Tuesday, August 16, 2022 7:01:55 AM
INTV AUDITOR RED FLAGS MUST READ! Part 2
Another One... This scam runs so deep with the INTV I really struggled to pick 2 case studies.
ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS CEASEANDDESIST TO SECTION 8 A OF ORDER AND PURSUANT A THE SECURITIES ACT ESQ., **** M&K CPAS, PLLC,
Items 1 thru 17, was related to the companies and not M&K CPAS PLLC the INTV Auditors so I did not include. The full report has all the information.
https://www.sec.gov/litigation/admin/2015/33-9918.pdf
18. In or about November 2011, Briner contacted M&K to conduct audits of certain issuers’ financial statements that were to be included in Form S-1 registration statements. Manis was the engagement partner for audits of Stone Boat and Goldstream and the engagement quality review partner for audits of Chum, Eclipse, Kingman, Bonanza, CBL, Lost Hills, Yuma, and Seaview. Ridenour (together with Manis, the “Audit Partners”) was the engagement partner for audits of Kingman, Bonanaza, CBL, Lost Hills, Yuma, and Seaview and the engagement quality review partner for audits of Stone Boat, Goldstream, and PRWC (together with Eclipse and Chum, the “Issuers”).
19. The Audit Partners knew that Briner did the accounting and created the financial statements to be used in the Form S-1 registration statements for each of the Issuers. The Audit Partners also knew that Briner maintained all of the Issuers’ purported funds “in trust” in an account Briner controlled (the “Master Trust Account”).
20. Briner and his assistant were the exclusive contacts between M&K and each Issuer’s officer. The Audit Partners did not directly communicate with any of the Issuers’ officers. The Audit Partners knew that Briner provided all of the information concerning the Issuers and all of the supporting evidence for their audits.
21. The Issuers two largest transactions consisted of the officer’s purchase of Issuer stock for $30,000 and the Issuer’s purchase of British Columbia mineral claims for between $7,500 and $8,500 from Jervis.
22. The Audit Partners conducted the Issuers’ audits, including auditing the above transactions, and consented to the inclusion of M&K’s audit report in each of the Issuers’ Form S-1 registration statements filed with the Commission. M&K was paid a total of $49,500 in fees for the Issuers’ audits. Each audit report stated that “[w]e conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States)” and that the financial statements present the Issuers’ financial position “in conformity with U.S. generally accepted accounting principles.” Respondents Failed to Detect Red Flags in Accepting and Continuing with the Issuers as Clients
23. Under PCAOB standard QC Section 20 (System of Quality Control for a CPA Firm’s Accounting and Auditing Practice) (“QC 20”), “[p]olicies and procedures should be established for deciding whether to accept or continue a client relationship” and “[s]uch policies and procedures should provide the firm with reasonable assurance that the likelihood of association with a client whose management lacks integrity is minimized” (at .14).
24. 2 Under PCAOB Auditing Standard No. 12 (Identifying and Assessing Risks of Material Misstatement) (“AS 12”), auditors should “evaluate whether information obtained from the client acceptance and retention evaluation process or audit planning activities is relevant to identifying risks of material misstatement” (¶ 41).
25. Additionally, under PCAOB Auditing Standard No. 7 (Engagement Quality Review) (“AS 7”), among other things, engagement quality review partners, should “evaluate the significant judgments made by the engagement team,” (¶ 9) including “consideration of the firm’s recent engagement experience with the company and risks identified in connection with the firm’s client acceptance and retention process” (¶ 10 a.).
26. Finally, auditors must meet PCAOB standard AU Section 230 (Due Professional Care in the Performance of Work) (“AU 230”), which requires that auditors “exercise professional skepticism” (at .07), “consider the competency and sufficiency of the evidence” (at .08), and “neither assume[] that management is dishonest nor assume[] unquestioned honesty” (at .09).
27. M&K’s client acceptance policies and procedures in effect at the time it accepted the Issuers as clients required very little. M&K’s policy called for “background checks on all significant owners and chief executives.” In practice, such check consisted of a simple Internet search.
28. The Audit Partners failed to sufficiently question or otherwise investigate the Issuers’ management, which would have revealed Briner’s undisclosed role as a control person. Nor did they conduct a background check of Briner or Dalmy, which at minimum would have turned up, among other things, the Commission’s complaint alleging fraud and suspension order against Briner, and that Briner had been on the OTC Market’s Prohibited Attorney List since March 15, 2006, and that Dalmy had also been on the list since September 25, 2009.
29. Additionally, M&K’s client acceptance policies and procedures failed to detect clues that should have raised concerns. Upon referring the Issuers, Briner’s assistant provided M&K with the names of the officers, the inception dates, and the year-end dates for each of the Issuers. From this, M&K was on notice that two of the officers controlled four Issuers. M&K was also on notice that seven of the eleven Issuers were incorporated on the same day or within one day of each other (May 31, 2012 or June 1, 2012).
30. This information should have at least caused M&K and the Audit Partners to question why the Issuers’ dates of incorporation appeared to be coordinated. The Audit Partners failed to ask any questions with respect to this information.
31. For the above reasons, M&K’s client acceptance policies and procedures failed to meet QC 20 and, in the course of utilizing these procedures during the engagements at issue, the Audit Partners failed to meet AS 7, AS 12, and AU 230. The Audit Partners Failed to Obtain an Understanding of the Issuers
32. Under AS 12, auditors should “obtain an understanding of the company and its environment . . . to understand the events, conditions, and company activities that might reasonably be expected to have a significant effect on the risks of material misstatement,” including “[t]he nature of the company” (¶ 7.b.) and “[t]he company’s objectives and strategies and those related business risks that might reasonably be expected to result in risks of material misstatement” (¶ 7.d.). Further, obtaining an understanding of the nature of the company includes understanding “[t]he company’s organizational structure and management personnel; [t]he sources of funding of the company’s operations and investment activities, including the company’s capital structure[, t]he company’s operating characteristics, including its size and complexity” (¶ 10), and “an understanding of internal control includes evaluating the design of controls that are relevant to the audit and determining whether the controls have been implemented” (¶ 20).
