September 9, 2015 / 3:13 PM / in 3 years

SEC charges accounting firm BDO, others over deficient audits

WASHINGTON (Reuters) - Accounting giant BDO America admitted on Wednesday that it missed red flags and issued false audit opinions about one of its client companies, and agreed to pay more than $2 million to settle the charges, U.S. regulators said.

The Securities and Exchange Commission also charged five of the firm’s partners for their role in issuing deficient audits of their client, the employment agency General Employment Enterprises Inc.

In addition, the SEC charged two former chief executives of General Employment Enterprises, as well as its former chairman and majority shareholder, Stephen B. Pence, who is a former U.S. attorney and former lieutenant governor of Kentucky.

All of the executives settled the charges, except Pence, who is continuing to contest the case.

Michael A. Valenti, an attorney for Pence, said the SEC’s case represents a “strong arm tactic of the highest degree by the SEC” and he will vigorously contest the charges.

The SEC said that problems came up during BDO’s 2009 audit of General Employment after the company told its auditors that the $2.3 million it had invested in bank certificates of deposit had not been repaid by the bank.

The $2.3 million represented about half of the company’s assets, but a bank employee said there was no record that the company had ever purchased the CDs.

BDO received conflicting stories from company management about what happened with the alleged $2.3 million investment.

Eventually the company received a series of deposits totaling $2.3 million from three entities unaffiliated with the bank, including one owned by Pence, the SEC said.

At first, BDO demanded an independent investigation into the matter, but it later withdrew the request and issued an unqualified audit opinion for the company’s financial statements.

In a statement, BDO said it is pleased to have the SEC’s case resolved. It added that its auditors were misled by two senior corporate officers and that BDO still “significantly contributed to the return of the $2.3 million in diverted funds.”

BDO’s five partners and the two former General Employment CEOs are all settling without admitting or denying the charges.

CHARGES AGAINST PENCE

Pence, meanwhile, is facing civil fraud charges for his role in the deficient audits.

Pence served as Lieutenant Governor of Kentucky from 2003 until 2007, and previously, as U.S. Attorney for the Western District of Kentucky.

The SEC alleges that Pence, in his capacity as a major shareholder for General Employment, was covertly acting as an agent for convicted felon Wilbur Anthony Huff, who secretly funded Pence’s acquisition of a majority stake in the company.

In exchange for this arrangement, the SEC claims Pence received $500,000 in payments from Huff from 2009 through 2010, as well as a luxury Cadillac Escalade.

Huff was sentenced to 12 years in prison for his role in a wide-ranging fraud that the SEC said included misappropriating the $2.3 million from General Employment.

Valenti, in an interview with Reuters, contested the SEC’s characterization of events, and said that the SEC only threatened to charge Pence with fraud after Pence refused to settle on a lesser charge concerning statements he made to BDO’s auditors.

He added that Pence, who previously did some legal work for Huff, had no knowledge of Huff’s criminal misconduct and that the payments the SEC references have “absolutely nothing to do with” General Employment.

Reporting by Sarah N. Lynch; Editing by Eric Walsh and Alan Crosby

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