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October 2, 2023

Report: That Sloppy McGladrey Audit Was Definitely Maybe Probably Unity Bank

HEY, everyone remember that really sloppy audit that 3 (then) McGladrey & Pullen auditors got smacked on the wrist and/or face for when the PCAOB found out they threw in a bunch of necessary documentation after the fact?

Jonathan Weil over at Bloomberg seems to have unpuzzled the whole thing and is saying the mystery client is, in fact, New Jersey's Unity Bank:

It has been almost four years since Unity Bancorp Inc. (UNTY) got $21 million of bailout funds as part of the government’s Troubled Asset Relief Program. The small New Jersey lender hasn’t repaid the money. But it has stayed out of trouble, unlike some people who once audited its books.

Last week the Public Company Accounting Oversight Board sanctioned three accountants who used to audit Unity’s financial reports for McGladrey LLP, one of the largest accounting firms outside the Big Four. The board accused Dale Hotz, Jyothi Manohar and Michael Fadner of altering their work papers and misleading the agency’s staff during an inspection of one of their audits. They settled without admitting to or denying the board’s allegations. McGladrey wasn’t accused of any violations.

Now how, exactly, does one figure this out? Well, it can't be that hard really. Even if the PCAOB (understandably) does not reveal client names in its enforcements, it didn't take much for Weil to match the date McGladrey was hired (March 2007) and the city where these auditors worked to figure the rest out.

But when in doubt, get someone else to confirm it. Turns out Unity's CEO, James Hughes, confirmed that Hotz and the rest worked on Unity audits and were yanked from that client by McGladrey for disciplinary reasons. Totes busted.

Now, our friend Mr Weil goes on to wonder out loud if PCAOB board member Jay Hanson – who was McGladrey's national director of accounting in late 2010 when Hotz, Manohar and Fadner were inserting important documents in the work papers way too late – might have been a witness in the PCAOB investigation or recused himself from voting on the matter as a board member.

He goes on:

Officially, the board’s mission is to “protect the interests of investors.” In this case it seems to be McGladrey’s interests that the board is protecting. Hiding Unity’s identity minimizes the risk that McGladrey might lose the company as a client.

There’s nothing in the law that prohibited the board from disclosing Unity’s name. Unlike with its inspection reports, the board’s usual practice when issuing disciplinary orders against accountants and their firms is to name the audit clients in question. Asked why it didn’t do so this time, a spokeswoman for the accounting board, Colleen Brennan, said the board “does not identify audit clients in orders imposing sanctions solely for conduct that is separate from the conduct of the audit.”

Here's the issue as far as I see it. If the PCAOB is meant to protect the interests of investors, as an investor, I would NOT want the name of the company I've sunk my money into revealed by the PCAOB in these enforcement matters. EVER. In a perfect world, Unity would tip off shareholders themselves. Audits would be perfect. The PCAOB wouldn't need to exist. But we all know we don't live in that world, so in the one we do, I don't think it's at all appropriate for the PCAOB to out shoddy audit clients. The firms who perform them, sure, but the clients? Absolutely not. That goes against their mantra of "protecting the interests of investors."

Even if things didn't go so well audit-wise, Unity's CEO isn't giving up on McGladrey and has nothing but nice things to say about the three auditors who sloppily inserted essential documents into the work papers hours before PCAOB inspectors rolled in to check their work:

Hughes, the CEO of Clinton, New Jersey-based Unity, said Hotz, Manohar and Fadner “were very, very professional at all times during the engagement, and I have nothing but the highest level of respect for them.” The allegations, he said, don’t “impact the financial statements or the credibility of the audit.” Additionally, Hughes said the directors on Unity’s audit committee “did what they felt was in the best interests of the shareholders and the company” when they decided to keep McGladrey as Unity’s auditor.

“The right decision was made,” Hughes said.

Yes, I think we can all agree printing off an engagement letter isn't exactly scandalous but come on, "very, very professional"? That's a stretch. After all, Fadner was the one who had to hand-tick the cash flow worksheet the morning the PCAOB was on its way to inspect them. That isn't necessarily what most of us would call professional

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