• SEC Fines Accountants $50,000 For Violating Auditor Independence Rules
   

  10/11/2016
  On September 30, 2016, Florida accountants Joseph D’Arelli and Mitchell Pruzansky, together with the firm D’Arelli Pruzansky P.A., agreed to pay a $50,000 civil penalty to settle the SEC’s investigation into alleged violations of auditor independence rules, which occurred when D’Arelli and Pruzansky each failed to rotate off certain audit engagements after five consecutive years.  The respondents neither admitted nor denied the SEC’s allegations, which were included in a settled cease and desist order that cited violations of Section 10A(j) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10A-2 thereunder.  In the Matter of D’Arelli Pruzansky, P.A., et al., File No. 3-17605 (Sept. 30, 2016).
  
  Section 10A(j) of the Exchange Act forbids public accounting firms from auditing their issuer clients if either the partner responsible for coordinating the audit (“lead partner”) or the partner responsible for performing a second-level review of the audit (“concurring partner”) has been in that role for more than five consecutive years.  Rule 10A-2 of the Exchange Act requires auditors to be “independent” of their clients, and Rule 201(c)(6)(i) of the SEC’s Regulation S-X clarifies that lead and concurring audit partners cannot be “independent” if they perform their services for a client for more than five consecutive years.
  
  According to the SEC, D’Arelli and Pruzansky ceased to be independent in violation of Rule 10A-2 when D’Arelli served as the lead audit partner for one client’s quarterly reports during his sixth consecutive year of engagement and Pruzansky served as lead partner for certain of four clients’ quarterly reports during his six consecutive year of engagement.  Pruzansky’s and D’Arelli’s failure to rotate off their engagements after five consecutive years allegedly caused each affected issuer client to file at least one quarterly report that was not reviewed by an independent accountant in violation of Section 13a of the Exchange Act and Rule 13a-13 thereunder.
  
  The $50,000 civil penalty levied against a small accounting firm and its partners demonstrates that the SEC believes its auditor independence rules are of high importance and that the Commission is willing to pursue even technical violations.  Unlike in the Weatherford settlement last week, in which the SEC argued that Weatherford engaged in deceptive accounting practices, there were no allegations in this case of any deceptive practices or misstatements in financial reports.  The SEC also did not contend that the auditors had any improper dealings with their clients.  Indeed, D’Arelli, Pruzansky, and their firm all had clean disciplinary records, self-reported to the SEC, and—in the words of the Commission—“took prompt remedial measures[,]” and yet they still received a relatively substantial fine.  
  Category: Regulatory Enforcement Matters
  

Links & Downloads

• o In the Matter of D’Arelli Pruzansky