On September 10, 2019 the Public Company Accounting Oversight Board (PCAOB or the Board) settled disciplinary proceedings against Marcum LLP, Marcum Bernstein & Pinchuk and Marcum's independence leader. The Board noted a few precedents in that it was the first time the PCAOB:
- sanctioned a firm for publicly advocating its audit clients as investment prospects;
- sanctioned an annually-inspected firm's independence leader; and
- required a firm to retain an independent consultant to conduct a review of the firm's quality controls over independence as a condition of settlement.
The Board found that Marcum violated PCAOB rules and standards over a four (4) year period by failing to comply with the Board's and the SEC's independence rules. The PCAOB asserted that Marcum advocated numerous issuer audit clients in connection with the firm's annual MicroCap Conferences held between 2012 and 2015. The MicroCap Conference provided a platform for small and emerging growth companies to present to potential investors and a means for connecting investors to investment opportunities. As the host, Marcum praised the presenting companies, which included many of the firm's audit clients, as high-quality companies that were selected via a vetting process.
The firm hired a firm to create company profiles that included laudatory descriptions of the presenting companies, including Marcum's audit clients as "leading" and "innovative". The profiles were distributed to potential investors at the conferences. The firm also reminded presenting companies to issue press releases about their participation in the conference.
Citing the Securities and Exchange Commission's (SEC's) general standard in Rule 2-01(b), the firm's conduct, the Board said, created mutual interests between Marcum and its issuer audit clients because both had an interest in whether the companies' performance lived up to Marcum's statements. The Board also cited the SEC's principle, which states that the auditor should not be an advocate for its audit client. Marcum's Independence Leader was held responsible for failing to conduct an adequate review of the potential independence issues created by the MicroCap Conferences. A consultation took place and the firm's Independence Leader provided advice regarding activities to avoid during the conference, i.e., Marcum should not be involved in specific company presentations or one-on-one meetings with investors, and should also refrain from making positive statements about individual companies.
The firm's quality control was found to be lacking since it did not provide reasonable assurance that the firm would identify and appropriately address potential independence issues. The Order notes that even after the firm was notified of potential independence issues in its 2015 inspection, it took certain actions, but failed to implement, apply and monitor policies and procedures that were sufficient to provide reasonable assurance of compliance with independence rules in 2016 and 2017.
As a result of these violations, the Board:
- censured Marcum and its Independence Leader, imposing civil money penalties of $450K and $25K, respectively; and
- mandated that the firm retain an independent consultant to review the firm's quality control policies and procedures, including education and training, related to independence and sufficiency of the firm's resources devoted to independence compliance.
An affiliate of Marcum involved similar independence issues related to Marcum Berstein & Pinchuk's "China Conference" held in 2013 and 2014, which was designed to connect potential investors with Chinese companies. As in the Marcum case, conference participants included the firm's audit clients. As an affiliate, the firm relied solely on the approval received for the MicroCap Conference. Similar to the Marcum matter, the Board censured the firm, imposed a civil money penalty of $50K and required the firm to hire an independent consultant to review its quality control policies and procedures related to independence.