Auditor Fined and Barred for Deficient Custody Audits

An audit firm was fined and the engagement partner was fined and barred before practicing in front of the SEC for performing deficient custody audits.  According to the SEC, the respondents issued clean custody reports even though one of the client’s principals used his bill-paying authority to steal client funds.  The SEC accuses the auditor of engaging in improper professional conduct by failing to (i) exercise due professional care and skepticism, (ii) obtain sufficient evidence and conduct adequate testing, (iii) prepare and maintain examination documentation, and (iv) assign an engagement team with “adequate training and proficiency” with the custody rule (206(4)-2).  The SEC also charges the auditor with direct violations of the Advisers Act for filing misleading Forms ADV-E, the custody report required to be filed with the Commission.

OUR TAKE: The SEC expects gatekeepers to patrol the industry to weed out bad actors.  Inexperienced professional services firms that wander into the investment management industry do so at their own risk.  Ensuring compliance with the technical requirements of the Advisers Act is best left to auditors, lawyers, and compli-pros that specialize in this space.  Neophytes will find themselves named on public enforcement actions.