SEC charges auditor for failing to adhere to standards
Washington DC, October 3, 2023
The Securities and Exchange Commission has settled with New Orleans-based auditor Luther Speight and Company and its principal Luther Speight for violating the antifraud provisions of the Securities Act by failing to adhere to Generally Accepted Auditing Standards in connection with a Louisiana school board's 2019 audit.
Jacob Frenkel, chair of government investigations and securities enforcement at law firm Dickinson Wright, found the allegations against the audit firm atypical of the Commission and not under its usual Public Company Accounting Oversight Board.
"To the extent that the SEC found deficiencies in the audit, they did not render the opinion itself incorrect or unreliable," said Frenkel, who was not involved in the case. "This audit was not under the PCAOB standards, nor did it need to be."
Without admitting or denying the findings, Speight and his firm agreed to be permanently enjoined from future violations of the securities laws, and ordered to pay $12,826 in disgorgement and prejudgment interest. LSC and Speight also agreed to pay $20,000 and $10,000 in civil penalties, respectively.
Speight also agreed to a conduct-based injunction, preventing him from serving as the engagement manager, engagement partner or engagement quality reviewer connected to any audit that would expect to be posted to EMMA, the Municipal Securities Rulemaking Board's bond disclosure website. His firm agreed to a similar injunction, preventing it from participating in the audit of financial statements that would be posted to EMMA. The settlement is subject to court approval.
The SEC has made headlines recently for a number of audit-related charges, namely two firms charged this summer in relation to Special Purpose Acquisition Companies, in addition to charging Prager Metis, the auditor of recently collapsed FTX, with hundreds of violations. Law firm Holland & Knight noted that was the first time the Commission has ordered a registered audit firm to make functional changes to its supervisory structure.
But the particular injunctions imposed in this case may not have much effect on the firm, as LSC was inexperienced auditing an issuer of municipal bonds and the school board's audit was the largest in the firm's history. They had originally intended to partner with a larger firm to perform the audit, but to no avail, the SEC said.
This matter began in April 2019 when the unnamed school board issued a request for proposal for professional auditing services and LSC responded to the request.
Louisiana state law requires local government entities to submit audited financial statements within six months of the entity's fiscal year-end, which in this case, was Jan. 2, 2020. In the firm's engagement letter, it agreed to issue the audit report by Dec. 15, 2019, two weeks ahead of the state's deadline.
Speight then signed the finished audit report on Jan. 2, but backdated it to Dec. 18, the Commission said, violating GAAS, which requires an auditor to obtain sufficient audit evidence prior to dating the auditor's report.
"During the Commission's investigation of this matter, Speight admitted that he chose that date for the auditor's report because that was when, in his opinion, LSC had substantially completed its fieldwork and audit work," the SEC said. "However, Speight and LSC continued to obtain audit evidence related to numerous audit issues after Dec. 18, 2019."
The school board's audited financials for 2019 were then issued on Jan. 3 and on Jan. 6, were made publicly available on EMMA, which claimed it was in accordance with GAAS. Three days later, employees within the school board reviewed the financial statements and identified errors in them, including an overstatement of revenues.
A meeting was held with school board officials and Speight admitted that he and his firm ran out of time to do the additional procedures that would have allowed them to identify and correct the error before the state's deadline.
A similar matter was brought to the attention of the SEC in February 2021 when two former KPMG auditors were charged after performing an audit on the College of New Rochelle, and failed to meet GAAS requirements before the college's deadline.
The errors were then corrected on the financial statements, but not on the audit report, nor was the date on the report changed. The changes also didn't reflect Speight's initial failure to include the issuance of $40 million in revenue anticipation notes in November 2019.
The revised version then replaced the original, but it was still not in accordance with GAAS.
The Commission alleged that Speight knew, or should've known that the school board would use the report, which included the false statement that it had adhered to GAAS standards, to sell $120 million of bonds to investors in March 2020.
While not legally binding itself, GAAS is used by regulators as a gold standard to which audits are to be conducted. But the Government Finance Officers Association recommends governmental entities to follow the Generally Accepted Government Auditing Standards, or GAGAS, which provides "a higher level of assurance with regard to internal control than Generally Accepted Audit Standards, which are fully incorporated into GAGAS," GFOA said.
GFOA also recommends that governmental entities enter into multi-year agreements of at least five years to help minimize the potential for disruption connected with independent audits, and can also reduce audit costs by allowing auditors to recover certain startup costs over several years.
Luther Speight did not respond to requests for comment.
[The Bond Buyer]