33. Additionally, auditors must meet AU 230, which requires that auditors “exercise professional skepticism” (at .07) and engagement partners “should be knowledgeable about the client” and are responsible for the “supervision of[] members of the engagement team” (.06).
34. The Audit Partners failed to obtain a sufficient understanding of the Issuers. What little understanding of the Issuers they obtained came almost entirely from draft Form S-1 registration statements and responses to certain questionnaires from the Issuers, both provided by Briner. The Audit Partners did not obtain an understanding of the Issuers through direct communication with the Issuers’ officers.
35. In obtaining an understanding of the Issuers, the Audit Partners did not question the substantial similarities among the Issuers. The Issuers filed eleven nearly identical Form S-1 registration statements. Using almost exactly the same language, each stated the following: (1) the Issuers are not blank check companies; (2) the Issuers’ officers purchased Issuer stock for $30,000; (2) the Issuers purchased British Columbia mineral claims from Jervis; (3) Jervis supplied nearly all the Issuers’ with their business plans; (4) the officers “solely” control the company; (5) the officers planned to devote only 4 to 5 hours each week to the business; and (6) the officers have not inspected the land comprising the mineral claims.
36. Despite Manis reviewing ten of these Form S-1 registration statements and Ridenour reviewing nine, neither raised any concern about the similarities among the registration statements, or perform any enhanced procedures to respond to the level of risk presented.
37. For the above reasons, the Audit Partners failed to meet AS 12 and AU 230.
The Audit Partners Failed to Properly Audit the Issuers’ Cash
38. Under PCAOB standard AU Section 330 (The Confirmation Process) (“AU 330”), when “information about the respondent’s [i.e., the person or entity from which a confirmation is requested] competence, knowledge, motivation, ability, or willingness to respond, or about the respondent’s objectivity and freedom from bias with respect to the audited entity comes to the auditor’s attention, the auditor should consider the effects of such information on designing the confirmation request and evaluating the results” and, in circumstances where “the respondent is the custodian of a material amount of the audited entity’s assets,” the auditor should exercise “a heightened degree of professional skepticism” and “should consider whether there is sufficient basis for concluding that the confirmation request is being sent to a respondent from whom the auditor can expect the response will provide meaningful and appropriate audit evidence” (at .27).
39. Additionally, under PCAOB Auditing Standard No. 15 (Audit Evidence) (“AS 15”), “[t]he auditor must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion” (¶ 4). To be appropriate, audit evidence must be both relevant and reliable in providing support for the conclusions on which the auditor’s opinion is based. “The reliability of evidence depends on the nature and source of the evidence and the circumstances under which it is obtained” (¶ 8). Under PCAOB Auditing Standard No. 13 (The Auditor’s Responses to the Risks of Material Misstatement) (“AS 13”), “[t]he auditor’s responses to the assessed risks of material misstatement, particularly fraud risks, should involve the application of professional skepticism in gathering and evaluating audit evidence” (¶ 7).
40. The Audit Partners exhibited no concern about Briner’s handling of the Issuers’ alleged cash. The Audit Partners knew that Briner held all of the Issuers’ purported funds in the Master Trust Account and that none of the Issuers had their own bank account. The Audit Partners also knew that Briner was a “consultant” to the Issuers and that MetroWest was a law firm. The Audit Partners did not seek any appropriate audit evidence about what, if any, limitations governed Briner’s use of the cash in his Master Trust Account. Nor did they ask for a reconciliation between Briner’s Master Trust Account and the schedules Briner provided purportedly showing how much cash in his account was attributable to each Issuer.
41. In addition, the Audit Partners violated the above standards by failing to apply professional skepticism in gathering and evaluating the evidence obtained, such as Briner’s confirmation of Issuer cash, and consider Briner’s “objectivity and freedom from bias with respect to the audited entity” in relation to the Issuers’ cash confirmation Briner provided. The Audit Partners Disregarded Red Flags that Briner’s Services to the Issuers Were Not Given Accounting Recognition
42. Under PCAOB standard AU Section 334 (Related Parties) (“AU 334”), transactions that are indicative of the existence of related parties include, among other things, “transactions [that] are occurring, but are not being given accounting recognition, such as receiving or providing accounting, management or other services at no charge” (at .08(f)). Further, under AS 15, “f audit evidence obtained from one source is inconsistent with that obtained from another, or if the auditor has doubts about the reliability of information to be used as audit evidence, the auditor
should perform the audit procedures necessary to resolve the matter and should determine the effect, if any, on other aspects of the audit” (¶ 29). Finally, auditors must exercise professional skepticism throughout the course of the engagement consistent with standard AU 230.
43. The Audit Partners failed to question Briner’s fee arrangement with the Issuers. Instead, they relied on legal confirmation letters from Briner that conflicted on their face with what ledgers in their possession showed to be true about the services Briner provided.
44. These letters each stated that “[a]s of the date of inception and up to the present date, the [Issuers were] not indebted to us for services and expenses (billed or unbilled) of which we are aware.” The Audit Partners knew that Briner provided substantial services to the Issuers, such as, among other things, performing accounting functions (paying expenses and recording transactions), drafting the Issuers’ registration statements, and preparing the Issuers’ financial statements for their registration statements. The Audit Partners also knew that the Issuers’ financial statements and general ledgers did not reflect payment for Briner’s services. Despite this, the Audit Partners did not ask Briner for any invoices, agreements, engagement letters, or any details about his fee arrangements with the Issuers. Nor did they conduct any related party analysis.
