Recent SEC Administrative Proceedings Highlight Agency’s Renewed Focus on Addressing Accounting Fraud
 

On June 6, 2016, and June 7, 2016, the SEC filed settled administrative proceedings against accounting and audit firms for allegedly deficient auditing procedures. These enforcement actions, along with recent press statements and general trends in SEC enforcement, reflect the SEC’s renewed focus on addressing accounting fraud.

In wake of the Enron scandal of 2001, the SEC focused heavily on combating accounting fraud in the early 2000s. This focus shifted in the late 2000s with the onset of the global financial crisis in 2008, and the SEC’s policing of accounting practices dropped off significantly.  Recent statements by SEC officials and trends in enforcement actions, however, suggest that the Commission is renewing its focus on accounting fraud and proper auditing principles.

First, on June 6, 2016, the SEC filed a settled administrative proceeding against auditing and Silberstein Ungar PLLC, which alleged numerous auditing procedure deficiencies, including: (1) a failure to obtain sufficient evidence to provide a reasonable basis for an audit opinion; (2) failure to properly document procedures relating to the evaluation of the adequacy of disclosure in financial statements; and (3) failure to properly supervise an audit. The allegations concerned nine audit opinions involving deficient procedures.  Among the allegedly deficient conduct included the use of work papers from prior audits and the use of accounting principles applicable to other industries.

Second, on June 7, 2016, the SEC filed another settled administrative proceeding against Frazer Frost, which issued an audit report regarding financial statements of China Valves Technology, Inc. (CVVT) in which certain material information was omitted or misstated. Frazer Frost was made aware by CVVT’s CEO that certain statements pertaining to the company’s acquisition of another company. The SEC found that Frazer Frost failed to adequately communicate these risks to CVVT’s management or audit committee, and as a result CVVT’s 10-Q report contained material misstatements. Frazer Frost also relied solely on information provided by CVVT, and thus was found to have failed to obtain sufficient evidence to support their audit.