A former national office leader at audit firm Marcum LLP has been charged by the US SEC over quality control failures. The regulator said Alfonse Gregory Giugliano, a certified public accountant, failed to address and remediate deficiencies in the firm’s quality control system sufficiently.

Giugliano served as National Assurance Services Leader at Marcum, and in his role oversaw quality control for the firm’s public company practice, including its relevant quality control policies, procedures, and monitoring, and directly or indirectly supervised all personnel working within quality control functions. The SEC said that he was fully aware of numerous deficiencies in Marcum’s quality control systems.

The regulator previously charged the business itself for these quality control deficiencies and other violations, many of which were in connection with Marcum’s audit work for hundreds of special purpose acquisition companies. And the SEC said Giugliano was also aware that inspections by the Public Company Accounting Oversight Board (PCAOB) and by Marcum itself revealed numerous deficiencies in Marcum’s quality control system.

Quality and audit control standards

The SEC’s order said that exponential growth in Marcum’s public company practice exposed substantial deficiencies in these functions. In addition, Giugliano did not sufficiently address and remediate the deficiencies unearthed by the PCAOB, leading to quality control and audit standard violations throughout Marcum’s audit work, such as client acceptance, engagement partner supervision and review, audit documentation, and technical consultations.

“This action highlights that those with responsibilities for audit firms’ quality control systems must fulfill these critical obligations.”

Carolyn Welshhans, Associate Director, SEC Division of Enforcement

Under Giugliano’s leadership of Marcum’s quality control system, the firm also failed to monitor the effectiveness of many policies and procedures sufficiently or (in many cases) adequately communicate those policies and procedures to relevant personnel, the SEC noted.

“PCAOB audit and quality control standards are the foundation of the auditor gatekeeping function,” said Carolyn Welshhans, Associate Director of the Division of Enforcement. “This action highlights that those with responsibilities for audit firms’ quality control systems, including national partners, must fulfill these critical obligations.”

Auditor and general gatekeeper obligations

SEC Rule 2-02(b)(1) of Regulation S-X (Representations as to the Audit included in Accountants’ Reports) requires an accountant’s report to state “whether the audit was made in accordance with generally accepted auditing standards”. 

The SEC said in its order that Giugliano engaged in improper professional conduct that lead him to violate Reg S-X and without admitting or denying the SEC’s findings, he consented to cease and desist from committing or causing any further such violations and to pay a civil penalty of $75,000. He also agreed to receive a censure and to comply with certain undertakings for a period of three years, including having no leadership, management, oversight, or supervisory position at any registered public accounting firm.

The SEC notes in this case how much investors rely on audit firms to serve a critical function regarding financial reporting and how quality controls and audit standards are necessary to maintain this gatekeeping role.

Paul Munter, the SEC’s Chief Accountant, has made this point in his speeches, and Gurbir Grewal, Director of its Enforcement Division, has singled out accountants and attorneys with a focus on gatekeeper accountability.

The American Bar Association recently adopted a resolution that strengthens a lawyer’s obligation to assess whether a client seeks to use the lawyer’s services to further a crime or fraud before accepting or maintaining representation.

The SEC has brought enforcement actions against gatekeepers who engaged in wrongdoing themselves or attempted to cover up wrongdoing, engaged in conduct that crossed a clear line, or failed meaningfully to implement compliance programs, policies and procedures for which the gatekeeper had direct responsibility. 

Last year, the SEC charged Ernst & Young LLP (EY) in connection with cheating by a significant number of its audit professionals on exams required to obtain and maintain Certified Public Accountant licenses, and for withholding evidence of this misconduct from the Division during the SEC’s investigation of the matter.

Last month, it noted the gatekeeping role that underwriters play in the marketplace; it issued cease-and-desist proceedings against Citigroup Global Markets Inc. for violating recordkeeping requirements concerning expenses that the firm incurred in connection with its underwriting business.

Also in August, the American Bar Association wrapped up its annual meeting by adopting a host of new policies, one of which was a resolution that strengthens a lawyer’s obligation to assess whether a client seeks to use the lawyer’s services to further a crime or fraud before accepting or maintaining representation. The resolution was an obvious acknowledgement of the important role of attorneys as gatekeepers.