45. 230. For the above reasons, the Audit Partners failed to meet AU 334, AS 15, and AU The Audit Partners Disregarded Red Flags that the Issuers’ Stock Sales to Their Officers Were Shams
46. Under PCAOB Auditing Standard No. 10 (Supervision of the Audit Engagement) (“AS 10”), the engagement partner “is responsible for proper supervision of the work of engagement team members and for compliance with PCAOB standards” (¶ 3) and should “[d]irect engagement team members to bring significant accounting and auditing issues arising during the audit to the attention of the engagement partner or other engagement team members performing supervisory activities so they can evaluate those issues and determine that appropriate actions are taken in accordance with PCAOB standards” (¶ 5 b.).
47. Briner provided an M&K staff member with schedules for each of the Issuers (prepared by Briner) purportedly listing all transactions that the M&K staff member reviewed (the same person reviewed the audit evidence for all of the Issuers’ audits).
48. Each of the schedules appeared to indicate that individuals or entities named “Hyperion Mgmt.”, “Luke Pretty”, or “Dhaliwal” supplied the funds to pay for the officers’ stock purchases and characterized these transactions as “investments.” The Issuers’ registration statements and stock purchase agreements (also reviewed by the same M&K staff member referred to above), by contrast, indicated that the Issuers’ respective officers paid for and purchased the Issuers’ stock.
49. Additionally, these schedules contained contradictions, such as dates listed for stock purchases that occurred (1) before the Issuers were incorporated or (2) after the Issuers purchased their mineral claims.
50. The Audit Partners disregarded these inconsistencies and contradictions in the audit evidence in violation of AS 15, AS 12, and AU 230. The Audit Partners also failed to meet AS 10 by failing to direct the M&K staff member reviewing the audit evidence to bring significant accounting and auditing issues to their attention and by otherwise failing to supervise the M&K Issuers’ audits. The Audit Partners Failed to Detect Basic Accounting Errors and Inconsistencies Between the Financial Statements and the Registration Statements
51. Under AU 230, “[a]n auditor should possess ‘the degree of skill commonly possessed’ by other auditors and should exercise it with ‘reasonable care and diligence’ (that is, with due professional care)” (at .05). Further, under AS 7, an engagement quality review partner should “review the financial statements” and “read other information in documents containing the financial statements to be filed with the Securities and Exchange Commission . . . and evaluate whether the engagement team has taken appropriate action with respect to any material inconsistencies with the financial statements or material misstatements of fact of which the engagement quality reviewer is aware” (¶ 10 f. and g.).
52. During the audits and engagement quality reviews, the Audit Partners failed to detect basic mistakes in the Issuers’ financial statements and inconsistencies between the financial statements and information contained in other parts of the registration statements as reflected in the chart under Appendix A.
53. Mistakes in the financial statements include, among other things, balance sheets that do not foot and conflicts between balance sheets and the notes to the financial statements. Inconsistences between the financial statements and other information in the registration statements include, among other things, the disclosure of a net loss in the registration statement that conflicts with what should be the same disclosure in the Statement of Operations in the financial statements. These errors may constitute material misstatements and reflect the Audit Partners apparent lack of due care in conducting their audits and engagement quality reviews, respectively.
54. For the reasons contained in the attached Chart under Appendix A, the Audit Partners failed to meet AU 230 and AS 7. Manis Did Not Investigate Failures to Account For Audit Fees
55. Under AS 15, “[t]he auditor must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion” (¶ 4). In doing so, the auditor must exercise professional skepticism throughout the course of the engagement consistent with AU 230.
56. Additionally, under PCAOB Auditing Standard No. 14 (Evaluating Audit Results) (“AS 14”), the “auditor should take into account all relevant audit evidence, regardless of whether it appears to corroborate or to contradict the assertions in the financial statements” (¶ 3) and should take into account “[t]ransactions that are not recorded in a complete or timely manner or are improperly recorded as to amount, accounting period, classification, or company policy” (Appendix C, C1.a.(1)).
57. Manis did not question the Issuers’ failures to account for audit fees paid during the audit period. Specifically, M&K requested retainers from Stone Boat and Goldstream, which were paid via wire transfers from Briner’s Master Trust Account during the audit period for these Issuers. But the retainers M&K received from these Issuers were not reflected in the corresponding schedules that Briner prepared from his Master Trust Account and provided to M&K.
58. For the above reasons, Manis failed to meet AS 14, AS 15, and AU 230. Manis Accepted Accounting that Violated GAAP
59. From November 2011 through June 2013, Manis served as the engagement partner in charge of auditing Stone Boat’s financial statements, the first of the eleven Issuers that M&K would audit. On or about July 27, 2012, Manis consented to the inclusion of M&K’s audit report in Stone Boat’s Form S-1 registration statement.
60. Manis accepted without question Briner’s improper accounting of certain material transactions. Specifically, Briner deleted Stone Boat transactions that purportedly occurred during the audit period on grounds that Stone Boat had purportedly “rescind[ed]” the transactions after the audit period.
61. On June 11, 2012, Briner’s assistant sent to M&K, among other things, a schedule purportedly reflecting cash attributable to Stone Boat in the Master Trust Account and financial statements for Stone Boat reflecting all transactions as of May 31, 2012 (Stone Boat’s period end). These documents reflected, among other things, (1) a $250,000 private placement for the sale of Stone Boat stock, (2) payments of $75,000 and $67,500 for property, and (3) a $10,000 legal retainer. Briner’s assistant also sent a cash confirmation, dated June 11, 2012, signed by Briner confirming that as of May 31, 2012, Briner held $106,105 in cash attributable to Stone Boat in the Master Trust Account.
