The Securities and Exchange Commission (SEC) announced the settlement of its fraud case against a New Orleans-based auditing firm and its principal. The firm and its principal were charged with violating antifraud securities laws for failure to adhere to Generally Accepted Auditing Standards (GAAS) concerning the 2019 audit of a Louisiana school board’s financial statements.
In July 2019, the school board hired the firm to audit its financial statements for the 2019 fiscal year. The principal of the auditing firm represented to the school board that he had 35 years of governmental auditing experience; however, he had never performed an audit involving the issuer of municipal bonds. Louisiana state law required the school board to furnish its audited financial statements by January 2, 2020. The firm and its principal promised the school board they would complete the audit by December 15, 2019, two weeks before the deadline. On January 2, 2020, the principal signed the audit, which provided, “[w]e conducted our audit in accordance with auditing standards generally accepted in the United States of America….” According to the complaint, the principal backdated the audit letter to December 18, 2019. GAAS allows an audit to be signed only when sufficient and appropriate evidence has been obtained. The principal was still collecting evidence after December 18.
On January 6, 2020, the audit was made available to the public on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) website, pursuant to the board’s continuing disclosure obligations relating to its outstanding publicly offered bonds. Investors use EMMA to obtain financial, and other information, relating to issuers of municipal bonds. The SEC alleged the audited financial statements provided on EMMA contained numerous mistakes and material omissions. In particular, the SEC alleged that the firm failed to verify that the financial statements included the disclosure as a subsequent event of $40 million in revenue anticipation notes issued in November 2019. The principal then revised the audit, and the revised audit was posted to EMMA on March 11, 2020. However, the SEC alleged that the principal failed to correct all material omissions, including the November issuance, and did not change the December 18 signing date. The school board used the modified (yet incomplete and incorrect) financial statements and auditor’s report to issue $120 million in municipal bonds to a single bank in March 2020.
On September 29, 2023, the firm, its principal, and the SEC reached a settlement. The firm and its principal were permanently enjoined from any future violations of the relevant securities laws. The principal was personally enjoined from serving as an engagement manager, engagement partner, or engagement quality reviewer of any audit that could reasonably be expected to be posted on EMMA. The firm was enjoined from participating in any audit that could reasonably be expected to be posted on EMMA. The firm and its principal also agreed to pay $30,000 in civil penalties and $12,826 in disgorgement. The settlement is subject to approval by the court. The issuer was not a party to the settlement reached with the SEC.
This settlement illustrates the importance of exercising caution when selecting and monitoring the performance of auditors. Municipal bond issuers should have procedures in place to ensure quality and timely work by their auditors, especially in the case of work product that will be used in any securities offering or otherwise posted to EMMA.