Directors, Trustees and Administrators Beware: SEC Sanctions Fund Trustee for Failure to Disclose Relationship with Consulting Arm of Fund’s Audit Firm

Investment Management Update

Date: July 02, 2015

Yesterday, the Securities and Exchange Commission (SEC) charged a Big Four accounting firm with violating auditor independence rules because its consulting affiliate had a business relationship with a trustee who served on the boards and audit committees of three funds the Big Four Firm audited. What is most notable in the action is that the SEC also charged the funds’ trustee, Andrew Boynton, and its administrator with causing related violations.

According to the SEC, the consulting affiliate acquired a proprietary brainstorming business methodology from Boynton in 2006. The affiliate worked with Boynton to implement the methodology for the consulting affiliate’s clients and others through 2011.

During the relevant time, Boynton served on the boards and audit committees of three funds that were audited by the Big Four Firm. Nevertheless, when completing his annual trustee and officer (T&O) questionnaire, Boynton failed to identify his business relationship with the consulting affiliate, including in response to the question of whether he had a “direct or material indirect business relationship” with the Big Four Firm, apparently because he understood that the consulting affiliate was a separate legal entity from the Big Four Firm.

The SEC charged the Big Four Firm with violating the auditor independence standards. Before the consulting affiliate entered the relationship with Boynton, it did not perform the independence consultation required under its policies, and the Big Four Firm did not discover that the consultation had not occurred until five years after the Boynton transaction. The Big Four Firm agreed to pay disgorgement of audit fees in the amount of $497,438 plus prejudgment interest of $116,478 and a penalty of $500,000.

Boynton was charged with causing those independence violations by failing to report his work with the consulting affiliate. Boynton agreed to pay disgorgement of $30,000 plus prejudgment interest of $5,329 and a penalty of $25,000.

The SEC further charged the administrator with causing the funds’ compliance violations. According to the SEC, the administrator had contracted to assist the funds in discharging their responsibilities but failed to adopt sufficient written policies and procedures as required to prevent auditor independence violations, including (1) the failure of the T&O questionnaires to cover expressly business relationships with the auditor’s affiliates; (2) the absence of sufficient training to assist board members in the discharge of their responsibilities related to auditor independence; and (3) the lack of sufficient written policies and procedures to prevent other types of auditor independence violations. The administrator agreed to pay a $45,000 penalty.

These charges likely signal the beginning of a not unexpected trend. Recently, both the SEC and the Public Company Accounting Oversight Board (PCAOB) have expressed concern about the expansion by the accounting firms of their consulting capabilities and the negative effect that growth might have on audit quality – an independence issue that was viewed by the SEC as a cause of the audit failures alleged in the early 2000s. Given that the SEC views auditor independence as a shared responsibility between the company/fund and its auditor, directors, trustees and fund administrators must refamiliarize themselves with the independence rules and their roles in monitoring independence, and review the policies, procedures and forms currently in place.

In this regard, it is imperative that companies/funds assess whether their director/trustee and officer questionnaires adequately inquire about facts that would impair auditor independence. At a minimum, companies/funds should confirm with their auditors that the questionnaires identify all affiliates of the auditor and that there are no other inquiries that need to be made regarding matters that could be deemed to compromise the auditor’s independence.


For more information, please contact Tammy P. Bieber or any member of our Investment Management or Corporate Transactions & Securities practice groups.

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