SEC Sues Audit Partner and Senior for Failing to Assess Valuations
The SEC has commenced administrative proceedings against an audit partner and the senior manager for failing to adhere to professional standards by failing to review management valuations. According to the SEC, the bank being audited often used stale, dated, and undocumented appraisals of collateral underlying troubled real estate loans. The SEC said that the respondents identified that loan losses and collateral valuations represented a fraud risk and a significant risk of material misstatement. However, the SEC charges that, with respect to collateral valuations, the respondents’ audit work “consisted of checking management’s basic math, confirming that appraisals (no matter how stale) existed, reviewing a sample of appraisals, and relying on management’s uncorroborated representations concerning property-specific issues…” The SEC charges that the respondents violated several PCAOB standards.
OUR TAKE: This case has relevance for audit reviews of fair valuations of Level 3 securities (i.e. valuations of securities not traded on an exchange). Expect the audit firms to enhance reviews of the fair valuation process.