The Securities and Exchange Commission has settled charges with RSM for “improper professional conduct” after the firm assigned unqualified staff to audit a series of private investment funds managed by SBB Research Group, an SEC-registered investment adviser charged with securities fraud last year.
According to the SEC’s order, the underlying matter involved deficiencies in RSM’s system of quality control for staffing certain private investment fund financial statement audits for the calendar years ended 2013, 2014, and 2015. For each of those years, RSM performed audits of a series of private funds managed by SBB Research Group.
“The private funds invested almost exclusively in structured notes linked to equity indices and valued those investments for purposes of its financial statements using a proprietary valuation model,” the SEC stated. However, due to “insufficient quality controls,” according to the SEC, the RSM audit team, including assigned internal valuation specialists, “lacked the appropriate competence and capabilities to evaluate SBB’s valuation model and the resulting valuations of the structured notes.”
Consequently, RSM’s audit team “repeatedly violated professional standards by failing to properly assess, test, and document risks of material misstatement associated with SBB’s valuation of the structured notes,” the SEC stated. Last year, RSM resigned as the private funds’ auditor and recalled its previously issued audit reports on the private funds’ financial statements.
In its order, the SEC said it considered RSM’s remedial efforts of reviewing and evaluating the sufficiency and adequacy of its quality controls and policies and procedures. “In particular, RSM performed an internal review and evaluation of the sufficiency and adequacy of certain quality controls, policies, and procedures for audits of private funds within its financial services practice; made certain enhancements to its quality controls, policies, and procedures, including enhancements that have been implemented since April 2016; and proposed additional initiatives.”
Without admitting or denying the findings, RSM has agreed to be censured and to comply with certain undertakings designed to test the post-implementation effectiveness of RSM’s enhancements and to ensure its quality controls “provide reasonable assurance of compliance” with SEC regulations, as well as with the standards and rules of the Public Company Accounting Oversight Board.
This is not RSM’s first run-in with the SEC. In August 2019, the SEC settled charges with the firm related to numerous auditor independence violations, spanning more than 100 audit reports across 15 clients. In that case, the SEC said RSM provided a range of prohibited services to audit clients from 2014 to at least 2016 as a result of failures at the firm to properly identify affiliations that might impair independence.
Without admitting or denying the findings in that case, the firm agreed to a $950,000 penalty and several remedial actions to address the cause for the violations, including engagement of an independent consultant.
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