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January 23, 2014 at 04:36 AM
The Securities and Exchange Commission was handed a huge victory by the courts with the decision by an administrative law judge that audit firms registered in the U.S. but located overseas must disclose records to the agency. The SEC also obtained a settlement from a former Oppenheimer fund manager on fraud charges.
In addition, the Department of Labor reached a $10 million settlement with People Care Holdings and its former owners, who sold the company to its employees via an employee stock ownership plan at what DOL said was an inflated value.
Big Four Overseas Dealt Blow in Court by SEC; Must Disclose Records
An administrative law judge ruled in favor of the SEC in a long-running battle with U.S.-registered accounting firms doing business in China over records disclosure. Not only that, he placed the Big Four’s Chinese units under suspension for six months, forbidding them from auditing U.S.-listed companies for that period.
The Chinese affiliates of KPMG, Deloitte & Touche, PricewaterhouseCoopers and Ernst and Young, along with a fifth firm, Dahua, which was previously a member of the BDO international network, have argued for years that they would be in danger of violating Chinese secrecy laws by disclosing audit work papers. This has frustrated many of the SEC’s efforts to go after Chinese firms listed in the U.S. that have been involved in accounting scandals.
The decision by SEC Administrative Law Judge Cameron Elliot left no doubt as to his feelings on the matter, rendered in a 112-page document that was highly critical of the accounting firms and their behavior.
In the decision, he said, “Respondents operated large accounting businesses for years, knowing that, if called upon to cooperate in a Commission investigation into their business, they must necessarily fail to fully cooperate and might thereby violate the law…. Such behavior does not demonstrate good faith, indeed, quite the opposite—it demonstrates gall.”
Elliot censured all five firms, but did not impose a suspension on Dahua, which had already withdrawn from the market.
The decision’s consequences could be far-reaching, not only for the audit firms involved, but for the companies they audit. Even though the accounting firms plan an appeal, the process could be protracted and the companies they audit would need to put in place other auditors during the suspension or risk suspension of share sales because of failure to file their accounts.
In addition, Chinese firms seeking IPOs in the U.S. could find their progress halted, and even U.S. multinationals doing significant business in China might think twice about using any of the Big Four’s Chinese units for auditing work.
DOL Wins $10 Million Settlement in ESOP Case
The Department of Labor has announced a $10 million settlement with People Care Holdings Inc. and former owners Bruce Jacobson and Jerry Lewkowitz, who sold the company to their employees through the creation of an employee stock ownership plan. DOL found that they were in violation of the Employee Retirement Income Security Act (ERISA) by selling the company to the ESOP at a higher price than its fair market value. People Care is a home-care agency based in Manhattan with facilities in New York and New Jersey. It provides caregiving services such as meal preparation, laundry, shopping, housekeeping, companionship and medication assistance. Its ESOP has approximately 4,655 ERISA-covered plan clients.
The Employee Benefits Security Administration’s New York regional office found during an investigation that Jacobson, Lewkowitz and People Care breached their fiduciary duties by allowing unrealistically optimistic projections of People Care’s future earnings and profitability to remain in effect even after the company lost a key municipal contract.
In addition, EBSA’s investigation determined that the stock purchase agreement’s indemnification provision was invalid because it would require People Care, which is entirely owned by the ESOP, to pay any costs incurred by Jacobson and Lewkowitz in connection with an investigation or litigation.