62. On June 27, 2012, approximately one month after the period’s end, Briner sent an email to an M&K employee working on the Stone Boat audit stating the following: There have been some dramatic changes with the company over the past two weeks. The Company was forced to rescind the private placement it received for $250,000. As such, it has reversed the two property payments it made as well as the legal retainer for $10,000. Accordingly, I have reversed all of the transactions required by these changes and am sending you the updated financials and [general ledger].
63. According to Briner’s email, the purported rescission apparently occurred after Briner sent the first set of Stone Boat financial statements on June 11, 2012 and therefore, after the period ending May 31, 2012. These subsequent events, therefore, should be treated as nonrecognized subsequent events and should not result in adjustment of the financial statements. See ASC 855-10-25-3 (Evidence about Conditions That Did Not Exist at the Date of the Balance Sheet). Briner’s accounting on behalf of Stone Boat, therefore, violated GAAP. Manis did not question the business rationale or motive behind the rescission or Stone Boat’s ability to back-out of the transactions such as by conducting an “examination of data to assure that proper cutoffs have been made and . . . information to aid the auditor in his evaluation of the assets and liabilities as of the balance-sheet date,” as required under PCAOB standard AU Section 560 (Subsequent Events) (“AU 560”) (at .11).
64. Yet Manis accepted this accounting without question. Further, Manis raised no concern with the new documents Briner provided that excluded the above transactions as well as a second cash confirmation dated July 20, 2012 and signed by Briner confirming that, as of May 31, 2012, Briner held $9,570.00 of cash attributable to Stone Boat in his Master Trust Account. Manis failed to resolve the material difference between the June 11, 2012 cash confirmation of $106,105 and the July 20, 2012 cash confirmation of $9,570.
65. In addition to consenting to the filing of his firm’s audit report where the Issuers’ underlying accounting violated GAAP, Manis failed to meet AS 15, AS 12, AS 3, AU 560, and AU 230 for failing to obtain sufficient appropriate evidence, exercise professional skepticism, and document the consideration of Briner’s accounting with respect to the alleged rescission. Manis also failed to meet PCAOB standard AU Section 316 (Consideration of Fraud in a Financial Statement Audit) (“AU 316”) for not gaining “an understanding of the business rationale for [a significant transaction that is outside of the normal course of business for the entity] and whether that rationale (or the lack thereof) suggests that the transactions may have been entered into to engage in fraudulent financial reporting or conceal misappropriation of assets” (at .66).
66. Further, Ridenour, as the engagement quality review partner for Stone Boat, violated AS 7, which provides that an engagement quality review partner should “evaluate the significant judgments made by the engagement team and the related conclusions reached in forming the overall conclusion on the engagement” (¶ 9). Manis’s decision not to evaluate the manner in which Briner, on behalf of Stone Boat, accounted for the purported rescission was a significant judgment Ridenour should have, but failed, to evaluate. Manis Ignored Red Flags Indicating that Briner May Have Engaged in a Related Party Transaction With Stone Boat
67. Under AU 334, transactions that because of their nature may be indicative of the existence of related parties include, among other things, “orrowing or lending on an interest-free basis” and “[m]aking loans with no scheduled terms for when or how the funds will be repaid” (at .03(a) and (d)). Further, under AS 15, “f audit evidence obtained from one source is inconsistent with that obtained from another, or if the auditor has doubts about the reliability of information to be used as audit evidence, the auditor should perform the audit procedures necessary to resolve the matter and should determine the effect, if any, on other aspects of the audit” (¶ 29). Finally, auditors must exercise professional skepticism throughout the course of the engagement consistent with AU 230.
68. Manis ignored evidence indicating that Stone Boat may have engaged in a related party transaction with Briner and therefore failed to meet the above standards.
69. On June 13, 2012, Briner’s assistant sent an email to an M&K employee with two documents: (1) a related party worksheet listing no related parties for the period ending May 31, 2012 that was signed by Stone Boat’s officer, and (2) a confirmation that as of May 31, 2012, MetroWest issued a $100,000 “non-interest bearing demand loan” to Stone Boat.
70. Despite the apparent contradiction between the MetroWest loan to Stone Boat and Stone Boat’s officer’s assertion that that there were no related party transactions during the audit period, the M&K employee did not investigate the nature of the alleged noninterest bearing loan from MetroWest, including whether it constituted a related party transaction. As a result, Manis violated AU 334, AS 15, AU 230, and AS 10 by failing to direct the M&K staff member reviewing the audit evidence to bring this significant accounting and auditing issue to his attention and by otherwise failing to supervise the Stone Boat audit. RESPONDENTS VIOLATED SECTION 17(a) OF THE SECURITES ACT, RULE 2-02 OF REGULATION S-X, AND ENGAGED IN IMPROPER PROFESSIONAL CONDUCT
71. As a result of the conduct described above, Respondents violated Sections 17(a)(2) and (3) of the Securities Act by claiming that they conducted the Issuers’ audits in accordance with PCAOB standards when in fact they did not.
72. Additionally, for failing to meet the PCAOB audit standards identified above in auditing the Issuers, Respondents engaged in improper professional conduct pursuant to the Commission’s Rules of Practice Rule 102(e)(1)(ii) by each engaging in at least one instance of highly unreasonable conduct or at least two instances of unreasonable conduct under Rule 102(e)(1)(iv). Further, M&K violated Rule 2-02(b)(1) of Regulation S-X by providing audit reports included in the Issuers’ Form S-1 Registration statements that state that the Issuers’ audits were conducted in accordance with PCAOB standards when in fact they were not. Manis and Ridenour caused M&K’s violations of Rule 2-02(b)(1) of Regulation S-X by consenting to the filing of such audit reports.
73. Further, as described above, Respondents willfully violated Sections 17(a)(2) and (3) of the Securities Act thereby engaging in conduct subject to the Commission’s Rules of Practice Rule 102(e)(1)(iii).
