PicoBlog

On May 3 The Securities and Exchange Commission dramatically announced it was cutting public accounting firm BF Borgers off at home plate.

SEC Charges Audit Firm BF Borgers and Its Owner with Massive Fraud Affecting More Than 1,500 SEC Filings

No namby-pamby word mincing for this press release. The headline uses the "f" word and amplifies it with the descriptor "massive" while telling us exactly how many SEC filings were now in jeopardy.

The Securities and Exchange Commission today charged audit firm BF Borgers CPA PC and its owner, Benjamin F. Borgers, with deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023.

Similar to some other recent enforcement actions against public accounting firms — which I will elaborate on in a bit — the SEC is making sure to tell us how bad this was and over which specific period. The SEC only had to look at post-SPAC boom and post-pandemic 2021 through June of last year to find violations of audit and review standards in more than 1,500 filings.

This firm that most had never heard of, and its sole partner, had been very, very busy.

The SEC also charged the Respondents with falsely representing to their clients that the firm’s work would comply with PCAOB standards; fabricating audit documentation to make it appear that the firm’s work did comply with PCAOB standards; and falsely stating in audit reports included in more than 500 public company SEC filings that the firm’s audits complied with PCAOB standards.

Among the violations is the standard fault of luring your client into lying to the SEC about your audit. How did that happen? From the settled complaint:

13. Respondents knew that the BF Borgers audit reports containing the false certifications were required to be and would be included in the clients’ required filings with the Commission which, for issuers, would be publicly available to investors.

Respondents also knew that (i) certain other BF Borgers clients made public disclosures via the website maintained by OTC Markets, (ii) those disclosures would include BF Borgers audit reports containing false certifications, and (iii) those disclosures would be publicly available to investors.

What was the punishment?

To settle the SEC’s charges, BF Borgers agreed to pay a $12 million civil penalty, and Benjamin Borgers agreed to pay a $2 million civil penalty. Both Respondents also agreed to permanent suspensions from appearing and practicing before the Commission as accountants, effective immediately.

The firm and its sole owner, Benjamin Borgers, will pay total fines of $14 million and neither the firm nor its sole owner can ever "appear or practice" before the SEC as accountants ever again from this day forward.

However, both the firm and its sole owner did not admit nor did they deny the SEC’s findings. 

The SEC, though, made sure that the $14 million penalty is not able to be discharged via bankruptcy. Via the settled complaint:

"...solely for purposes of exceptions to discharge set forth in Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by Respondent Borgers, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Respondent Borgers under this Order or any other judgment, order, consent order, decree or settlement agreement entered in connection with this proceeding, is a debt for the violation by Respondent Borgers of the federal securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19)."

I am at least thrilled that a situation that seems to have been really bad was seemingly dealt with quickly and definitively, despite the collateral damage.

What's the collateral damage?

Well, for one, Borgers’ highest profile client, Trump Media, needs to find a new auditor. But so do a dog's breakfast of other microcap and penny stock companies. Who are those companies? Many are much smaller in profile and potential than Trump Media. From Fortune on April 8:

Closely held companies often retain audit firms after going public through mergers with blank-check companies. But most of BF Borgers’ clients, such as Lingerie Fighting Championships Inc., a mixed martial arts league, are significantly smaller than Trump’s media business... In 2022, the PCAOB placed a two-year ban on one of BF Borgers’ audit directors for failures on the audits of Chineseinvestors.com Inc., United Cannabis Corp. and China Pharma Holdings Inc. China Pharma’s shares are down 99% in the past three years.

Clients include cannabis,  crypto, Chinese reverse mergers.

Lingerie Fighting Championships Inc. is exactly what it sounds like.

Bloomberg's Nicola White quoted the owner:

“This will likely shut down a lot of companies, or make them go private,” said Shaun Donnelly, CEO of mixed martial arts entertainment company Lingerie Fighting Championship Inc., a BF Borgers client.

Bloomberg also highlighted some other Borgers clients:

Borgers had clients ranging from American Rebel Holdings Inc., a Nashville-based business that makes apparel and backpacks for concealed carry guns, to Eva Live Inc., an AI-focused digital advertising company in California...

Duke Pitts, president and CEO of Las Vegas-based nutritional supplement company Healthy Extracts Inc., which sells supplements including “ultimate brain nutrients,” said he’s “feverishly looking at other firms now” to replace Borgers. He said he hopes the SEC will give companies up to 60 days if possible to meet the deadline for 10-Q filings.

Pitts said he’s “100% confident” in his company’s accounting practices. “The biggest negative is the expense and the cost,” of finding a new auditor, he said.

