Three CPAs from a New Jersey public accounting firm most of you probably have never even heard of got their wrists slapped by the SEC on Sept. 30 for signing off on the audits of an IT company’s financial statements, even though the company’s CEO and CFO were perpetuating a massive fraud.
Schulman Lobel Zand Katzen Williams & Blackman accountants Marla Manowitz, Thomas Vreeland, and Kenneth Gralak reached a settlement with the SEC, which included fines and suspensions from appearing or practicing before the commission, for their shoddy auditing of Quadrant 4 System Corp. (QFOR).
Manowitz, a principal at Schulman Lobel, was fined $25,000 and given a three-year ban; Vreeland, a principal at Schulman Lobel at the time of the violations who no longer works at the firm, was fined $15,000 and received a two-year ban; and Gralak, a principal and director of quality control at Schulman Lobel, was fined $9,472 and is banned for one year.
While Gralak is still listed as a principal on the firm’s website, Manowitz no longer is and her bio page has been taken down.
Schulman Lobel probably now wishes it hadn’t taken that QFOR audit engagement in April 2015. The company’s former external auditor, Sassetti LLC, resigned in early April 2015 after discovering that QFOR had issued fraudulent invoices and that unknown individuals affiliated with QFOR had returned false audit confirmations to them.
This was part of the fraudulent scheme that was going down at QFOR, which went bankrupt in 2017 as a result, according to the SEC order:
Between at least June 2012 and November 2016, Nandu Thondavadi and Dhru Desai perpetrated a fraudulent scheme through QFOR, a public company. Thondavadi, as CEO, and Desai, as CFO, used several fraudulent means to overstate QFOR’s revenue, overstate its assets, understate its liabilities, and conceal their misappropriation of at least $4.1 million. Among other things, they caused QFOR to enter into undisclosed related party transactions, misstated the terms of various acquisitions, and concealed liabilities through a variety of means. Between March 2013 and November 2016, Thondavadi and Desai caused QFOR to file false and misleading Forms 10-Q, 10-K, and 8-K, which included numerous material misstatements and omissions regarding QFOR’s revenue, acquisitions, assets, liabilities, and related party transactions and Thondavadi’s and Desai’s misappropriation and stock ownership.
The SEC charged Thondavadi and Desai with multiple violations in June 2017, including fraud, falsifying books and records, lying to auditors, falsely certifying QFOR’s filings, and aiding and abetting QFOR’s alleged violations.
Criminal charges were also filed against the two, alleging that Thondavadi and Desai obstructed the SEC’s investigation, lied to the SEC under oath, and paid two individuals to lie to the SEC during its investigation.
Desai pleaded guilty to wire fraud charges in May 2018 and was sentenced to three years in prison in September of that year. Thondavadi also pleaded guilty to wire fraud and got a five-year jail sentence.
According to the SEC, Schulman Lobel was engaged to perform QFOR’s 2014 audit, and in June 2015, after being informed that Sassetti would not reissue its 2013 audit report due to an inability to rely on management’s representations, Schulman Lobel was engaged to conduct QFOR’s 2013 audit.
Schulman Lobel’s engagement acceptance and planning workpapers for the 2013 and 2014 audits revealed that QFOR had internal control deficiencies and characterized the audits as “high risk,” according to the SEC. You think?! But that didn’t stop Manowitz and Vreeland from giving the audits their stamp of approval:
Manowitz and Vreeland served as co-engagement principals, sharing responsibility for the engagements and the issuance of the firm’s report. SL completed the 2013 and 2014 Audits in August 2015. Manowitz and Vreeland consented to the issuance of SL’s audit report that contained an unqualified opinion, which was dated August 21, 2015, and incorporated in QFOR’s 2014 Form 10-K filed the same day.
But wait, there’s more:
SL performed the 2Q2016 Review with Manowitz and Vreeland again serving as co-engagement principals, and Gralak serving as the EQR. Manowitz and Vreeland consented to, and Gralak provided concurring approval of issuance of, the release of QFOR’s 2Q2016 Form 10- Q, which was filed on August 15, 2016.
SL audited QFOR’s financial statements for the year ended December 31, 2015 (the “2015 Audit”). In late August or early September 2016, QFOR told SL that QFOR intended to file an amended Form 10-K for the year ended December 31, 2015, that would disclose, among other things, new information about certain related party transactions. On September 6, 2016, SL was engaged to audit the amended financial statements in the 2015 Form 10-K/A, which included footnote disclosures regarding certain related party transactions. Manowitz served as the engagement principal for the 2015 Form 10-K/A Audit, and Gralak served as the EQR. Manowitz and Gralak consented to the issuance of SL’s audit report that contained an unqualified opinion, which was dual-dated as of September 22, 2016, as to Notes 11 and 14 (which included the new disclosures regarding related party transactions) and March 28, 2016, as to the remainder of the financial statements, and was incorporated in QFOR’s 2015 Form 10-K/A filed on September 22, 2016.
Schulman Lobel resigned as QFOR’s auditor on Oct. 21, 2016, citing concerns about the firm’s ability to rely on management’s representations. A little over a month later, Thondavadi and Desai were arrested on federal charges of wire fraud and certifying false financial reports.
So, lots of PCAOB standards were broken by the three CPAs, including:
- Identifying and properly auditing related party transactions. (Manowitz, Vreeland, and Gralak)
- Obtaining sufficient audit evidence. (Manowitz and Vreeland)
- Conducting appropriate procedures to obtain reasonable assurance that the financial statements were free of material misstatements caused by fraud. (Manowitz and Vreeland)
- Conducting appropriate procedures upon the subsequent discovery of facts existing at the date of a previous audit report. (Manowitz)
- Conducting appropriate procedures in connection with a review of interim financial information. (Manowitz)
- Properly planning the audit and assessing and responding to risks of material misstatement. (Manowitz)
- Conducting proper engagement quality reviews. (Gralak)
- Exercising due professional care and professional skepticism. (Manowitz, Vreeland, and Gralak)
In addition, the SEC said Manowitz and Vreeland “willfully aided and abetted and caused Schulman Lobel’s violation of Regulation S-X Rule 2-02(b)(1)” when they “authorized SL to issue its audit report dated Aug. 21, 2015, stating that SL had conducted the 2013 and 2014 audits in accordance with PCAOB standards when it had not” and when they “authorized SL to issue its audit report dual-dated March 28, 2016, and Sept. 22, 2016, stating that SL had conducted the 2015 Form 10-K/A audit in accordance with PCAOB standards when it had not.”
And don’t be surprised if Schulman Lobel sends a check to the SEC in the near future, as the commission ordered a public hearing to be held within the next month or two to review the evidence against the firm regarding its auditing violations and decide on possible punishments.