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Monday, June 19 2017

Broker-Dealers’ SEC Violations Caused by Accounting Firm’s Failures

The SEC suspended and fined Edward Richardson and his firm, Edward Richardson Jr., CPA, after constantly violating auditing standards and independence requirements in the course of providing independent audit services to dozens of broker-dealer clients.

Edwards Richardson is a Certified Public Accountant licensed in Michigan and also holds other accounting licenses and permits in several other states. Between 2010 and 2015, his firm employed only one other professional staff member and one clerical assistant.

Meanwhile, over 80 broker-dealers hired the Edward Richardson Jr., CPA to conduct their financial statement audits in preparation of fulfilling their legal filing requirements. Pursuant to Exchange Act Rule 17, broker-dealers must file a balance sheet, income statement, and any other financial information that is certified by an independent public accounting firm. The Rule also requires that the audit be done in accordance to generally accepted auditing standards. Generally accepted auditing standard require auditors to maintain strict independence from their audit clients, meaning they “must be free from any obligation to or interest in the client, its management, or its owners.” An auditor is not independent if it performs non-audit services to an audit client. Additionally, Rule 2-01 of the Sarbanes-Oxley Act of 2002 specifically prohibits an audit firm from preparing an audit client’s financial statements that will be filed with the Commission.

Edward Richardson Jr., CPA assisted in preparing financial statements, for at least one audit conducted for its broker-dealer audit clients. After receiving financial statements from a broker-dealer, the firm entered the client’s financial data into the Firm’s engagement software to generate new financial statements (including the notes) and updated them as needed with information from prior years. The Firm then sent the financial statements to the audit client for approval. After a final look, the broker-dealers filed these financial statements with the Commission as required by Exchange Act Rule 17. This practice led the Commission to find that the Firm was not independent when they provided “non-audit services” by creating new financial statements for audit clients with the firm’s own software. Consequently, the firm violated generally accepted auditing standards and a directly violated strict independence requirements and the Sarbanes-Oxley Act of 2002.

Overall, the Commission found that the firm lacked due care, and concluded that the Firm either did not possess the degree of skill commonly possessed by auditors or did not exercise reasonable care and diligence in performing audit work.

Richardson and his firm agreed to a seven-year suspension from appearing or practicing before the Commission as accountants. For seven years, they must refrain from participating in financial reporting or audits of broker-dealers. Richardson also agreed to pay a fine of $35,000.