In an action marked by far more drama than is normally associated with audit firms, SEC Administrative Law Judge Cameron Elliot closed the books on a now-defunct accounting firm when he imposed sanctions on Michelle L. Helterbran Cochran and Susan A. Cisneros, the firm’s former engagement partner and the engagement quality reviewer.
As initially alleged by the SEC, the firm, its owner and Helterbran Cochran and Cisneros collectively failed to conduct at least 16 annual audits and 35 quarterly reviews in accordance with PCAOB standards. ALJ Elliot suspended Helterbran Cochran from appearing or practicing before the Commission as an accountant for at least five years, and imposed a civil penalty of $22,500. Cisneros received a one-year suspension and a civil penalty of $10,000.
The accounting misconduct in this case occurred in a workplace which could fairly be classified as dysfunctional. As described by Judge Elliot, the firm’s owner, David S. Hall, was "difficult to work for." The ALJ described Hall as confrontational during weekly Monday morning staff meetings, and cited testimony that Hall would frequently and loudly berate his employees. "Some staff would get nervous on Sunday due to the stress of the upcoming Monday meeting," wrote Judge Elliot, and "because of Hall’s behavior, there was high turnover and low morale at The Hall Group." Cisneros testified that "several people left because they couldn’t cope with Hall anymore.” According to Helterbran Cochran, at least 12 employees quit with little or no notice, and in one instance, an employee left for lunch and never returned.
The SEC staff apparently became aware of the morale and retention problems at the firm, because the Enforcement Division took the unusual step of filing a motion to preemptively preclude any testimony by Helterbran Cochran that Hall "was a demanding or domineering boss or that she only engaged in the conduct [alleged in the order instituting proceedings] to preserve her job to support her family." According to the division, the evidence was excludable because "difficult personal or professional circumstances" do not excuse failure to comply with Public Company Accounting Oversight Board auditing standards."
ALJ Elliot denied the division's motion. He found that there was no reason to exclude the anticipated evidence before the hearing. Even if the evidence of personal hardship or job pressure was not relevant to liability, the administrative law judge found that the evidence could establish mitigating circumstances and to the determination of appropriate sanctions.
Despite recognizing that the women worked in a hostile environment, and that Hall had improperly trained and supervised them, ALJ Elliot found that both Helterbran Cochran and Cisneros committed significant substantive violations. The violations centered on:
The most interesting aspect of these findings involved the failure to employ a partner or comparable professional to perform the engagement quality reviews. Auditing Standard No. 7 requires that an engagement quality reviewer “from the firm” conducting the audit or review “must be a partner or another individual in an equivalent position.” This requirement does not apply to reviewers who are “outside the firm.”
According to the PCAOB, the purpose of the “from the firm” requirement is to ensure that the engagement quality review is “an objective second look” at the engagement team’s work. Objectivity is not a major concern for outside parties, but for firm associates, it could be difficult to withstand pressure from the engagement partner or other firm personnel. In adopting this provision, the PCAOB reasoned that a partner, or someone in an equivalent position, would be more likely to conduct an independent review without undue internal pressures.
ALJ Elliot readily rejected claims that Cisneros was not "from the firm" because Hall classified and paid her as an independent contractor. While she may have been a contractor for tax, labor law and other matters, her status was not determinative under the accounting standard. “Under any reasonable construction of the phrase,” he concluded, “Cisneros was ‘from the firm’” when conducting the engagement quality reviews.
In a previous proceeding, the SEC barred Hall and the firm from appearing or practicing before the Commission, and imposed a civil penalty of $25,000 on Hall. The PCAOB also censured Hall and the firm, revoked the firm’s registration and barred Hall from associating with a registered accounting firm for at least three years, and imposed a $10,000 penalty on the firm.
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