SEC and PCAOB Discipline Firms that Lack Auditor Independence

Last month the Securities and Exchange Commission (SEC) found that eight accounting firms lacked the adequate independence during their audits.  The Public Accounting Oversight Board (PCAOB) found seven other firms that lacked independence during their audits of broker-dealers.

These firms all consented and settled the disciplinary matters with these regulatory bodies – without admitting or denying the findings.  The fifteen firms ranged in size and location.  In general, the findings revolved around the rules limiting auditors from providing other non-attest services that could jeopardize their impartiality.  Specifically, these firms were found to have prepared the financial statements through the year prior to the audit – in essence auditing their own work.

Each firm paid a small monetary fine and agreed to remediation and training to address the issues.

This matter shows the importance of maintaining independence in all services – whether working for a public company or the neighborhood grocers. A lack of independence may lead to an accountant’s malpractice claim, a regulatory investigation or to an upset client when they feel the work was slanted.

This also highlights the need for a firm to have accountant’s professional liability insurance.  Some policies provide coverage for regulatory investigations – like the kind noted above.  Other policies would not provide such protection.  Since no insurance policy is exactly the same, these seemingly minor differences on paper could turn into large and important issues in practice.  Having an experienced insurance broker is necessary to make sure that a firm is obtaining all the coverage it needs.

Emmy-Award Winning Actor Sues Accounting Firm

In another matter that developed towards the end of 2014, Edward Herrmann sued his accountant for malpractice.  The Emmy-award winning actor explained in the suit papers that he and his wife had granted full power of attorney to CohnReznick and its predecessor firms for years – giving the firm full range of authority to pay bills, open bank accounts and represent them to the IRS.  Herrmann recently discovered that the firm had not presented an IRS investigation to them appropriately which, the suit explains, was larger than initially thought.  This also led Mr. Herrmann to uncover erros that had been ongoing for years on his tax returns.  $1.2M is being sought.

The need for accounting firms to carry professional liability insurance is by no means diminishing as we enter 2015.  If anything, the world is getting increasingly complex and the litigious nature of business only seems to be increasing.

Contact us for a review of the insurance plans your firm carries or to discuss ways to better protect your firm in the New Year.