Another One... This scam runs so deep with the INTV I really struggled to pick 2 case studies.
ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS CEASEANDDESIST TO SECTION 8 A OF ORDER AND PURSUANT A THE SECURITIES ACT ESQ., **** M&K CPAS, PLLC,
Items 1 thru 17, was related to the companies and not M&K CPAS PLLC the INTV Auditors so I did not include. The full report has all the information.
https://www.sec.gov/litigation/admin/2015/33-9918.pdf
18. In or about November 2011, Briner contacted M&K to conduct audits of certain issuers’ financial statements that were to be included in Form S-1 registration statements. Manis was the engagement partner for audits of Stone Boat and Goldstream and the engagement quality review partner for audits of Chum, Eclipse, Kingman, Bonanza, CBL, Lost Hills, Yuma, and Seaview. Ridenour (together with Manis, the “Audit Partners”) was the engagement partner for audits of Kingman, Bonanaza, CBL, Lost Hills, Yuma, and Seaview and the engagement quality review partner for audits of Stone Boat, Goldstream, and PRWC (together with Eclipse and Chum, the “Issuers”).
19. The Audit Partners knew that Briner did the accounting and created the financial statements to be used in the Form S-1 registration statements for each of the Issuers. The Audit Partners also knew that Briner maintained all of the Issuers’ purported funds “in trust” in an account Briner controlled (the “Master Trust Account”).
20. Briner and his assistant were the exclusive contacts between M&K and each Issuer’s officer. The Audit Partners did not directly communicate with any of the Issuers’ officers. The Audit Partners knew that Briner provided all of the information concerning the Issuers and all of the supporting evidence for their audits.
21. The Issuers two largest transactions consisted of the officer’s purchase of Issuer stock for $30,000 and the Issuer’s purchase of British Columbia mineral claims for between $7,500 and $8,500 from Jervis.
22. The Audit Partners conducted the Issuers’ audits, including auditing the above transactions, and consented to the inclusion of M&K’s audit report in each of the Issuers’ Form S-1 registration statements filed with the Commission. M&K was paid a total of $49,500 in fees for the Issuers’ audits. Each audit report stated that “[w]e conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States)” and that the financial statements present the Issuers’ financial position “in conformity with U.S. generally accepted accounting principles.” Respondents Failed to Detect Red Flags in Accepting and Continuing with the Issuers as Clients
23. Under PCAOB standard QC Section 20 (System of Quality Control for a CPA Firm’s Accounting and Auditing Practice) (“QC 20”), “[p]olicies and procedures should be established for deciding whether to accept or continue a client relationship” and “[s]uch policies and procedures should provide the firm with reasonable assurance that the likelihood of association with a client whose management lacks integrity is minimized” (at .14).
24. 2 Under PCAOB Auditing Standard No. 12 (Identifying and Assessing Risks of Material Misstatement) (“AS 12”), auditors should “evaluate whether information obtained from the client acceptance and retention evaluation process or audit planning activities is relevant to identifying risks of material misstatement” (¶ 41).
25. Additionally, under PCAOB Auditing Standard No. 7 (Engagement Quality Review) (“AS 7”), among other things, engagement quality review partners, should “evaluate the significant judgments made by the engagement team,” (¶ 9) including “consideration of the firm’s recent engagement experience with the company and risks identified in connection with the firm’s client acceptance and retention process” (¶ 10 a.).
26. Finally, auditors must meet PCAOB standard AU Section 230 (Due Professional Care in the Performance of Work) (“AU 230”), which requires that auditors “exercise professional skepticism” (at .07), “consider the competency and sufficiency of the evidence” (at .08), and “neither assume[] that management is dishonest nor assume[] unquestioned honesty” (at .09).
27. M&K’s client acceptance policies and procedures in effect at the time it accepted the Issuers as clients required very little. M&K’s policy called for “background checks on all significant owners and chief executives.” In practice, such check consisted of a simple Internet search.
28. The Audit Partners failed to sufficiently question or otherwise investigate the Issuers’ management, which would have revealed Briner’s undisclosed role as a control person. Nor did they conduct a background check of Briner or Dalmy, which at minimum would have turned up, among other things, the Commission’s complaint alleging fraud and suspension order against Briner, and that Briner had been on the OTC Market’s Prohibited Attorney List since March 15, 2006, and that Dalmy had also been on the list since September 25, 2009.
29. Additionally, M&K’s client acceptance policies and procedures failed to detect clues that should have raised concerns. Upon referring the Issuers, Briner’s assistant provided M&K with the names of the officers, the inception dates, and the year-end dates for each of the Issuers. From this, M&K was on notice that two of the officers controlled four Issuers. M&K was also on notice that seven of the eleven Issuers were incorporated on the same day or within one day of each other (May 31, 2012 or June 1, 2012).
30. This information should have at least caused M&K and the Audit Partners to question why the Issuers’ dates of incorporation appeared to be coordinated. The Audit Partners failed to ask any questions with respect to this information.
31. For the above reasons, M&K’s client acceptance policies and procedures failed to meet QC 20 and, in the course of utilizing these procedures during the engagements at issue, the Audit Partners failed to meet AS 7, AS 12, and AU 230. The Audit Partners Failed to Obtain an Understanding of the Issuers
32. Under AS 12, auditors should “obtain an understanding of the company and its environment . . . to understand the events, conditions, and company activities that might reasonably be expected to have a significant effect on the risks of material misstatement,” including “[t]he nature of the company” (¶ 7.b.) and “[t]he company’s objectives and strategies and those related business risks that might reasonably be expected to result in risks of material misstatement” (¶ 7.d.). Further, obtaining an understanding of the nature of the company includes understanding “[t]he company’s organizational structure and management personnel; [t]he sources of funding of the company’s operations and investment activities, including the company’s capital structure[, t]he company’s operating characteristics, including its size and complexity” (¶ 10), and “an understanding of internal control includes evaluating the design of controls that are relevant to the audit and determining whether the controls have been implemented” (¶ 20).
