Compliance, Corp Finance, Enforcement

SEC Charges Audit Firm Marcum LLP for Widespread Quality Control Deficiencies

Marcum LLP Faces SEC Charges for Audit Quality Control Failures

In a significant development, audit firm Marcum LLP has come under scrutiny by the Securities and Exchange Commission (SEC) for its systemic quality control failures and violations of audit standards. The charges are particularly related to its audit work for numerous special purpose acquisition company (SPAC) clients, dating back to 2020. As a result, Marcum has agreed to pay a substantial $10 million penalty to settle the charges. This article delves into the details of the SEC’s order and sheds light on the consequences faced by Marcum.

Growth Strains Reveal Systemic Deficiencies

According to the SEC’s order, Marcum experienced a remarkable surge in its number of public company clients, with a particular emphasis on SPACs, during a three-year period. In 2020 and 2021 alone, Marcum audited over 400 SPAC initial public offerings, highlighting the scale of its involvement in this segment. However, the strain of rapid growth unearthed significant deficiencies in the firm’s quality control policies and procedures, which were present even before this expansion. These weaknesses permeated all stages of the audit process and were amplified as Marcum took on more SPAC clients.

Violations of Audit Standards and Consequences

The SEC’s order reveals numerous violations of audit standards in Marcum’s handling of SPAC audits. The firm failed to comply with requirements related to audit documentation, engagement quality reviews, risk assessments, audit committee communications, engagement partner supervision and review, and due professional care. Notably, these violations were found in 25-50 percent of audits reviewed, with certain audit standards exhibiting nearly wholesale violations across Marcum’s SPAC practice.

SEC Chair Gary Gensler emphasizes the critical role of public company auditors in safeguarding investors and capital markets. However, he notes that Marcum neglected its gatekeeper function in favor of rapid growth. The firm’s audacious pursuit of business expansion outpaced the development of a robust system of quality controls. This situation jeopardized the interests of Marcum’s clients and the broader investing public.

Consequences and Accountability in the SPAC Space

From 2020 to 2021, the SPAC market witnessed an overwhelming boom, with over 860 SPACs completing initial public offerings. Shockingly, Marcum audited nearly half of these SPACs without adequately considering their capacity to serve as a gatekeeper. Gurbir S. Grewal, Director of the Division of Enforcement, highlights the enforcement action initiated by the staff, bringing much-needed accountability to the SPAC space. Marcum’s actions placed investors at risk, underscoring the significance of this enforcement action.

Inadequate System of Quality Control

The SEC’s order reveals that Marcum failed to design, implement, and monitor an adequate system of quality control concerning certain audit standards and other key components, including client acceptance and technical consultations. To rectify these shortcomings, Marcum will be required to engage in extensive undertakings that ensure compliance with essential quality control and audit standards.

Remedial Actions and Independent Compliance Consultant

To protect the integrity of the markets, Marcum has agreed to a series of remedial actions. These actions include retaining an independent compliance consultant who will comprehensively assess and strengthen the firm’s audit, review, and quality control policies and procedures. Additionally, Marcum has accepted restrictions on the type and number of new audit clients it may accept in the future.

 

Read the Full Press Release


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Mark J. Astarita is a veteran securities attorney representing investors and financial professionals nationwide in securities investigations and arbitrations. Have a question? Email him at mja@sallahlaw.com, call his office at 212-509-6544, or visit The Securities Lawyer

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