Almost two years ago, on July 15, 2021, the SEC charged the former CEO and CFO of FTE Networks, Inc. with perpetrating a multi-year accounting fraud.  The allegations included multiple misstatements, including overstating revenues and concealing the existence of conversion features in notes payable.  The SEC also alleged that the former officers stole money from the company.  The Department of Justice brought criminal charges.

In cases like this, the question of where were the auditors invariably arises.  In many cases the auditors were as much victims of the fraud as any other parties.  Audit procedures designed to find fraud provide “reasonable” rather than “absolute” assurance that fraud will be detected.  When the PCAOB and the SEC Enforcement Division investigate these kinds of situations and find that audits were conducted in accordance with Generally Accepted Auditing Standards (GAAS), no action is brought against the auditors and there is no public announcement of any kind.

In other cases, auditors may not have appropriately designed their audit to detect material fraud or not followed GAAS in other ways.  In these cases, there will be public announcements by the PCAOB or the SEC Enforcement Division.

The FTE case falls into the second of these categories and is an example of how separate cases against companies and their auditors move at different rates.  On February 28, 2023, almost two years after the original charges, the SEC instituted public administrative and cease-and-desist proceedings against the company’s auditor.  As you can read in the related Accounting and Auditing Enforcement Release, the proceedings allege several audit failures.

This auditor focused enforcement is particularly important as it fits together with the Chief Accountant’s October 2022 Statement about the auditors’ responsibilities for fraud detection.  You can read more in this blog post.

As always, your thoughts and comments are welcome!