CohnReznick charged with improper auditing conduct by SEC

The Securities and Exchange Commission charged Top 20 firm CohnReznick LLP and three of its partners Wednesday with improper professional conduct on engagements for two clients in 2017, and the firm agreed to pay a $1.9 million penalty to investors. 

The two clients, Sequential Brands Group, Inc. and the cryptocurrency business Longfin Corp., were previously charged by the SEC for filing fraudulent financial statements prior to their bankruptcies and Nasdaq delisting (see story). The SEC also charged partners Stephen M. Wyss, Stephen H. Jackson and Robert G. Hilbert with improper professional conduct for violating professional standards in their third quarter 2017 interim review and 2017 annual audit of Sequential’s financial statements. All the respondents agreed to settle charges with the SEC and pay penalties. 

According to the SEC, CohnReznick improperly accepted Sequential’s contention that its goodwill was not impaired or reduced in value in the third quarter of 2017. Despite CohnReznick’s national office partners and the firm’s own valuation specialists expressing concerns with Sequential’s conclusion, the firm failed to obtain sufficient evidence or conduct additional procedures. The SEC order found that CohnReznick’s deficient system of quality control led to failures to adhere to professional auditing standards. Sequential, a consumer brands company that worked with celebrities like Jessica Simpson to market their fashion brands and owned chains like Joe’s Jeans and Avia, filed for bankruptcy last August.

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CohnReznick office in Miami

As for the Longfin audit, the SEC order said CohnReznick and its national office failed to address known issues involving related-party transactions that were employed by Longfin to fraudulently inflate its revenues. Longfin voluntarily delisted from the Nasdaq in May 2018 and went out of business later that year.

A second related order found that on multiple occasions from the end of 2016 through the second quarter of 2017, Wyss accepted Sequential management’s assertions that goodwill was not impaired despite strong indicators of impairment. The SEC also found that in the third quarter of 2017, Wyss, Jackson and Hilbert saw indications that Sequential’s goodwill impairment test wasn’t supported by sufficient evidence, but they still accepted Sequential’s conclusion that goodwill wasn’t impaired even though additional audit procedures hadn’t been performed that would have been appropriate.

“Auditors are critical gatekeepers that must employ a robust system of quality control to ensure faithful adherence to professional standards,” said Melissa Hodgman, associate director in the SEC’s Division of Enforcement in a statement. “CohnReznick’s deficient system and repeated failures to exercise due professional care at all levels, from the engagement team up through the firm’s national office, not only allowed but were a cause of both Sequential’s and Longfin’s disclosure violations.”

Without admitting or denying the SEC’s findings, CohnReznick agreed to pay a $1.9 million penalty, to be censured, and to retain an independent consultant who would review and evaluate its audit, review and quality control policies and procedures, as well as abide by certain restrictions on retaining new audit clients during the consultant’s review.

The firm said it is working to improve its audits and quality controls. “Integrity and quality are the cornerstone of our firm,” CohnReznick said in a statement. “We are committed to providing audit services of the highest quality and fulfilling our important role in the capital markets. Over the past five years, we have significantly expanded our national assurance team and implemented a continuous improvement initiative to monitor and enhance our quality control structure. These important actions ensure we are delivering the highest quality services and upholding the firm’s long-standing reputation for excellence and integrity.”

Without admitting or denying the SEC’s findings, Wyss and Jackson agreed to pay civil penalties of $30,000 and $20,000, respectively, and not appear or practice before the SEC as accountants. They have the right to apply for reinstatement after three years and one year, respectively. For his part, without admitting or denying the SEC’s findings, Hilbert agreed to pay a civil penalty of $30,000 and a censure. All the auditors also agreed to a cease-and-desist order. They did not immediately respond to requests for comment.

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