The SEC has charged New York-based CohnReznick, the 16th largest firm in the nation, with improper professional conduct on engagements for two audit clients in 2017, and the firm has agreed to settle and pay penalties of $1.9 million to investors.
According to the SEC order, CohnReznick improperly accepted the conclusion of a brands management company, Sequential Brands Group, that its goodwill, or the excess amount paid to acquire a company over its book value, was not impaired or reduced in value, in the third quarter of 2017. Despite CohnReznick’s national office partners and the firm’s own valuation specialists expressing concerns with Sequential’s conclusion, the firm failed to obtain sufficient evidence or conduct additional procedures. The order finds that CohnReznick’s deficient system of quality control led to failures to adhere to professional auditing standards.
The order also addresses an audit of Longfin Corp., a cryptocurrency company, finding that CohnReznick and its national office failed to address known issues involving related party transactions, which were used by Longfin to fraudulently inflate its revenues.
The SEC also charged firm partners Stephen M. Wyss, Stephen H. Jackson and Robert G. Hilbert with improper professional conduct for violating numerous professional standards in their third quarter 2017 interim review and 2017 annual audit of Sequential’s financial statements.
The order says Wyss accepted Sequential management’s assertions that goodwill was not impaired despite strong indicators of impairment. The order also finds that in the third quarter of 2017, Wyss, Jackson and Hilbert were confronted with indications that Sequential’s goodwill impairment test was not supported by sufficient evidence, but they still accepted Sequential’s conclusion that goodwill was not impaired even though appropriate additional audit procedures had not been performed.
“Auditors are critical gatekeepers that must employ a robust system of quality control to ensure faithful adherence to professional standards,” said Melissa Hodgman, associate director of the SEC enforcement division, in a statement. “CohnReznick’s deficient system and repeated failures to exercise due professional care at all levels, from the engagement team up through the firm’s national office, not only allowed but were a cause of both Sequential’s and Longfin’s disclosure violations.”
Without admitting or denying the SEC’s findings, CohnReznick agreed to pay a $1.9 million penalty, to be censured, and to implement undertakings to retain an independent consultant to review and evaluate certain of its audit, review and quality control policies and procedures, as well as to abide by certain restrictions on retaining new audit clients during the consultant’s review. Also without admitting or denying the SEC’s findings, Wyss and Jackson agreed to pay civil penalties of $30,000 and $20,000, respectively, and to not appear or practice before the SEC as an accountant with the right to apply for reinstatement after three years and one year, respectively. Finally, without admitting or denying the SEC’s findings, Hilbert agreed to pay a civil penalty of $30,000 and to accept a censure. All respondents also agreed to a cease-and-desist order.
