An audit firm based in Japan, its former CEO, and its former acting reputation and risk leader ("RRL") (collectively, the "Respondents") agreed to settle SEC charges for violating auditor independence rules.
According to the SEC Order, the firm issued audit reports for a client when many employees kept bank accounts with the client's subsidiary. The firm violated the SEC auditor independence rules because the accounts had balances exceeding the amount insured by the Deposit Insurance Corporation of Japan. The SEC Order also found that the Respondents caused the audit client to violate reporting obligations, that the firm's system of quality controls "did not provide reasonable assurances that the firm and its auditors were independent from audit clients," and that Respondents engaged in improper professional conduct.
To settle the charges, the audit firm agreed to pay more than $2 million in financial penalties. The former CEO and RRL agreed to be suspended from appearing and practicing before the SEC as accountants, with the right to apply for reinstatement after 2 years.
Commentary / Kyle DeYoung
While some of the auditor independence rules—including the ones violated here—can seem trivial, violations of these rules have long been a priority of the SEC and will likely continue to be a focus going forward. Firms subject to the independence rules should make sure that they have adequate quality control systems in place to avoid these kind of violations.
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