33. Additionally, auditors must meet AU 230, which requires that auditors “exercise professional skepticism” (at .07) and engagement partners “should be knowledgeable about the client” and are responsible for the “supervision of[] members of the engagement team” (.06).
34. The Audit Partners failed to obtain a sufficient understanding of the Issuers. What little understanding of the Issuers they obtained came almost entirely from draft Form S-1 registration statements and responses to certain questionnaires from the Issuers, both provided by Briner. The Audit Partners did not obtain an understanding of the Issuers through direct communication with the Issuers’ officers.
35. In obtaining an understanding of the Issuers, the Audit Partners did not question the substantial similarities among the Issuers. The Issuers filed eleven nearly identical Form S-1 registration statements. Using almost exactly the same language, each stated the following: (1) the Issuers are not blank check companies; (2) the Issuers’ officers purchased Issuer stock for $30,000; (2) the Issuers purchased British Columbia mineral claims from Jervis; (3) Jervis supplied nearly all the Issuers’ with their business plans; (4) the officers “solely” control the company; (5) the officers planned to devote only 4 to 5 hours each week to the business; and (6) the officers have not inspected the land comprising the mineral claims.
36. Despite Manis reviewing ten of these Form S-1 registration statements and Ridenour reviewing nine, neither raised any concern about the similarities among the registration statements, or perform any enhanced procedures to respond to the level of risk presented.
37. For the above reasons, the Audit Partners failed to meet AS 12 and AU 230.
The Audit Partners Failed to Properly Audit the Issuers’ Cash
38. Under PCAOB standard AU Section 330 (The Confirmation Process) (“AU 330”), when “information about the respondent’s [i.e., the person or entity from which a confirmation is requested] competence, knowledge, motivation, ability, or willingness to respond, or about the respondent’s objectivity and freedom from bias with respect to the audited entity comes to the auditor’s attention, the auditor should consider the effects of such information on designing the confirmation request and evaluating the results” and, in circumstances where “the respondent is the custodian of a material amount of the audited entity’s assets,” the auditor should exercise “a heightened degree of professional skepticism” and “should consider whether there is sufficient basis for concluding that the confirmation request is being sent to a respondent from whom the auditor can expect the response will provide meaningful and appropriate audit evidence” (at .27).
39. Additionally, under PCAOB Auditing Standard No. 15 (Audit Evidence) (“AS 15”), “[t]he auditor must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion” (¶ 4). To be appropriate, audit evidence must be both relevant and reliable in providing support for the conclusions on which the auditor’s opinion is based. “The reliability of evidence depends on the nature and source of the evidence and the circumstances under which it is obtained” (¶ 8). Under PCAOB Auditing Standard No. 13 (The Auditor’s Responses to the Risks of Material Misstatement) (“AS 13”), “[t]he auditor’s responses to the assessed risks of material misstatement, particularly fraud risks, should involve the application of professional skepticism in gathering and evaluating audit evidence” (¶ 7).
40. The Audit Partners exhibited no concern about Briner’s handling of the Issuers’ alleged cash. The Audit Partners knew that Briner held all of the Issuers’ purported funds in the Master Trust Account and that none of the Issuers had their own bank account. The Audit Partners also knew that Briner was a “consultant” to the Issuers and that MetroWest was a law firm. The Audit Partners did not seek any appropriate audit evidence about what, if any, limitations governed Briner’s use of the cash in his Master Trust Account. Nor did they ask for a reconciliation between Briner’s Master Trust Account and the schedules Briner provided purportedly showing how much cash in his account was attributable to each Issuer.
41. In addition, the Audit Partners violated the above standards by failing to apply professional skepticism in gathering and evaluating the evidence obtained, such as Briner’s confirmation of Issuer cash, and consider Briner’s “objectivity and freedom from bias with respect to the audited entity” in relation to the Issuers’ cash confirmation Briner provided. The Audit Partners Disregarded Red Flags that Briner’s Services to the Issuers Were Not Given Accounting Recognition
42. Under PCAOB standard AU Section 334 (Related Parties) (“AU 334”), transactions that are indicative of the existence of related parties include, among other things, “transactions [that] are occurring, but are not being given accounting recognition, such as receiving or providing accounting, management or other services at no charge” (at .08(f)). Further, under AS 15, “f audit evidence obtained from one source is inconsistent with that obtained from another, or if the auditor has doubts about the reliability of information to be used as audit evidence, the auditor
should perform the audit procedures necessary to resolve the matter and should determine the effect, if any, on other aspects of the audit” (¶ 29). Finally, auditors must exercise professional skepticism throughout the course of the engagement consistent with standard AU 230.
43. The Audit Partners failed to question Briner’s fee arrangement with the Issuers. Instead, they relied on legal confirmation letters from Briner that conflicted on their face with what ledgers in their possession showed to be true about the services Briner provided.
44. These letters each stated that “[a]s of the date of inception and up to the present date, the [Issuers were] not indebted to us for services and expenses (billed or unbilled) of which we are aware.” The Audit Partners knew that Briner provided substantial services to the Issuers, such as, among other things, performing accounting functions (paying expenses and recording transactions), drafting the Issuers’ registration statements, and preparing the Issuers’ financial statements for their registration statements. The Audit Partners also knew that the Issuers’ financial statements and general ledgers did not reflect payment for Briner’s services. Despite this, the Audit Partners did not ask Briner for any invoices, agreements, engagement letters, or any details about his fee arrangements with the Issuers. Nor did they conduct any related party analysis.
