RSM to pay $3.75M to SEC for improper audits

RSM US LLP agreed to pay a $3.75 million penalty to the Securities and Exchange Commission to resolve charges Friday over improper professional conduct for failing to properly audit a client, Revolution Lighting Technologies Inc.

The SEC charged the Chicago-based Top 10 Firm and three of its senior employees with not properly auditing Revolution's financial statements over a four-year period when the company was inflating its revenue with bill and hold sales. 

"Bill and hold" sales generally involve a company selling a product to a customer but not delivering the product to the customer until some later date. Such sales need to satisfy several criteria in order for a company to be able to recognize them as revenue.

According to the SEC's order, RSM's planning and supervision of the audit, as well as the evaluation of audit results and review of Revolution's disclosures, all failed to adhere to the Public Company Accounting Oversight Board's auditing and quality control standards.

Photo courtesy of RSM US LLP

"Auditors are important checks against fraud, and they should be scrutinizing arrangements like bill and hold sales," said Gurbir Grewal, director of the SEC's Division of Enforcement, in a statement Friday. "RSM failed to do this at all levels, from the engagement team up through the firm's national office. And by giving Revolution a pass, investors learned only too late that Revolution was committing a multiyear fraud."  

Without admitting or denying the SEC's findings, RSM agreed to pay a $3.75 million penalty, to be censured, and to retain an independent consultant to review and evaluate its audit, review and quality control policies and procedures. One RSM partner and a senior audit manager agreed to be suspended from appearing and practicing before the SEC as accountants, with the right to apply for reinstatement, and another partner agreed to be censured, without admitting or denying the findings. 

RSM defended its work. "The SEC did not bring charges of intentional misconduct, and the SEC previously has publicly stated that the former client deliberately 'misled' the RSM US audit team," the firm said in a statement Friday. "The SEC's order requires RSM US to complete undertakings involving the retention of an independent consultant to review and evaluate certain policies and procedures. RSM US also will pay a penalty of $3.75 million. As part of this settlement, RSM US and the individuals neither admitted nor denied the SEC's allegations. RSM US continually seeks to enhance its quality controls, policies and procedures. The firm is committed to the highest standards of integrity and audit quality and looks forward to continuing to provide the excellence in auditing that its clients have come to expect of RSM US."

A Revolution spokesperson did not immediately respond to a request for comment.