The SEC, and PCAOB, slam Marcum LLP over SPACs, but it's too little way, way too late
Marcum did just about everything wrong 400+ times in two years. Can $13 million in fines deter future bad audits?
It's officially summer, another birthday is under my belt, and I'm staying busy into the wide blue yonder of July and August.
There is so much going on it is hard to decide where to start updating you. Given the ongoing deterioration of one of my favorite tools for distributing news — Twitter — I expected to be focusing all my writing here and ditching that forum. But like the Sirens in Homer's Odyssey, Twitter's steady hum continues to draw me back to comment quickly on breaking news.
So, I'm experimenting with Substack's Notes feature, in an attempt to sate my need to say something. I want to soon break the Twitter habit completely. If you subscribe to this newsletter, you also have access to these Notes and can be notified when I post them. Go here to see my Notes.
Now for some news.
SEC Charges Audit Firm Marcum LLP for Widespread Quality Control Deficiencies
Washington D.C., June 21, 2023 —
The Securities and Exchange Commission today charged audit firm Marcum LLP with systemic quality control failures and violations of audit standards in connection with audit work for hundreds of special purpose acquisition company (SPAC) clients beginning at the latest in 2020. The SEC’s order also found that Marcum’s deficiencies were not limited to SPAC clients, but they reflected systemic quality control failures throughout the firm. Marcum agreed to pay a $10 million penalty to settle the charges.
“Throughout the SPAC boom of the last several years, Marcum prioritized increased revenue over audit quality: its aggressive pursuit of business growth far outpaced any commensurate development of an already weak system of quality controls,” said Gurbir S. Grewal, Director of the Division of Enforcement. “From 2020 through 2021, the market saw more than 860 SPACs complete IPOs and Marcum audited nearly half of them, without adequate consideration for its ability to serve as gatekeepers. Its actions put investors at risk and I am incredibly proud of the results of this staff-initiated enforcement action which brings needed accountability to the SPAC space.”
Do the penalties fit the crimes?
This is a penny-ante fine.
According to data from Audit Analytics, Marcum LLP alone collected $45.6 million in fees in 2020 and 2021 from SPAC audits. That good fortune continued in 2022 and now 2023, with $30.5 million more in fees for SPACs so far. From all clients in 2020 and 2021 combined, Marcum LLP collected $161.3 million in fees, a 193% increase from the 2019 fee total of $55 million.
SEC Director of Enforcement Gurbir Grewal: How does this small fine, not even 25% of fees collected from SPACS in 2020 and 2021 and only 6.2% of total fees for the period square with what you said back in December 2021?
The third thing I'll highlight and I've spoken about this in other conferences is about increasing our penalties when historical penalty amounts are not having the desired deterrent effect. Quite often, when we see these independence cases in particular, very skilled defense attorney on the other side come in. I will sit at a table like this one and they'll show us a list of other resolutions and other independence cases, and they'll say, “Okay, it was a one-year suspension. In that case, it was $20,000,” and give us five other examples of similar conduct with similar penalties.
In my mind, as someone who's trying to deter this type of conduct, that doesn't work. That's just showing me that, you know, dear Mr. Defense Counsel, that just makes it apparent to me that that penalty is not having the desired deterrent fact, and that we need to up our penalties. So I think you will see us really ratcheting up penalties where appropriate so they do have that desired deterrent effect, particularly in these auditor independence cases. Because, you know, there's almost a static penalty amount and it's sometimes viewed as a cost of doing business. And that can't really be the case.
How can this be the right fine, one that’s not just a “cost of doing business” and will have a deterrent effect, when Marcum did just about everything wrong in auditing these SPACS? The enforcement order outlines a soup to nuts set of serious allegations for over 400 + audits. The violations cover almost every PCAOB auditing standard, from client acceptance and continuance to audit quality review and post-opinion workpaper documentation.
The SEC's order found that, "Marcum’s deficiencies were not limited to SPAC clients, but they reflected systemic quality control failures throughout the firm."
The order against Marcum finds it engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC’s Rules of Practice, violated multiple audit standards across numerous engagements, and violated Rule 2-02(b)(1) of Regulation S-X.
During the SPAC boom, I wrote and commented quite a bit on this issue and in particular on Marcum, and the other dominant auditor Withum, and their activities.
Are the dominant SPAC auditors up to the job?
How hard is it to do a SPAC audit?
In that piece two years ago, David Buzkin, Marcum LLP’s SPAC practice leader, declined to comment on my questions about his fees, the partner workload and the secret of his success. Buzkin did comment for Nicola White at Bloomberg in February 2021:
Blank-check companies are just that: blank. They don’t have factories, equipment, or revenues. So auditing a SPAC is less time consuming and much cheaper than combing through the finances of a company that has warehouses full of inventory, offices in multiple states, or hard-to-value intangible assets like brand names and patents.
“People say, ‘All you do is audit a shell, how complicated is that?’,” said Marcum vice chairman David Bukzin. “But there are certain accounting nuances to the process and there has to be a speed associated with it, in getting it right the first time. We built this machine,” Bukzin said. “It’s almost a seamless conveyor belt, if you will.”
Ummm... A "seamless conveyor belt"? Probably not the best way to characterize audit work done by firm of supposed licensed professionals.
I guess the answer to whether Marcum was up to the job is...no.