Marcum fined $13M for control failures magnified by SPAC client boom

The SEC fined Marcum $10 million, while the PCAOB added a $3 million penalty—its largest ever imposed against an audit firm that is not a member of a global network. The PCAOB, which is overseen by the SEC, will require Marcum to make functional changes to its supervisory structure related to its system of quality control—a first for the regulator.

The SEC will require Marcum to retain an independent compliance consultant to assess its quality control policies and procedures and placed restrictions on the firm accepting new clients among other disciplinary measures.

The details: The popularity of SPACs as an alternative to the traditional initial public offering (IPO) process took off in the United States in 2020. Marcum quickly emerged as the lead auditor in the space, auditing more than 400 SPAC IPOs in 2020 and 2021, the SEC noted in a press release.

“The strain of this growth, however, exposed substantial, widespread, and pre-existing deficiencies in the firm’s underlying quality control policies, procedures, and monitoring,” the agency said. “These deficiencies permeated nearly all stages of the audit process and were exacerbated as Marcum took on more SPAC clients.”

Areas of engagement work impacted included risk assessments, audit committee communications, audit documentation, assembly and retention of audit documentation, engagement quality reviews, technical consultations, due professional care, and engagement partner supervision and review, according to the SEC’s order. The alleged deficiencies also impacted Marcum clients who were not SPACs, in part a result of the firm’s resource and staffing issues exacerbated by its rapid increase in clients.

“In sum, Marcum’s quality controls system failed and, as a result, certain audits were not conducted in compliance with PCAOB audit standards,” the SEC said.

The PCAOB’s order echoed this point, noting Marcum’s quality control system did not provide reasonable assurance it could execute the increased number of audits with competence.

“If firms put profits ahead of PCAOB standards that protect investors, there will be consequences,” said PCAOB Chair Erica Williams in a press release. “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.”

Compliance considerations: Marcum will be required to implement all recommendations provided by the independent consultant it retains to review its quality control policies and procedures, according to the PCAOB.

The regulator is also requiring the firm to create a new role to serve as head of its quality control system and to create a committee responsible for the oversight function for the audit practice, in addition to providing training for all staff.

The SEC’s order will require Marcum to receive certification from the consultant it retains regarding implementation of the changes recommended. Until that certification is provided to the SEC, Marcum is restricted to accepting no more than three new audit clients per quarter. The new clients Marcum adds must be reviewed and approved by the consultant and cannot conduct the majority of their operations outside the United States, among other restrictions.

Firm response: “This process with the SEC and PCAOB identified critical areas for improvement in the firm’s internal quality control and documentation processes,” a Marcum spokesman said. “We are working closely with an independent consultant to ensure that we fully meet PCAOB audit standards, and we remain committed to maintaining the full confidence of our clients, regulators, and investors.”

The firm neither admitted nor denied the findings of the SEC and PCAOB.