Let's break down this order from the SEC, filed last week, as simply as we can because A) I'm still high on cold pills and B) ain't nobody got time for that.
Mayer Hoffman McCann (MHM) is "associated with" CBIZ (CBIZ) through an alternative practice structure (APS). This means MHM leases from CBIZ virtually all of the human capital, equipment and overhead MHM requires to perform its attest work, in exchange for a majority of MHM’s revenue. Sweet deal, eh?
Here's where the problem comes in (allegedly):
MHM has numerous attest clients that file reports with the Commission, including Tradebot Systems, Inc. “(Tradebot”), a registered broker-dealer. Pursuant to Rule 17a-5 promulgated under Section 17(a) of the Exchange Act, Tradebot is required to file annual reports with the Commission containing financial statements audited by an independent public accountant (“Annual Reports”).
MHM audited Tradebot’s Annual Reports from 2004 through 2012. From 2008 to at least 2013, Tradebot invested in CBIZ stock, thereby impairing MHM’s independence with respect to its audits of Tradebot’s 2008 through 2012 financial statements. As a result, Tradebot’s Annual Reports do not comply with Rule 17a – 5 for those periods.
As Accounting Today reports, in mid-2012, MHM learned from Tradebot’s CFO that Tradebot had traded in CBIZ stock and was like, "hey is this, like, an independence issue?"
From the SEC's order:
MHM’s engagement shareholder contacted MHM’s national office shareholder over independence and asked “whether or not that was something we need to be concerned about from an independence issue.” MHM’s national office shareholder over independence indicated he was not sure and forwarded the question to MHM’s national director of professional standards, MHM’s president, and members of MHM’s executive committee.
On September 4, 2012, Tradebot’s CFO emailed MHM’s engagement shareholder seeking further guidance on the impact of Tradebot’s trading in CBIZ, asking: “Can you send me the link pointing to the independence issue related to trading public stock.”
You can guess what happened next.
On September 6, 2012, MHM’s engageme nt shareholder responded to Tradebot’s CFO’s email, stating: “I do not have anything specific to this situation to send (as it does not exist). It is basically an interpretation of the SEC rules. Our New York office had inquired of a similar situation in which the entity holds CBIZ stock and it was determined to be an issue…. Unfortunately our chief independence officer is on a long vacation and I am trying to get a hold of him for thoughts."
Apparently the chief independence officer isn't the type to answer emails on vacation, and Tradebot went ahead and engaged MHM for its 2012 audit on October 3, 2012. That person got around to responding at the end of October and was like "no, guys, it's cool, per Rule 2 – 01(c)(1)(iv)(A), I'm pretty sure it's only a problem if Tradebot owns more than 5% of the shares or something. Stop trippin.1"
The problem is that the rule referenced applied to Tradebot's officers and directors, not Tradebot itself. Oops.
All that sucks but WAIT, THERE'S MORE!
Until 2013, MHM did not have any quality control or audit procedures to ensure clients did not trade in CBIZ stock or to otherwise comply with Rule 2 – 01(c)(1)(iv)(A). Until 2013, MHM provided no guidance to any audit client, including Tradebot, regarding trading prohibitions in CBIZ stock by the audit client. Further, MHM did not implement any audit procedures during its audits of Tradebot, or any other broker – dealer clients, to r eview the securities they were trading to ensure compliance with Rule 2 – 01(c)(1)(iv)(A).
So yeah, a Terrible, Horrible, No Good, Very Bad SEC order all around for MHM.
1 dramatization, not actual words, which were pretty boring but also wrong