45. 230. For the above reasons, the Audit Partners failed to meet AU 334, AS 15, and AU The Audit Partners Disregarded Red Flags that the Issuers’ Stock Sales to Their Officers Were Shams
46. Under PCAOB Auditing Standard No. 10 (Supervision of the Audit Engagement) (“AS 10”), the engagement partner “is responsible for proper supervision of the work of engagement team members and for compliance with PCAOB standards” (¶ 3) and should “[d]irect engagement team members to bring significant accounting and auditing issues arising during the audit to the attention of the engagement partner or other engagement team members performing supervisory activities so they can evaluate those issues and determine that appropriate actions are taken in accordance with PCAOB standards” (¶ 5 b.).
47. Briner provided an M&K staff member with schedules for each of the Issuers (prepared by Briner) purportedly listing all transactions that the M&K staff member reviewed (the same person reviewed the audit evidence for all of the Issuers’ audits).
48. Each of the schedules appeared to indicate that individuals or entities named “Hyperion Mgmt.”, “Luke Pretty”, or “Dhaliwal” supplied the funds to pay for the officers’ stock purchases and characterized these transactions as “investments.” The Issuers’ registration statements and stock purchase agreements (also reviewed by the same M&K staff member referred to above), by contrast, indicated that the Issuers’ respective officers paid for and purchased the Issuers’ stock.
49. Additionally, these schedules contained contradictions, such as dates listed for stock purchases that occurred (1) before the Issuers were incorporated or (2) after the Issuers purchased their mineral claims.
50. The Audit Partners disregarded these inconsistencies and contradictions in the audit evidence in violation of AS 15, AS 12, and AU 230. The Audit Partners also failed to meet AS 10 by failing to direct the M&K staff member reviewing the audit evidence to bring significant accounting and auditing issues to their attention and by otherwise failing to supervise the M&K Issuers’ audits. The Audit Partners Failed to Detect Basic Accounting Errors and Inconsistencies Between the Financial Statements and the Registration Statements
51. Under AU 230, “[a]n auditor should possess ‘the degree of skill commonly possessed’ by other auditors and should exercise it with ‘reasonable care and diligence’ (that is, with due professional care)” (at .05). Further, under AS 7, an engagement quality review partner should “review the financial statements” and “read other information in documents containing the financial statements to be filed with the Securities and Exchange Commission . . . and evaluate whether the engagement team has taken appropriate action with respect to any material inconsistencies with the financial statements or material misstatements of fact of which the engagement quality reviewer is aware” (¶ 10 f. and g.).
52. During the audits and engagement quality reviews, the Audit Partners failed to detect basic mistakes in the Issuers’ financial statements and inconsistencies between the financial statements and information contained in other parts of the registration statements as reflected in the chart under Appendix A.
53. Mistakes in the financial statements include, among other things, balance sheets that do not foot and conflicts between balance sheets and the notes to the financial statements. Inconsistences between the financial statements and other information in the registration statements include, among other things, the disclosure of a net loss in the registration statement that conflicts with what should be the same disclosure in the Statement of Operations in the financial statements. These errors may constitute material misstatements and reflect the Audit Partners apparent lack of due care in conducting their audits and engagement quality reviews, respectively.
54. For the reasons contained in the attached Chart under Appendix A, the Audit Partners failed to meet AU 230 and AS 7. Manis Did Not Investigate Failures to Account For Audit Fees
55. Under AS 15, “[t]he auditor must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion” (¶ 4). In doing so, the auditor must exercise professional skepticism throughout the course of the engagement consistent with AU 230.
56. Additionally, under PCAOB Auditing Standard No. 14 (Evaluating Audit Results) (“AS 14”), the “auditor should take into account all relevant audit evidence, regardless of whether it appears to corroborate or to contradict the assertions in the financial statements” (¶ 3) and should take into account “[t]ransactions that are not recorded in a complete or timely manner or are improperly recorded as to amount, accounting period, classification, or company policy” (Appendix C, C1.a.(1)).
57. Manis did not question the Issuers’ failures to account for audit fees paid during the audit period. Specifically, M&K requested retainers from Stone Boat and Goldstream, which were paid via wire transfers from Briner’s Master Trust Account during the audit period for these Issuers. But the retainers M&K received from these Issuers were not reflected in the corresponding schedules that Briner prepared from his Master Trust Account and provided to M&K.
58. For the above reasons, Manis failed to meet AS 14, AS 15, and AU 230. Manis Accepted Accounting that Violated GAAP
59. From November 2011 through June 2013, Manis served as the engagement partner in charge of auditing Stone Boat’s financial statements, the first of the eleven Issuers that M&K would audit. On or about July 27, 2012, Manis consented to the inclusion of M&K’s audit report in Stone Boat’s Form S-1 registration statement.
60. Manis accepted without question Briner’s improper accounting of certain material transactions. Specifically, Briner deleted Stone Boat transactions that purportedly occurred during the audit period on grounds that Stone Boat had purportedly “rescind[ed]” the transactions after the audit period.
61. On June 11, 2012, Briner’s assistant sent to M&K, among other things, a schedule purportedly reflecting cash attributable to Stone Boat in the Master Trust Account and financial statements for Stone Boat reflecting all transactions as of May 31, 2012 (Stone Boat’s period end). These documents reflected, among other things, (1) a $250,000 private placement for the sale of Stone Boat stock, (2) payments of $75,000 and $67,500 for property, and (3) a $10,000 legal retainer. Briner’s assistant also sent a cash confirmation, dated June 11, 2012, signed by Briner confirming that as of May 31, 2012, Briner held $106,105 in cash attributable to Stone Boat in the Master Trust Account.
