SEC Bars Four CPAs For Audit Failure; Rare Prosecution Of CPA Auditors For Failing To Fulfill Their Professional Obligations Raises A Question For Financial Advice Professionals

Thursday, November 07, 2013 17:28
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SEC Bars Four CPAs For Audit Failure; Rare Prosecution Of CPA Auditors For Failing To Fulfill Their Professional Obligations Raises A Question For Financial Advice Professionals

Three New York CPAs today were prohibited from practicing before the Securities and Exchange Commission for at least five years, and another was barred for at least three years. Should it have been a lifetime bar?

 

It's rare that the SEC bars a CPA from a small audit firm because it is usually too difficult to establish that the accountant should have known a fraud was amiss. If someone is intent on fraud, it can be hard to detect. However, in this case the most basic financial facts about the company appear not to have been verified by the auditors.

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The SEC says the CPAs, from Sherb & Co. LLP, engaged in improper professional conduct in auditing two China-based companies, China Sky One Medical (and another called--you can't make this stuff up--Wowjoint). On September 4, the SEC charged China Sky and and its chief executive with fraud for recording fake sales of a weight loss product to inflate revenues in the company’s financial statements to the tune of $1 million a month.

 

If, like me, you are fascinated by fraud stories, check out this one. China Sky traded as high as $23 a share in January 2010. It now trades for 12 cents.

 

"China Sky One Medical Inc. (CSKI) falsely stated in 2007 annual and quarterly reports that it had entered into a strategic distribution agreement with a Malaysian company that would become the 'exclusive' distributor of CSKI’s 'slim patch' in Malaysia and generate $1 million per month in sales," according to the SEC's September release in the China Sky case. "However, the company never actually entered into any such agreement.  CSKI instead created approximately $19.8 million in phony export sales to Malaysia that were recorded as revenue in its financial results for 2007 and 2008."

 

 

Point is, if revenue can be fabricated so easily and the existence and fulfillment of major contracts by pubicly-held companies are not verified by the auditor, that's a major  failure by the professionals involved and getting barred three or five years just isn't enough.

 

Let these guys keep their professional designations, so they can earn a living preparing taxes for the rest of their lives. That's a fate worse than jail.

 

But if a CPA is guilty of failing to fulfill his or her professional obligations as an auditor, as the SEC charged, the SEC should not let them ever practice again as an auditor of publicly held companies.  

 

Nowe here's an exercise for those of you who want the delivery of financial planners and investment advisors to be a profession. If a financial advisor is guilty of gross incompetence, would he or she get the same treatment as the CPAs--accepted professionals.  The answer: No.

 

The SEC does not prosecute IA reps for failing to fulfill their professional obligations. If you want to have a profession, shouldn't the SEC be able to do that? 

 

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