A national accounting and advisory services firm based in New York City has been charged by the Securities and Exchange Commission (SEC) for violations related to quality control and auditing standards. The allegations are primarily connected, but not limited, to the firm's work with special purpose acquisition company (SPAC) clients.
The SEC reported June 21 that Marcum LLP agreed to pay a $10 million penalty to settle charges of "systemic quality control failures and violations of audit standards" in its audit work for "hundreds" of SPAC clients since at least 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," the news release reported.
The SEC’s order found that Marcum experienced significant growth over a three-year period during which it "more than tripled" the number of majority-SPAC public-company clients in its portfolio, including auditing more than 400 SPAC initial public offerings in 2020 and 2021, according to the release.
The SEC charged that during the SPAC boom, Marcum prioritized revenue growth over audit quality, leading to an inadequate system of quality controls, the release reported. The rapid expansion exposed widespread deficiencies in the firm’s quality-control policies, procedures and monitoring, according to the release.
The firm failed to comply with audit standards across hundreds of SPAC audits, including issues related to audit documentation, risk assessments, engagement quality reviews and due professional care, according to the SEC. As Marcum took on more SPAC clients, these deficiencies permeated various stages of the audit process.
"Depending on the audit standard at issue," SEC states in the release, "violations were found in 25-50 percent of audits reviewed, with even more frequent, nearly wholesale violations found as to certain audit standards across Marcum’s SPAC practice."
Marcum was determined by the SEC to have failed to create, use and supervise an appropriate quality-control system for specific audit standards and components, such as for client acceptance and technical consultations, according to the release.
Gurbir Grewal, director of the SEC's Division of Enforcement, said in the release that Marcum prioritized revenue growth over audit quality throughout the SPAC boom, and that the company's "aggressive pursuit of business growth" was not matched by improvements to its "already weak system of quality controls."
“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," Grewal said in the release. "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.”
The SEC's ongoing investigation is being led by Kathleen McDermott, Alexandra Arango, and Timothy Tatman under the supervision of Carolyn Welshhans and Laura Josephs, according to the release. The SEC said it received assistance from the Public Company Accounting Oversight Board, which also announced a parallel action.
In addition to paying the $10 million fine, Marcum agreed to be censured and to take remedial actions including engaging an independent compliance consultant to assess and strengthen the firm’s audit and quality control policies and to accept certain restrictions on accepting new audit clients. The company neither admitted nor denied the SEC's charges, the release reports.
SEC Chair Gary Gensler said in the release that in one year, Marcum added 600 new SPAC clients and was "churning out audits at an unsustainable pace causing widespread quality control and audit standard violations that put its clients and the investing public at risk.”
“Public company auditors occupy positions of trust that are critical to protecting investors and our capital markets more broadly,” Gensler said in the release. “Marcum neglected its essential gatekeeper function in service to its own growth."
