It is clear that the way in which regulators are looking at the work being done by accounting firms has changed over the last two decades.

In the US, the accounting firm Arthur Andersen self-collapsed in 2002 thanks to their negligence during the audits of Enron and Worldcom. In 2024, the US Securities and Exchange Commission (SEC) has shut down the accounting firm BF Borgers due to “massive fraud”, “deliberate and systematic failure” and running a “sham audit mill”.

BF Borgers case

SEC charged the firm, BF Borgers, and its founder, Ben Borgers with falsely representing to clients that its audit work would comply with US standards, and fabricating documentation. It said Borgers, one of the most prolific auditors of US public companies, was responsible for one of the largest wholesale failures by gatekeepers in our financial markets. Without admitting or denying the SEC’s findings, the firm has agreed to pay a $12-million penalty and Ben Borgers to pay $2 million.

Borgers has expanded rapidly to become auditor to hundreds of small and microcap companies, but the SEC said that three-quarters of its audits were faulty. The agency said it was stepping in to permanently close what it called a “massive fraud” and “sham audit mill”, and it told Borgers’ clients they would need to check past financial statements in case they contained errors.

The firm’s deliberate and systemic failure to meet professional standards affected more than 1,500 company filings, the SEC said. Borgers built the eighth-largest client list of any US audit firm in just 15 years while still operating out of a single-storey building in a suburb of Denver, Colorado.

Its latest regulatory filing showed it had just 50 staff, 10 of whom are certified public accountants. Borgers himself signed off on more than 140 audit opinions in the past year.

His firm was found to have a 100 per cent deficiency rate in audits inspected by the Public Company Accounting Oversight Board, the Colorado state board of accountancy fined him $5,000 earlier this year for bad audits of retirement plans and Canada’s audit regulator barred BF Borgers from operating in that country.

The SEC’s order barring the firm from public auditing leaves more than 170 US public companies searching for new accountants. SEC said it would monitor the situation and advised companies they were entitled to limited extensions for filing their financial results if needed. The SEC also stated that issuers should consider whether their filings may need to be amended to address any reporting deficiencies arising from the BF Borgers engagement.

Quantity over quality

A look into the order of the SEC brings out the fact that the auditor in question was focusing only on quantity of audits and not on the quality of audits. The firm clearly did not have the resources to handle a large number of audits with only 50 staff out of which only 10 were CPAs. One can expect many companies for which Borgers was the auditor to restate their financial statements in due course.

In India, the National Financial Reporting Authority (NFRA) has been penalising auditors and audit firms who have been negligent in the discharge of their duties. Rule 11(6) of the NFRA Rules empowers NFRA to take no action, impose a monetary penalty, ban the auditor from doing certain types of audits or impose a penalty and ban the auditor for a certain period of time. Till date the NFRA has issued more than 60 orders imposing monetary fines on auditors and/or banning them for some time.

The Code of Ethics and other regulations from the Institute of Chartered Accountants of India limit the number of audits that firms and their partners can do in India. Due to this, one may not get an audit firm running a sham audit mill in India provided audit firms ensure that the entities they audit do not cross the line with respect to compliances.

The writer is a chartered accountant

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