The Securities and Exchange Commission has settled charges against Crowe, two of its partners, and two additional partners at a now-defunct audit firm for “significant audit failures” connected to a payroll services firm that went bankrupt.
According to the SEC, Crowe’s audit team identified “pervasive fraud risks” in its 2013 audit of Corporate Resource Services but failed to respond appropriately. The company declared bankruptcy in 2015 after the discovery of roughly $100 million in unpaid federal payroll tax liabilities.
In a statement, Crowe says the enforcement action related to work the company performed on a single audit in 2014. “Crowe is committed to maintaining the highest standards of audit quality and regulatory compliance, and we cooperated fully with the SEC to resolve this matter,” the firm said. “We are pleased to put the matter behind us.”
The SEC says Crowe’s auditors failed to include audit procedures to detect the company’s undisclosed payroll tax obligations and failed to properly identify and audit the company’s related-party transactions. Auditors also bypassed the need to obtain sufficient audit evidence to respond to the fraud risks, to support revenue recognition, or to support the audit opinion, the SEC says.
In addition, auditors should have but did not evaluate whether there was adequate cause to flag the company’s ability to continue in business as a going concern, and the engagement quality review failed to act as the backstop intended, the SEC says. The order also contends Crowe had an ongoing direct business relationship with Corporate Resource Services, which compromises the audit firm’s independence.
The SEC’s enforcement order says the various failures happened despite the involvement of Crowe's national office, which was aware of the risks. The order specifically names Crowe's engagement partner, Joseph C. Macina, and engagement quality reviewer, Kevin V. Wydra, as causing the failures.
The SEC censured Crowe and fined the firm $1.5 million. Macina was fined $25,000 and is barred from auditing or preparing financial statements filed with the SEC but can apply for reinstatement after three years. Wydra was fined $15,000 and is similarly barred but can apply for reinstatement after one year.
In a related order, the SEC also disciplined Mitchell J. Rubin and Michael Bernstein, former partners at the now-defunct audit firm of Rosen, Seymour, Shapss, Martin, accusing them of fraud for their work in performing a “highly deficient audit” of the same company the year before Crowe took over the engagement. The SEC says their audit “amounted to no audit at all.” They were each fined $25,000 and permanently barred.