As tends to be the case in late September, and as John predicted last week, the SEC enforcement actions are coming in hot. Hat tip to friend of the sites and Maynard Cooper counsel Bob Dow for highlighting this $1.5 million settlement that landed Friday against an audit firm whose work for a SPAC and another public company was allegedly deficient in regards to identifying related party transactions. Here’s more detail from the complaint:
Friedman failed to exercise professional skepticism when reviewing work papers. First, the work papers that documented the details and testing of accounts receivable and prepaid expenses and other current assets contained names included on iFresh’s related party lists. Friedman did not identify the names on the work papers as related parties, so certain related party transactions were not disclosed in the financial statements.
Second, Friedman failed to recognize red flags that indicated undisclosed related parties. For example, schedules provided to Friedman by iFresh in connection with the 2018 through 2020 audits included names of entities that had similar names as iFresh subsidiaries, and transaction descriptions that were inconsistent with iFresh’s business.
Friedman also encountered numerous red flags of undisclosed related party transactions with Li Ba HVAC & Construction (“Li Ba”). Li Ba was a related party because it was owned by Deng’s brother.
The complaint goes on to detail other “red flags,” like this:
Friedman failed to design and to perform procedures to obtain a sufficient understanding of the following significant unusual transactions involving undisclosed related parties: 1) the sale of commercial refrigeration equipment to Li Ba and the resulting large receivable with long aging and little to no collection for the 2017 through 2020 audits; 2) a legal settlement paid by Li Ba on behalf of iFresh for the 2018 audit; 3) iFresh and Li Ba extending loans to each other for the 2019 and 2020 audits; 4) Deng’s payments to iFresh on behalf of White Plains for the 2020 audit; and 5) Jiutian’s capital contributions to iFresh on behalf of Deng for the 2020 audit.
There are few things that excite SEC Enforcement more than shady SPACs and related party transactions – and this enforcement action follows remarks by Enforcement Division Director Gurbir Grewal a year ago where he emphasized gatekeeper accountability. The cherry on top is that Friedman is now owned by Marcum LLP, which back in 2020 was sanctioned and prohibited by the PCAOB from conducting audits of China-based businesses for three years. As this Twitter thread from a whistleblower lawyer points out, some companies have used their audit by Friedman to certify compliance with the new HFCAA rules. This settlement doesn’t directly impact that approach.
– Liz Dunshee