Auditor Failed to Complete Custody Review Engagement
The SEC fined and barred an audit firm and its principal for failing to complete surprise custody exams for which it was engaged. According to the SEC, the respondents accepted the engagement but failed to complete the examination or withdraw from the engagement after the adviser refused to cooperate with requests for information arising from field work. The adviser maintained custody through omnibus accounts and was ultimately charged with misappropriating more than $700,000 in client funds. The SEC asserts that the respondents engaged in improper professional conduct and caused violations of the custody rule (206(4)-2) by accepting the engagement, commencing field work, and receiving compensation but then failing to issue a report or formally withdraw.
OUR TAKE: Nonresponsive clients pose significant challenges for service providers including auditors, lawyers, compli-pros, and administrators, who the SEC has called “gatekeepers” for the securities markets. This case reveals the importance of detailing assignment scope including completion criteria and then clearly (and noisily) withdrawing if a client does not cooperate. Otherwise, the service provider risks regulatory actions for “causing” securities laws violations.