Regulation

BDO to Pay $2.1Million Over Deficient Audits

The SEC alleges the big accounting firm ignored red flags in signing off on the financial statements of an employment staffing company.
Matthew HellerSeptember 9, 2015

BDO has agreed to pay $2.1 million to settle charges that it improperly signed off on the financial statements of an employment staffing company that was implicated in a fraud scheme.

The U.S. Securities and Exchange Commission filed the charges in an administrative order Wednesday, alleging BDO approved statements included in General Employment Enterprises’ 2009 and 2010 annual reports despite its auditors’ misgivings over $2.3 million in company funds that had gone missing under suspicious circumstances.

The money turned out to have been stolen from GEE as part of an $11 million fraud involving Park Avenue Bank, its former president, and Kentucky businessman Wilbur Huff.

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“Audit firms must train their audit and national office professionals not only to recognize red flags but also to have the resolve to refuse signing off on an audit if there are unresolved material issues,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said in a news release. “BDO failed to do that here, even though these issues were elevated to the highest levels of its audit practice.”

The accounting firm agreed to pay disgorgement of its audit fees and interest totaling approximately $600,000, as well as a $1.5 million penalty, to resolve the case.

In addition, five BDO partners — Sean C. Henaghan, John E. Rainis, James J. Gerace, Leland E. Graul, and Wendy M. Hambleton — will pay a total of $75,000 in penalties for their roles in the deficient audits.

Also charged in the case is former Kentucky Lt. Gov. Steve Pence, who allegedly acted as Huff’s front man in the diversion scheme while serving as GEE’s chairman.

According to the SEC, BDO was advised near the end of its 2009 audit of GEE that the $2.3 million had been invested in a CD but wasn’t repaid by the bank when it matured. The money represented about half of the company’s assets and most of its cash.

Even though BDO never received a reasonable explanation of how the money went missing, the SEC said, it withdrew its demand for an independent investigation and issued unqualified opinions of the financial statements included in the annual reports.