The Securities and Exchange Commission delivered a heavy blow to Grant Thornton and two of its engagement partners with charges they ignored red flags and fraud risks at two public companies that ultimately faced enforcement actions of their own.

Grant Thornton agreed to a penalty of $3 million, forfeited $1.5 million in audit fees, and admitted to wrongdoing. Partner Melissa Koeppel did not admit or deny the charges, but agreed to a penalty of $10,000 and a five-year bar from practicing before the SEC. Partner Jeffrey Robinson also did not admit or deny charges, but agreed to a penalty of $2,500 and a two-year bar.

The SEC says the inaction of the firm, Koeppel, and Robinson allowed public companies Assisted Living Concepts and Broadwind Energy to make numerous false and misleading public filings from 2009 to 2011. The SEC pursued fraud charges against two former ACL executives accused of listing fake occupants at some senior residences to meet lease covenant requirements. At Broadwind, the SEC charged accounting and disclosure violations that would have revealed to investors a reduction in business.

“Grant Thornton auditors recognized that representations by ALC and Broadwind management were questionable,” said David Glockner, director of the SEC’s Chicago regional office. “Yet in the end, Grant Thornton accepted faulty explanations as the truth and failed to demonstrate adequate professional skepticism or obtain corroborating evidence.”

SEC’s allegations against Grant Thornton say the firm knew or should have known to scrutinize ALC’s calculations of occupancy and coverage ratio covenants, but ignored “repeated red flags” around the company’s claim that it had an agreement with a lessor to meet lease covenants by treating ALC employees and other nonresidents as occupants. With Broadband, the SEC says the firm relied almost exclusively on unsupported management assertions that a $58 million impairment did not occur before a significant public offering, even after learning management expected the impairment.

In a statement, a Grant Thornton spokesman said: “We are pleased to have these several-years-old matters resolved, and we maintain a strong commitment to continually improving the quality of our work.”

Mike Scudder, a partner with Skadden, Arps, Slate, Meagher & Flom, says the charges in the Grant Thornton enforcement, like those in a recent BDO action, come from SEC’s “operation broken gate,” an enforcement effort to hold auditors responsible when their failure to meet professional standards puts investors at risk. “There have been and will continue to be a lot of very serious resolutions,” he says. “I would expect there to be continued robust enforcement in furtherance of the commission’s commitment to ‘operation broken gate.’”

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