About an hour ago the Public Company Accounting Oversight Board (PCAOB) announced a settled disciplinary order [PDF] sanctioning Marcum for violations of PCAOB rules and quality control standards. This order imposes a $3 million civil penalty against the firm, this is on top of a $10 million penalty from SEC proceedings around the same conduct. The PCAOB’s penalty is the largest it has imposed on a “non-affiliate firm,” meaning an audit firm that is not a member of a global network. This is the first time a PCAOB settled disciplinary order has ever required functional changes to the quality control supervisory structure of a registered firm. The full order is embedded at the bottom of this page.
TL;DR Marcum violated PCAOB rules related to the firm taking on “a substantial number” of audit clients, more work than they could handle which led to serious quality control deficiencies. They got fined big and now the PCAOB is requiring significant changes at the firm.
The news release — that uses the word competence four times — has the gory details:
Several of Marcum LLP’s violations of PCAOB rules and quality control standards were the result of the firm accepting a substantial number of audit clients, including hundreds of special purpose acquisition company (SPAC) audits, resulting in a dramatic increase in its issuer audit practice between January 2020 through October 2021. Marcum’s quality control system did not provide reasonable assurance that it could execute these audits with competence.
“If firms put profits ahead of PCAOB standards that protect investors, there will be consequences,” said PCAOB Chair Erica Y. Williams. “Today’s order makes clear, the PCAOB will use every tool at our disposal, including requiring a firm to change its supervisory structure, in order to ensure compliance with PCAOB standards.”
The Division of Enforcement and Investigations closely coordinated its investigation of Marcum LLP with the SEC Division of Enforcement.
“Firms have a responsibility to undertake only those engagements that they can reasonably expect to be completed with professional competence,” said Robert E. Rice, Director of the PCAOB’s Division of Enforcement and Investigations. “When they fail to do so, and fall short of PCAOB standards, they will be held accountable. We at the PCAOB thank the SEC for its significant assistance in this matter, which reflects the strong working relationship between the PCAOB and SEC enforcement staff.”
The PCAOB found that Marcum LLP’s system of quality control failed to provide reasonable assurance that the firm would:
- Undertake only those issuer engagements that the firm could reasonably expect to be completed with professional competence and appropriately consider the risks associated with providing professional services in the particular circumstances;
- Ensure that partner workloads were manageable to allow sufficient time for engagement partners and engagement quality review partners to discharge their responsibilities with professional competence and due care;
- Timely assemble complete and final sets of audit documentation;
- Timely and accurately file Form APs;
- Perform procedures to identify and assess the risks of material misstatement at the assertion level with respect to SPAC audits;
- Ensure that engagement teams were consulting with individuals within or outside the Firm, when appropriate, when dealing with complex issues;
- Perform sufficient procedures to determine whether certain matters were critical audit matters; and
- Make all required communications to issuer audit committees.
Marcum did not admit or deny the findings, the firm settled with the PCAOB and consented to a disciplinary order. In addition to the civil money penalty on the firm and a censure, the order requires the firm to engage an independent consultant to review and make recommendations concerning its quality control policies and procedures, after which the firm is required to implement said recommendations. This is the first time a PCAOB settled disciplinary order has ever required functional changes to the quality control supervisory structure of a registered firm.
Beyond requiring certain training for all audit staff, the order, among other things, requires Marcum LLP to make functional changes to its supervisory structure related to the firm’s system of quality control. These changes – requiring the firm to create a new role and hire an individual to serve as head of the firm’s quality control system (“Chief Quality Officer”) and to create a committee responsible for the oversight function for the audit practice (“Audit Oversight Committee”) – were important and necessary measures to address the significant quality control violations identified in the PCAOB’s investigation.
The related SEC order: SEC Charges Audit Firm Marcum LLP for Widespread Quality Control Deficiencies and PDF of the SEC order.