By allowing a poorly rated partner to continue auditing a public company without sufficient supervision and oversight, “Grant Thornton prioritized the career of its partner and the retention of that partner’s clients over the interest of investors, with serious negative consequences,” Andrew J. Ceresney, director of the Securities and Exchange Commission’s division of enforcement, said in a Wednesday conference call with reporters following the announcement that the accounting firm had reached a $4.5 million settlement with the SEC.
In the case, Grant Thornton and two of its former partners, Melissa Koeppel, 54, and Jeffrey Robinson, 63, agreed to settle allegations “that they ignored red flags and fraud risks while conducting deficient audits of two publicly traded companies that wound up facing SEC enforcement actions for improper accounting and other violations,” according to an SEC press release.
Robinson has since retired from Grant Thornton, while Koeppel remains with the firm but in a non-auditing, non-partner role.
Grant Thornton admitted wrongdoing and agreed to forfeit about $1.5 million in audit fees and interest, pay a $3 million penalty, and hire an independent consultant to review a number of its procedures.
“We are pleased to have these several years-old matters resolved and we maintain a strong commitment to continually improving the quality of our work,” Grant Thornton stated.
The admission by the firm follows a similar acknowledgement of wrongdoing by BDO in a September settlement with the SEC. The commission has of late been stressing the need to extract admissions of guilt in its settlements with companies hit with enforcement actions.
Without admitting or denying the SEC’s allegations, Koeppel agreed to pay a $10,000 penalty and be suspended from practicing before the SEC as an accountant for at least five years. Robinson agreed to pay a $2,500 penalty and be suspended from practicing before the SEC as an accountant for at least two years.
The SEC’s Ceresney asserted that the firm had failed in particular to oversee the work of Koeppel, an engagement partner on the deficient audits of both companies. Robinson was an engagement partner on one of the audits, which together spanned 2009 to 2011. The audits involved Assisted Living Concepts (ALC), a nursing home provider, and Broadwind Energy, an alternative energy company.
As early as the third quarter of 2010, when Grant Thornton was conducting field work for a review of the ALC case, the audit firm’s national professional standards and risk management staff “had become aware of negative quality indicators with respect to Koeppel, who was placed on a November 2010 monitoring list for partners with such negative indicators,” according to the SEC order against her and Robinson.
Grant Thornton put Koeppel on this list “because, among other things, her audit clients had restated their financial statements or interim financial information four times in the preceding two years,” according to the auditor.
In its 2008 inspection report on Grant Thornton, the Public Company Accounting Oversight Board had also found deficiencies in one of Koeppel’s audits stemming from Grant Thornton’s failure to gather enough audit evidence.
By November 2010, Grant Thornton’s national professional practice director for the Midwest region learned about Koeppel’s negative audit quality indicators as a result of an ongoing PCAOB inspection. Although the director didn’t know that Koeppel had been placed on the partner monitoring list, others in the firm told him that she had a number of negative audit quality indicators.
The director also learned of observations by other Grant Thornton partners that the Wisconsin practice, where Koeppel was the managing partner, had “gotten off the tracks from a methodology perspective.”
Last December, the commission announced fraud charges against ALC’s former CEO, Laurie Bebo, and its former CFO, John Buono. The executives were charged with making false disclosures and manipulating internal books and records — in the latter case by listing fake occupants at some assisted living facilities in order to meet lease covenant requirements.
Bebo was ordered by an SEC administrative law judge to pay a $4.2 million fine in October and Buono, the ex-finance chief, settled his case with the SEC, according to a report in the Milwaukee-Wisconsin Journal Sentinel.
In February, the SEC gained settlements with Broadwind and its former CEO J. Cameron Drecoll and its ex-finance chief Stephanie Kushner regarding accounting and disclosure violations that prevented investors from knowing that reduced business was damaging the company’s long-term financial prospects.
The investigations of the companies led to the charges against Grant Thornton and its ex-auditors. “It’s fair to say, in many cases, [that when] we’re looking at fraud in connection with an issuer and its employees, we’re also going to look at the activities of the auditor to determine whether the auditor complied with Generally Accepted Accounting [Principles],” Ceresney told reporters.
“This case reflects that in both Broadwind and ALC. We obviously did bring cases against the issuer and employees of those firms. And so in each of those firms, we also looked at the acts of the auditor — and that’s what ultimately resulted in this case,” he added.