SEC Drops Hammer on Accounting Giant

(CN) - The nationwide audit firm BDO and five of its partners issued false and misleading audits, the SEC said Wednesday.

BDO USA LLC ignored red flags and issued deficient, unqualified audit opinions about the financial statements of staffing company General Employment Enterprises, the U.S. Securities and Exchange Commission claims.

The agency also filed fraud charges against former GEE chairman Stephen Pence, who is a former U.S. attorney and former lieutenant governor of Kentucky.

BDO learned in 2009 that $2.3 million in GEE cash was unaccounted for and got conflicting stories about the money from company executives, according to the government. GEE then received a suspicious series of deposits totaling $2.3 million from three entities unaffiliated with a bank that purportedly held a GEE certificate of deposit, which the company previously claimed had not been repaid by the bank.

The SEC says BDO then issued a five-page letter to GEE highlighting the conflicting information and asking for an independent investigation. But BDO withdrew its demand days later without explanation and instead issued an unqualified audit report on GEE's financial statements, the government claims.

BDO audits incorrectly stated that GEE had a cash equivalent of $2.3 million and that the audits were conducted in accordance with industry standards, according to the SEC.

The five BDO partners charged by the SEC are Sean Henaghan, John Rainis, Leland Graul, James Gerace and Wendy Hambleton. They are certified public accountants licensed to practice in Illinois, according to the agency.

The SEC said Wednesday that BDO agreed to admit wrongdoing, pay a $600,000 disgorgement of audit fees, and pay a $1.5 million penalty. The five partners also agreed to settle charges against them, including varying periods of suspension from public company accounting work, the agency says.

However, litigation continues against Pence. He is accused of making misleading statements and omissions to BDO auditors. Pence also received at least $500,000 from Wilbur Anthony Huff, who was sentenced to prison for a conspiracy that included misappropriating the $2.3 million in question, according to the SEC.

Pence was the Western Kentucky U.S. Attorney from 2001 to 2003, and was lieutenant governor of the Bluegrass State from 2003 to 2007.

The SEC separately charged former GEE CEOs Ronald Heineman and Salvatore Zizza for making misleading statements and omissions to BDO. Both consented to $150,000 penalties without admitting or denying SEC findings, the government announced.

Andrew Ceresney, director of the SEC's enforcement division, said in a statement that BDO did not properly train its auditors and the problem existed at the company's highest level.

"Audit firms must train their audit and national office professionals not only to recognize red flags but also to have the resolve to refuse signing off on an audit if there are unresolved material issues," Ceresney said.

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