Audit firm CohnReznick agreed to pay $1.9 million as part of a settlement with the Securities and Exchange Commission for improper conduct at two of its clients the SEC previously charged with filing fraudulent financial statements.
The agreement, announced Wednesday, addresses alleged deficiencies in CohnReznick’s fiscal year 2017 audits at Sequential Brands Group and purported cryptocurrency firm Longfin Corp. Sequential, after filing for bankruptcy, avoided a fine in settling with the SEC in November over charges it violated accounting principles when it did not properly acknowledge goodwill impairment, while a federal court in September 2019 ordered Longfin to pay $6.8 million in penalties and disgorgement for conducting a fraudulent public offering and falsifying revenue from sham commodities transactions. Longfin shut down in November 2018.
In addition to the penalty, which the SEC said would be returned to investors, CohnReznick agreed to be censured, retain an independent consultant to review and evaluate certain of its policies and procedures, and abide by restrictions on retaining new audit clients during the consultant’s review. Three partners at the firm involved in the Sequential audit also agreed to settlements with the SEC for improper professional conduct.
The details: At Sequential, CohnReznick valuation specialists were among a group to express concerns regarding Sequential’s fair value estimates, according to the SEC’s order. These worries were enough to halt CohnReznick’s interim review process, but the engagement team at the firm “ultimately accepted Sequential’s conclusion that goodwill was not impaired without obtaining sufficient relevant and reliable evidence in support of management’s assertions or performing sufficient additional contemporaneous procedures.”
Stephen Wyss served as the CohnReznick engagement partner on the audit, and Stephen Jackson was the engagement quality review partner. Robert Hilbert, as managing partner of assurance and national director of accounting, was the liaison between the firm’s auditors and its internal group of valuation specialists, the SEC stated.
Wyss agreed to pay a civil penalty of $30,000 and be suspended from appearing before the SEC as an accountant for at least three years for allegedly failing to adequately consider and address the concerns raised by his colleagues before accepting Sequential’s findings. Proper testing would have indicated Sequential’s goodwill was likely impaired, according to the SEC. Instead, CohnReznick “was a cause of Sequential’s violation of the reporting and books and records provisions of the Exchange Act,” the agency stated.
Jackson agreed to pay a civil penalty of $20,000 and be suspended at least one year for failing to reasonably evaluate whether appropriate consultations had taken place regarding the determination on Sequential’s goodwill conclusion, the SEC said. Hilbert agreed to pay a civil penalty of $30,000 and be censured for alleged failures in his role.
Without admitting or denying the SEC’s findings, all three men agreed to a cease-and-desist order.
At Longfin, similar deficiencies in CohnReznick’s system of quality controls caused the firm to fail to apply appropriate professional skepticism or perform audit procedures appropriate to the identified risk, according to the SEC. Specific problem areas included audit planning, revenue and receivables, related party transactions, and intangible assets. These alleged deficiencies occurred around the same time Longfin began receiving document requests from the SEC’s Division of Enforcement.
The agency concluded CohnReznick’s audit did not meet professional standards.
“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,” said Melissa Hodgman, associate director at the SEC’s Enforcement Division, in a press release.
CohnReznick response: CohnReznick neither admitted nor denied the SEC’s findings in reaching settlement.
“Over the past five years, we have significantly expanded our national assurance team and implemented a continuous improvement initiative to monitor and enhance our quality control structure,” the firm said in an emailed statement. “These important actions ensure we are delivering the highest quality services and upholding the firm’s long-standing reputation for excellence and integrity.”