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Marcum Took On Too Many Clients and Totally Wrecked Their Quality Control, Says the PCAOB in Disciplinary Order

Posted on by Adrienne Gonzalez
Naughty dog - Lying dog in the middle of mess in the kitchen

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.

PCAOB settled disciplinary order against Marcum LLP by Adrienne Gonzalez on Scribd

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PCAOB Officially Proposes That Audit Firms Name Names

For some time now, the PCAOB has been talking about making audit partners famous (at least to investors that are paying attention) in ways that they aren’t too thrilled about. Earlier today the Board issued a proposal for comment that will do just that.

The proposed amendments would:

• require registered public accounting firms to disclose the name of the engagement partner in the audit report,
• amend the Board’s Annual Report Form to require registered firms to disclosgagement partner for each audit report already required to be reported on the form, and
•require disclosure in the audit report of other accounting firms and certain other participants that took part in the audit.

So if you can consider yourself an astute observer of auditing policy and regs, they’d love to hear your thoughts. However, it would be greatly appreciated if you didn’t take your cues from the FASB letters and kept things constructive.

All of the Board Members made statements, including PCAOB Chairman Jim Doty (full statement on page 2) who sees this latest proposal as good sense:

I fail to see why shareholders in BNP Paribas, listed on the Euronext Paris exchange, should be able to see the name of the engagement partner in the audit report, but shareholders in Citigroup, listed on the New York Stock Exchange should not. Indeed, the names of engagement partners for some European companies that are listed on the NYSE are disclosed in U.S. filings. Why are shareholders in France Telecom to be favored over shareholders in AT&T?

And then there’s Steven Harris’s statement (in full on page 3). Harris, who is known to speak frankly about auditors, finds the proposal okay enough but would really like to see the audit partners’ John Hancocks:

While I support an identification of the engagement partner, I continue to strongly support, and would have preferred, a requirement for the engagement partner to actually sign his or her name on the audit report. My views, which I stated when the Board last publicly discussed the issue in July 2009, have not changed. Very fundamentally, I believe that nothing focuses the mind quite like putting one’s individual signature on a document.

And for good measure, he threw in this:

Many find it ironic that auditing firms in the United States, whose business is providing assurance about the transparency provided by others, resist publicly providing their own financial statements. There is no apparent reason that the auditing firms that act as gatekeepers to our securities markets should not be as transparent to investors as the companies they audit.

If you agree with Mr. Harris and happen to have a copy of your firm’s financial statements, feel free to pass it along. Or if you’d rather not wait to make your thoughts known on the Board’s proposals, you may drop them in the comments below.

Doty Statement on Transparency Proposal

Harris Statement 10-11-11

KPMG Arrives at the Paperless Audit Party

office-space-402a-061907.jpgWe’ve received several reports about Klynveldians attending “eAudit” training this summer which marks the firm’s attempt to get break into the “paperless” audit world. Reports have been mixed with some saying that it’s best technology KPMG has invested in but others claiming that it will only run on Vista which may be problematic when Windows 7 rolls out.
Forgetting the technology mumbo-jumbo, it’s been long rumored that KPMG was the last major firm to make the move to a paperless audit. This could have been due to a number of things:
More, after the jump


• Partners that have been around since WWII that can’t even use email put the kibosh on the whole idea
• M-O-N-E-Y
• Accountants, in general, resist the idea of trying a new restaurant so don’t even think about messing with their audit methods
What’s more surprising is that some Radio Station clients have said that they prefer the old school audit. Not exactly sure what is so appealing about young auditors schleping around boxes of binders that weigh a few metric asstons but whatevs.
Our point, dude, is that KPMG has finally caved on this whole “paperless” idea. Since audits aren’t truly paperless we’re not sure what all the fuss is about but KPMGers got an extra week in Florida in the dead of summer out of it. Discuss the firm breaking into the new century in the comments or let us know how terrible your lives will be because of it.

The Truth About Public Accounting, Part II: PCAOB Inspection Hysteria — How to Fix It

While there is a consensus that the PCAOB’s existence has improved audit quality, it is […]

10 thoughts on “Marcum Took On Too Many Clients and Totally Wrecked Their Quality Control, Says the PCAOB in Disciplinary Order”

  1. Is it odd that not a single individual partner was found to be at fault nor even one partner called out by the PCAOB by name (not even the EQR)? It is just a legal entity (LLP) that committed these wrongful acts?

    1. I think the reason that they didn’t name specific partners is because we’re talking about systemic quality control failures, not just run of the mill deficient audits. They took on 600 SPAC IPO audits in one year and it sounds like pretty much all of them were garbage (surprise).

    3. Their head of audit Alphonse “Greg” Giugliano during this period had previously been fined personally for Pcaob violations. It’s quite surprising they would have kept him in the role. Terrible optics.

  2. No, it’s not odd at all.
    It’s unlike what the PCAOB does with the Big Four (BF). When the PCAOB “disciplines” a BF firm, it will select a partner for discipline, then not sanction the firm, like in the Lacetti case, among others.
    Perhaps what’s really going on here, is the PCAOB is trying to push Marcum’s business to the BF. Think about it.
    I need to see what $3 million would be relative to Marcum’s revenues.
    We will see what if anything, the PCAOB does with KMPG and its three recent audits of banks which failed. The failures cost the public about $33 billion.

    GW

    1. $3,000,000 to Marcum’s revenue does not even move the needle. It’s a rounding error to them.

      1. Marcum is a $1B+ firm. The total $13M in fines will sting but still feels like a slap on the wrist.

  3. I read the SEC’s 38-page and the PCAOB’s 25-page orders. Pages 26-38 of the former and 13-25 of the latter, have much identical material. Which “enforcer” is redundant, the SEC or PCAOB? Why should investors pay for this redundancy?
    In 2022 Marcum had about $1.2 billion in revenues, $13 million is 1.08% of this. Suppose say D&T with $50 billion in revenues got a proportionate fine, that’s $540 million. Would either the SEC or PCAOB fine a Big Four firm anything close to that?
    The PCAOB notes on page 3 of its release in 2020 and 2021, Marcum got a total of 795 new SPAC clients. While the PCAOB does not disclose Marcum’s billings to these clients, I will assume $150,000 per year and an average of two years billings, that’s $238 million. If Marcum had direct costs of say 33% of this, $160 million dropped to Marcum’s bottom line in the two years in question. What’s the deterrent value of $13 million?
    What happened here? Marcum’s board of directors (BOD) or whatever it calls it, saw a new revenue source and didn’t care what it did to its working partners and managers. No member of the Marcum BOD was suspended from practice for a day.
    Marcum will hire a “Chief Quality Officer”, page 14, and an “Independent Consultant”, page 16, of the PCAOB’s release. Are these jobs for former SEC Chief Accountants and retired PCAOB Commissioners?
    While 164 Marcum SPAC clients restated their financials because of warrant or liability accounting issues, PCAOB release, page 10, we do not know if any Marcum client restated its financials because of other issues.
    I won’t go as far as to say, these SEC and PCAOB actions against Marcum are “Much Ado About Nothing”, but don’t see them as much more than a nuisance to Marcum.
    When the PCAOB or SEC takes a comparable action against one of the four firms which audit 97% of SEC registrants by market capitalization, I’ll take the regulators more seriously.

    1. Marcum is restricted in taking on new audit clients. See order
      Also, Marcum was only billing $30-$45k for these SPAC audits.

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