62. On June 27, 2012, approximately one month after the period’s end, Briner sent an email to an M&K employee working on the Stone Boat audit stating the following: There have been some dramatic changes with the company over the past two weeks. The Company was forced to rescind the private placement it received for $250,000. As such, it has reversed the two property payments it made as well as the legal retainer for $10,000. Accordingly, I have reversed all of the transactions required by these changes and am sending you the updated financials and [general ledger].
63. According to Briner’s email, the purported rescission apparently occurred after Briner sent the first set of Stone Boat financial statements on June 11, 2012 and therefore, after the period ending May 31, 2012. These subsequent events, therefore, should be treated as nonrecognized subsequent events and should not result in adjustment of the financial statements. See ASC 855-10-25-3 (Evidence about Conditions That Did Not Exist at the Date of the Balance Sheet). Briner’s accounting on behalf of Stone Boat, therefore, violated GAAP. Manis did not question the business rationale or motive behind the rescission or Stone Boat’s ability to back-out of the transactions such as by conducting an “examination of data to assure that proper cutoffs have been made and . . . information to aid the auditor in his evaluation of the assets and liabilities as of the balance-sheet date,” as required under PCAOB standard AU Section 560 (Subsequent Events) (“AU 560”) (at .11).
64. Yet Manis accepted this accounting without question. Further, Manis raised no concern with the new documents Briner provided that excluded the above transactions as well as a second cash confirmation dated July 20, 2012 and signed by Briner confirming that, as of May 31, 2012, Briner held $9,570.00 of cash attributable to Stone Boat in his Master Trust Account. Manis failed to resolve the material difference between the June 11, 2012 cash confirmation of $106,105 and the July 20, 2012 cash confirmation of $9,570.
65. In addition to consenting to the filing of his firm’s audit report where the Issuers’ underlying accounting violated GAAP, Manis failed to meet AS 15, AS 12, AS 3, AU 560, and AU 230 for failing to obtain sufficient appropriate evidence, exercise professional skepticism, and document the consideration of Briner’s accounting with respect to the alleged rescission. Manis also failed to meet PCAOB standard AU Section 316 (Consideration of Fraud in a Financial Statement Audit) (“AU 316”) for not gaining “an understanding of the business rationale for [a significant transaction that is outside of the normal course of business for the entity] and whether that rationale (or the lack thereof) suggests that the transactions may have been entered into to engage in fraudulent financial reporting or conceal misappropriation of assets” (at .66).
66. Further, Ridenour, as the engagement quality review partner for Stone Boat, violated AS 7, which provides that an engagement quality review partner should “evaluate the significant judgments made by the engagement team and the related conclusions reached in forming the overall conclusion on the engagement” (¶ 9). Manis’s decision not to evaluate the manner in which Briner, on behalf of Stone Boat, accounted for the purported rescission was a significant judgment Ridenour should have, but failed, to evaluate. Manis Ignored Red Flags Indicating that Briner May Have Engaged in a Related Party Transaction With Stone Boat
67. Under AU 334, transactions that because of their nature may be indicative of the existence of related parties include, among other things, “orrowing or lending on an interest-free basis” and “[m]aking loans with no scheduled terms for when or how the funds will be repaid” (at .03(a) and (d)). Further, under AS 15, “f audit evidence obtained from one source is inconsistent with that obtained from another, or if the auditor has doubts about the reliability of information to be used as audit evidence, the auditor should perform the audit procedures necessary to resolve the matter and should determine the effect, if any, on other aspects of the audit” (¶ 29). Finally, auditors must exercise professional skepticism throughout the course of the engagement consistent with AU 230.
68. Manis ignored evidence indicating that Stone Boat may have engaged in a related party transaction with Briner and therefore failed to meet the above standards.
69. On June 13, 2012, Briner’s assistant sent an email to an M&K employee with two documents: (1) a related party worksheet listing no related parties for the period ending May 31, 2012 that was signed by Stone Boat’s officer, and (2) a confirmation that as of May 31, 2012, MetroWest issued a $100,000 “non-interest bearing demand loan” to Stone Boat.
70. Despite the apparent contradiction between the MetroWest loan to Stone Boat and Stone Boat’s officer’s assertion that that there were no related party transactions during the audit period, the M&K employee did not investigate the nature of the alleged noninterest bearing loan from MetroWest, including whether it constituted a related party transaction. As a result, Manis violated AU 334, AS 15, AU 230, and AS 10 by failing to direct the M&K staff member reviewing the audit evidence to bring this significant accounting and auditing issue to his attention and by otherwise failing to supervise the Stone Boat audit. RESPONDENTS VIOLATED SECTION 17(a) OF THE SECURITES ACT, RULE 2-02 OF REGULATION S-X, AND ENGAGED IN IMPROPER PROFESSIONAL CONDUCT
71. As a result of the conduct described above, Respondents violated Sections 17(a)(2) and (3) of the Securities Act by claiming that they conducted the Issuers’ audits in accordance with PCAOB standards when in fact they did not.
72. Additionally, for failing to meet the PCAOB audit standards identified above in auditing the Issuers, Respondents engaged in improper professional conduct pursuant to the Commission’s Rules of Practice Rule 102(e)(1)(ii) by each engaging in at least one instance of highly unreasonable conduct or at least two instances of unreasonable conduct under Rule 102(e)(1)(iv). Further, M&K violated Rule 2-02(b)(1) of Regulation S-X by providing audit reports included in the Issuers’ Form S-1 Registration statements that state that the Issuers’ audits were conducted in accordance with PCAOB standards when in fact they were not. Manis and Ridenour caused M&K’s violations of Rule 2-02(b)(1) of Regulation S-X by consenting to the filing of such audit reports.
73. Further, as described above, Respondents willfully violated Sections 17(a)(2) and (3) of the Securities Act thereby engaging in conduct subject to the Commission’s Rules of Practice Rule 102(e)(1)(iii).
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