An accounting firm agreed to pay more than $11.8 million to settle SEC charges relating to the failed audits of an oil services company that allegedly used deceptive income tax accounting to inflate earnings.

The SEC Order determined that:

  • the firm's audit team failed repeatedly to detect the company's ongoing fraud for over four years despite placing the energy company audits in a high-risk category;
  • the firm's audit team relied on the energy company's unsubstantiated explanations instead of performing required audit procedures in order to scrutinize the company's accounting, even though it was aware that the company made post-closing adjustments in order to lower the year-end provision significantly for income taxes each year; and
  • the firm failed to minimize recurrent known problems experienced by its audit team when auditing tax accounting.

Enforcement Director Andrew J. Ceresney remarked that the responsibility for addressing such failures lies with auditing and accounting professionals:

Audit and national office professionals must appropriately address known deficiencies in their auditing of high-risk areas, and auditors must have the fortitude to refuse to sign off on an audit if important issues remain unresolved. [This firm] failed to ensure that material post-closing accounting adjustments were justified by appropriate audit evidence, leading to a significant audit failure.

The firm agreed to pay (i) a disgorgement of $9 million, (ii) prejudgment interest of more than $1.8 million, and (iii) a penalty of $1 million.

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