Audit firm Mayer Hoffman McCann and one of its audit clients are under fire from the Securities and Exchange Commission for alleged violations of auditor independence rules over stock trades.

The SEC says MHM audit client TradeBot, a high-tech, high-frequency broker-dealer, owned shares of publicly traded consulting firm CBIZ, to which MHM is tied under an “alternative practice structure” in violation of auditor independence rules. The SEC says CBIZ and MHM are regarded as a single entity for purposes of interpreting auditor independence rules, and companies are not permitted under those rules to hold an ownership stake in the firm that audits its financial statements.

In separate administrative proceedings against both MHM and Tradebot, the SEC says MHM audited Tradebot annual reports from 2004 to 2012, and that Tradebot invested in CBIZ stock from 2008 through 2013. “MHM lacked an appropriate system of quality controls to detect transactions in CBIZ stock to its attest clients in order to ensure those engagements complied with the firm’s legal and ethical requirements,” the SEC wrote. “MHM’s quality control and audit procedures failed to meet adequate professional standards with respect to its audits of Tradebot.”

The SEC orders say that Tradebot and MHM shared communication in 2012 on the question of whether stock trades violated independence rules and that MHM misinterpreted the rules. The SEC fined Tradebot $50,000 and gave MHM an opportunity to prepare a response to the allegations. MHM has not yet presented that response, nor did it have any immediate comment on the proceedings.

The alternative practice structure for MHM and CBIZ is based on an administrative service agreement, the SEC says, whereby MHM leases from CBIZ virtually all of its critical resources to perform its attest work in exchange for a majority of MHM’s revenue. The MHM-CBIZ relationship has been on the SEC’s radar since 1998, according to the SEC’s administrative proceedings. The SEC says its Office of the Chief Accountant notified CBIZ to be careful of the independence rules and that CBIZ and MHM would be viewed as a single entity for purposes of applying those rules.

The SEC and the Public Company Accounting Oversight Board are looking more closely at compliance with auditor independence rules, with the SEC bringing action against EY and KPMG earlier this year over lobbying and bookkeeping services provided to audit clients.

 

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