe’s audit team identified pervasive fraud risks in connection with its 2013 audit of Corporate Resource Services. Despite this, the firm failed to include procedures designed to detect the company's undisclosed payroll tax obligations; did not properly identify and audit the company's related-party transactions; and did not obtain sufficient appropriate audit evidence to respond to these fraud risks, support recognition of revenue, and otherwise support the audit opinion.
In addition, the US regulator said Crowe also failed to evaluate substantial doubt about the company's ability to continue as a going concern, and did not conduct a proper engagement quality review.
The order also finds that Crowe was not independent as a result of an ongoing direct business relationship with Corporate Resource Services. According to the order, the audit deficiencies occurred despite the involvement of Crowe's national office, which was aware of the high-risk nature of the engagement and the inability to obtain appropriate evidence.
The SEC order singled out Crowe’s engagement partner, Joseph Macina, and engagement quality reviewer, Kevin Wydra, as causing the audit failures. Macina has agreed to pay a penalty of $25,000, and Wydra is to pay a $15,000 penalty.
The regulator also took action against Mitchell Rubin and Michael Bernstein, former partners at a now defunct audit firm, Rosen, Seymour, Shapps, Martin & Co. The SEC said they engaged in fraud and performed a highly deficient audit of Corporate Resource Services' 2012 financial statements, which amounted to no audit at all, and that Bernstein caused the firm to lack the required independence when he failed to comply with partner rotation requirements. Rubin and Bernstein have each agreed to pay a penalty of $25,000.
Anita Bandy, associate director in the SEC’s division of enforcement, said: ‘The audit standards are designed to ensure that public accounting firms have reasonable procedures to identify and respond to illegality and issues that pose material risks to the integrity of an issuer's financial statements.
‘As set out in our order, the pervasive audit failures of Crowe and these accountants left investors with a misleading picture of Corporate Resource Services' financial condition.’
Macina, Wydra, Rubin, and Bernstein 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 permits Macina and Wydra to apply for reinstatement after three years and one year, respectively. Crowe, Macina, Wydra, Rubin, and Bernstein, who settled without admitting or denying the findings, also were ordered to cease and desist from future violations.
Report by Pat Sweet