RSM to pay $3.75M to settle improper conduct charges

RSM failed to properly audit the financial statements of Connecticut-based Revolution Lighting Technology when the latter was violating generally accepted accounting principles (GAAP) from 2015-18 by improperly inflating its revenue with bill and hold sales, according to the SEC.

Without admitting or denying the agency’s findings, RSM will pay a fine of $3.75 million and hire an independent consultant to review its audit, review, and quality control policies and procedures.

RSM Partner Steven Kirn agreed to be suspended from appearing before the SEC for three years, Senior Manager Michael Piqueira agreed to a one-year suspension, and Partner Richard Condon agreed to a censure. None of the auditors admitted or denied the SEC’s findings.

RSM, Kirn, and Piqueira also agreed to a cease-and-desist order.

“Auditors are important checks against fraud, and they should be scrutinizing arrangements like bill and hold sales,” said Gurbir Grewal, director of the SEC’s Division of Enforcement, in a press release Friday. “RSM failed to do this at all levels, from the engagement team up through the firm’s national office. And by giving Revolution a pass, investors learned only too late that Revolution was committing a multiyear fraud.”

The details: RSM “failed to properly conduct audits of Revolution’s financial statements and internal control over financial reporting” and failed to adhere to auditing and quality control standards set by the Public Company Accounting Oversight Board, according to the SEC’s order. Specifically, RSM, through Kim and Piqueira, failed to adequately plan and supervise the audit through the evaluation of the audit results and review of Revolution’s disclosures.

Revolution was fined $1.25 million by the SEC in 2020 for improperly inflating its revenues. Four Revolution executives were also charged with misconduct in the case.

Audit evidence provided to RSM showed Revolution’s bill and hold practices did not adhere to GAAP, but the SEC said RSM improperly concluded the practice was not material to Revolution’s financial condition and adhered to GAAP.

“Overall, rather than exercise an appropriate level of skepticism in this area—an area requiring heightened scrutiny—RSM made unreasonable determinations in concluding that Revolution’s misstatements were immaterial,” the order said. “The lack of due professional care by RSM’s personnel had the effect of hiding the RSM engagement team’s failure to properly conduct an audit for fiscal years 2014-2017.”

Despite Revolution being at the top of RSM’s audit risk scale for potential material misstatements, RSM did not properly supervise the bill and hold testing, allowing junior members of the firm to conduct it, the order said. Only the engagement partner had any experience with bill and hold sales, the SEC said, and RSM did not offer any formal training about how to apply the bill and hold criteria.

“RSM’s audit team kept placing the highest risks of the audit on the shoulders of the least experienced team members,” the order said. “… [Y]ear after year, RSM signed off on Revolution’s improper accounting because the audit team’s leadership improperly supervised the junior members of the audit team, who had failed to adequately assess Revolution’s application of the seven bill and hold criteria.”

Condon was charged with failures related to his review and approval of RSM’s analysis at Revolution.

In a statement posted on its website, RSM said it “continually seeks to enhance its quality controls, policies, and procedures. The firm is committed to the highest standards of integrity and audit quality and looks forward to continuing to provide the excellence in auditing that its clients have come to expect of RSM US.”