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FCPA Blog Daily News

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Thursday
Sep102015

Audit gone bad: SEC charges BDO and five partners for ignoring red flags

The Securities and Exchange Commission Wednesday charged national audit firm BDO USA with ignoring multiple red flags and issuing false and misleading unqualified audit opinions for staffing services company General Employment Enterprises.

The SEC charged five of the firm’s partners and filed fraud charges against General Employment’s then-chairman and majority shareholder Stephen B. Pence.

Pence is a former U.S. attorney and a former lieutenant governor of Kentucky.

BDO admitted wrongdoing. It disgorged to the SEC its audit fees and interest totaling $600,000 and paid a $1.5 million penalty. 

The five partners also agreed to settle the charges against them. 

Two former CEOs of General Employment agreed to settle separate charges. The SEC's litigation against Pence is ongoing.

The SEC’s administrative orders against BDO and the partners said:

  • Near the end of its 2009 audit, General Employment told BDO that $2.3 million purportedly invested in a 90-day nonrenewable CD wasn’t repaid by the bank upon its maturity date. 
  • BDO learned that a bank employee indicated there was no record of a CD being purchased from the bank. 
  • The $2.3 million was about half of the company’s assets and substantially all of its cash.
  • BDO received "multiple conflicting stories" from company management and board members about the status of the purported CD.
  • The company received a series of deposits totaling $2.3 million from three entities unaffiliated with the bank. One entity was purportedly owned by Pence.
  • After BDO raised more questions, the company claimed the deposits were proceeds of an agreement to assign the purported CD to an unrelated party in return for the value of the CD. 
  • BDO never received "reasonable and coherent explanations" about why the $2.3 million went missing and why an equivalent amount was later wired to the company under suspicious circumstances.
  • BDO issued a five-page letter to the company highlighting the conflicting information and demanding an independent investigation overseen by the audit committee.

But just days later and despite no reasonable explanation from the company, BDO withdrew its demand and instead issued unqualified opinions on the financial statements included in General Employment’s 2009 and 2010 annual reports.

*     *     *

BDO’s engagement partner on the audit was Sean C. Henaghan and the concurring reviewer was John E. Rainis. They consulted with senior BDO partners, including regional technical director James J. Gerace, national director of accounting Leland E. Graul, and national SEC practice director Wendy M. Hambleton.

Without admitting or denying the SEC’s findings, Henaghan, Rainis, Gerace, and Graul agreed to be suspended from practicing public company accounting for varying periods. 

Henaghan agreed to pay a $30,000 penalty, Rainis agreed to pay a $15,000 penalty, and Gerace, Graul, and Hambleton each agreed to pay $10,000 penalties.

*     *     *

The SEC filed a complaint against Pence in federal court in Manhattan. It alleges he made materially misleading statements and omissions to BDO audit professionals about the purported $2.3 million CD and third-party transactions.

The SEC said Pence allegedly acted as an agent for a convicted felon named Wilbur Anthony Huff, who had funded Pence’s acquisition of a majority stake in General Employment.

Huff gave Pence at least a half-million dollars in 2009 and 2010, the SEC said, as well as a Cadillac Escalade worth $50,000.

In June this year, Huff, 53, was sentenced to 12 years in prison for bribery and fraud, including taking the $2.3 million from General Employment.

The SEC separately charged former General Employment CEOs Ronald E. Heineman and Salvatore J. Zizza with making materially misleading statements and omissions to BDO. 

Without admitting or denying the findings, Heineman and Zizza each agreed to pay $150,000 penalties.

SEC enforcement chief Andrew Ceresney said, “Audit firms must train their audit and national office professionals not only to recognize red flags but also to have the resolve to refuse signing off on an audit if there are unresolved material issues."

“BDO failed to do that here, even though these issues were elevated to the highest levels of its audit practice,” Ceresney said.

*     *     *

The SEC's administrative order against BDO USA is here (pdf).

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Richard L. Cassin is the publisher and editor of the FCPA Blog. He can be contacted here.