In the storied history of auditor independence violations by PCAOB-registered accounting firms, Marcum broke the rules in a rather unique and spectacular way: it publicly advocated its audit clients as investment opportunities.
The PCAOB was probably giddy writing and sending out this press release on Sept. 10:
The Public Company Accounting Oversight Board today announced the settlement of disciplinary proceedings against Marcum LLP and Marcum Bernstein & Pinchuk LLP, as well as Alfonse Gregory Giugliano, CPA. This is the first time the Board has: (1) sanctioned a registered public accounting firm for publicly advocating its audit clients as investment opportunities—a violation of auditor independence requirements; (2) sanctioned an annually inspected firm’s head of independence for substantially contributing to the firm’s independence violations; and (3) mandated the retention of an independent consultant.
Wow, there’s a lot to unpack here. But before we try to, we should note that Marcum settled with the PCAOB for $450,000, Marcum Bernstein & Pinchuk for $50,000, and Giugliano for $25,000.
OK, first let’s look at Marcum’s transgressions, which occurred during several microcap conferences the firm used to host. According to the PCAOB, the event, which was held annually from 2012 to 2017, was an investor conference where smaller or emerging public companies made business presentations to audiences that included potential investors, who perceived the gathering as a good way to find high-quality investment opportunities. Marcum organized the conference to increase its visibility and brand in the microcap space.
From 2012 through 2015, Marcum LLP and two senior partners made public statements advocating the investment potential of the companies presenting at its annual Microcap Conference, 62 of which were the firm’s issuer audit clients.
Marcum promoted the conference as an exclusive, annual showcase for microcap-presenting companies that the firm publicly described as being “highly vetted,” “high quality” investment opportunities, according to the PCAOB order. Many of these statements were directly attributed to the firm’s managing partner and SEC services leader.
For example, the PCAOB said:
In 2012, Marcum described the conference as an “invitation-only” event with “the very best,” “promising high growth companies, the top picks by some of the most astute analysts.” The Firm stated that the conference would be “a unique opportunity for investors to uncover ‘hidden gem’ investment opportunities.” The Managing Partner characterized the presenting companies as having “high quality management teams.” The SEC Services Leader called the presenting companies “exceptionally well managed,” with “sound business practices,” and predicted that the presenting companies “will be recognized by the investment community both for their business management success and for their investment potential.”
Marcum issuer audit clients made up a large percentage of the presenting companies at each conference between 2012 and 2015. They represented 18 of 64 presenting companies (28%) at the 2012 conference, 21 of 122 (17%) at the 2013 conference, 30 of 128 (23%) at the 2014 conference, and 36 of 152 (24%) at the 2015 conference.
During that four-year period, Marcum issued audit reports on the financial statements of those 62 issuer audit clients.
The Firm’s independence was impaired with respect to these issuer audit clients because Marcum’s hosting and promotion of the conference: (1) involved publicly advocating for these issuer audit clients as high-quality investment opportunities; and (2) created a mutual interest between Marcum and these issuer audit clients with respect to whether those clients’ subsequent performance lived up to Marcum’s billing. As a result, the Firm failed to satisfy the independence criteria set out in Rule 2-01(b) of Commission Regulation S-X,6 in violation of PCAOB Rule 3520 and AU § 220.
Now, Giugliano, who is a partner and was in charge of the firm’s auditor independence compliance during that four-year period, approved the conference and was even aware of Marcum’s touting of the presenting companies, according to the PCAOB.
However, the PCAOB said he “failed to recognize the independence implications of touting a group of companies that included audit clients, in part because he failed to conduct any substantial independence deliberations concerning the conference.”
According to the order, Giugliano had a phone call with the firm’s SEC services leader before the 2012 conference about whether the conference would violate auditor independence rules. Giugliano basically told the SEC services leader, “Nah, we’ll be fine.”
At the conclusion of their telephone call, Giugliano advised the SEC Services Leader that he did not believe the MicroCap Conference would impair Marcum’s independence. Giugliano subsequently reviewed certain independence rules, which did not change his view with respect to the conference. Giugliano did not document his call with the SEC Services Leader, or his conclusion that the conference would not impair Marcum’s independence, because he did not believe that the matter required any substantial deliberation.
Giugliano subsequently attended each of Marcum’s annual MicroCap Conferences and became aware of the manner in which the conferences were promoted to the public. However, until PCAOB staff raised the issue in 2015, neither Giugliano nor anyone else at Marcum undertook any further review or consultation to assess whether the MicroCap Conference had any implications for the Firm’s independence with respect to audit clients of the Firm who might present at, sponsor, or otherwise participate in the conference.
Giugliano, who currently leads the firm’s national assurance services division, has since stepped down from his role as the member of Marcum’s senior management responsible for compliance with auditor independence requirements, according to the PCAOB.
Similarly, in 2013 and 2014, Marcum Bernstein & Pinchuk, an affiliate of Marcum, advocated the investment potential of the companies participating in its China Conference, seven of which were the firm’s issuer audit clients.
In addition to the monetary penalties given to Marcum and Marcum Bernstein & Pinchuk, the PCAOB ordered Marcum to engage an independent consultant to review its policies, procedures, staffing, and training with respect to meeting and maintaining auditor independence, and it also ordered Marcum Bernstein & Pinchuk to undertake a review of the same areas.