SEC Fines Marcum $10 Million for Improper SPAC Audits

Violations extend back to "at least" 2020.

The Securities and Exchange Commission censured accounting firm Marcum LLP for engaging in unethical and improper professional conduct related to Special Purpose Acquisition Corporations (SPAC).

The SEC also noted that Marcum offered $10 million to settle the case, which the commission said it will accept it. Marcum is major accounting partner in the cannabis industry.

“Public company auditors occupy positions of trust that are critical to protecting investors and our capital markets more broadly,” SEC Chair Gary Gensler said. “Marcum neglected its essential gatekeeper function in service to its own growth. Marcum took on more than 600 new SPAC clients for a nearly six-fold increase in just one year, churning out audits at an unsustainable pace causing widespread quality control and audit standard violations that put its clients and the investing public at risk.”

Quality Control Lacking

The SEC Administrative Proceeding stated that the violations of audit standards extend back to at least 2020. While the violations of Public Company Accounting Oversight Board professional standards primarily related to audit work for SPACs, the agency noted “the nature of these professional standard violations – including their volume and range – reflects deficiencies relevant to and impacting Marcum’s entire public company audit practice.”

The filing also stated that Marcum’s quality control and audit standard failures “permeated most stages of engagement work – from client acceptance to risk assessments, audit committee communications, audit documentation, assembly and retention of audit documentation, engagement quality reviews, technical consultations, due professional care, and engagement partner supervision and review.”

The SEC went on to claim that Marcum lacked sufficient policies and procedures to provide reasonable assurance that engagements were conducted in accordance with professional standards.

Marcum was also cited for not sufficiently monitoring the effectiveness of its policies and procedures and did not adequately communicate those policies and procedures to engagement teams.

SPACs Biz Grew Too Big

The SEC pointed out that in 2020 and 2021, more than 860 SPACs completed initial public offerings in the United States, of which more than 400 were audited by Marcum.

In 2019, Marcum served as the auditor for only 185 public company issuers; by 2022, the firm was responsible for auditing more than three times that number – a total of 575  – the majority of which were SPACs. This volume of work pushed the company to become the fifth largest public company auditing firm.

“Throughout the SPAC boom of the last several years, Marcum prioritized increased revenue over audit quality: its aggressive pursuit of business growth far outpaced any commensurate development of an already weak system of quality controls,” said Gurbir S. Grewal, director of the SEC division of enforcement.

It seems that growth was at the heart of the problems as the company itself was identifying an increasing number of deficiencies. The company determined that the problems stemmed from a lack of time spent on the engagements, but it didn’t take steps to remedy it. New customers were put through a Client Acceptance Committee, but staffing requirements weren’t considered when evaluating taking on new clients.

The SEC noted that in 2020, Marcum accepted 178 new SPAC clients. In 2021, it accepted 633, including 159 accepted in March 2021 alone – a substantial increase from the eight new SPAC clients accepted just one year prior.

A typical SPAC client also generated multiple audit engagements – first an IPO engagement, then an engagement in connection with periodic reporting obligations as a public company. The SEC said that in the first three months of 2021 alone, Marcum sent out 345 new SPAC engagement letters.

According to the notice, Marcum has undertaken certain remedial steps, including revisions to certain quality control policies and procedures. Marcum has also agreed not to accept more than three new audit clients per quarter.

Debra Borchardt

Debra Borchardt is the Co-Founder, and Executive Editor of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Master's degree in Business Journalism from New York University.

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