The publication Crowdfund Insider had to publish a special report just for those Borgers clients who use the Reg A+ exemption to raise capital online. It quotes the SEC guidance issued simultaneously with its enforcement order that speaks directly to small business capitalists who use this shortcut to raise money:

“Similarly, before the staff could grant a qualification request, in light of the findings in the Order, and because BF Borgers has been denied the privilege of appearing or practicing before the Commission, any issuer with a pending Regulation A offering statement requiring audited financial statements in which any financial statements have been previously audited by BF Borgers would need to file a pre-qualification amendment to include financial statements audited by a qualified, independent accountant that is permitted to appear or practice before the Commission.

Issuers with ongoing Regulation A offerings are reminded that a qualified offering statement must not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.”

But let's be real.

Is Borgers really worse than many others that the SEC and PCAOB have smacked around a bit but have not yet taken out of the game?

Mazars USA, prior service provider to the Trump organization that famously made a noisy exit and flipped on him, is getting ahead of the curve by quitting audit in the US. Mazars USA has been slowly resigning all its US audits. Here's a disclosure from one of them from early April.

Mazars is entering into a transaction with FORVIS, LLP such that by June 2024, Mazars will no longer be providing accounting and auditing services, and effective June 1, 2024, FORVIS, LLP will rebrand as Forvis Mazars, LLP. 

Is Borgers any worse than Armanino or Prager Metis, the firms that who signed audit opinions for FTX?

Armanino has also prophylactically limited its public company audit activity.

Prager Metis is also being sued by the SEC for conveniently forgetting over and over that you can't ask audit clients to indemnify you if everyone gets sued for perpetrating or missing accounting fraud. Prager Metis is still signing audit opinions for public companies.

Borgers may audit small companies but it's in the big time, from a PCAOB inspection perspective, based on the sheer number of public companies for which it provided audit opinions. If an audit firm provides audit opinions for more than 100 issuers, the PCAOB inspects them annually. (If a firm provides audit opinions for 100 or fewer issuers, the PCAOB, in general, only inspects them at least triennially.)

BF Borgers has been Trump Media's auditor since 2022, according to audit opinions included in SEC filings made when it  went public in April in a merger with the shell company Digital World Acquisition Corp.. But according to the Financial Times' Stephen Foley, Borgers got the gig after WithumSmith + Brown backed out after working with CEO Devin Nunes just a few months.

Trump Media & Technology Group engaged WithumSmith+Brown to check its financial statements shortly after the company was founded in 2021, but by the end of the year the accounting firm had decided it did not want to be associated with a business venture by the former US president, these people said.

In August 2023 Marcum LLP suddenly pulled out of its engagement as auditor to SPAC Digital World Acquisition Corp.. Marcum was under scrutiny at the time on multiple fronts.

In June 2023 the SEC had fined Marcum $10 million and the PCAOB fined it $3 million — the largest penalty it had ever imposed on a “non-affiliate firm,” meaning an audit firm that is not a member of a global network — for what the SEC called "systemic quality control failures and violations of audit standards in connection with audit work for hundreds of special purpose acquisition company (SPAC) clients beginning at the latest in 2020. The SEC’s order also found that Marcum’s deficiencies were not limited to SPAC clients, but they reflected systemic quality control failures throughout the firm."

Marcum did not admit nor did it deny the SEC’s findings, and agreed to several remedial actions, including retaining an independent consultant to review and evaluate its audit, review, and quality control policies and procedures, as well as to comply with restrictions on accepting new audit clients. As with the Borgers order, the SEC made sure to emphasize the volume of violations.

According to the SEC’s order, over a three-year period, Marcum more than tripled its number of public company clients, the majority of which were SPACs, including auditing more than 400 SPAC initial public offerings in 2020 and 2021.

You may recall Marcum and WithumSmith + Brown were the dominant SPAC auditors during that brief boomlet.

In September 2023, the SEC charged Alfonse Gregory Giugliano, CPA, the former National Assurance Services Leader at Marcum LLP, with failing to sufficiently address and remediate numerous deficiencies in Marcum’s quality control system. Giugliano did not admit nor deny the SEC’s findings, but agreed to a censure and to comply with certain undertakings for a period of three years, including having no leadership, management, oversight, or supervisory position at any registered public accounting firm and to pay a civil penalty of $75,000.

Readers of The Dig may recall Marcum was the subject of earlier PCAOB disciplinary actions that limited its China-related work and Marcum LLP(PDF) and Marcum Bernstein & Pinchuk LLP(PDF), as well as Alfonse Gregory Giugliano, CPA(PDF) were also subject to PCAOB disciplinary action related to auditor independence violations.

In October 2023 the Ontario Canada public accounting licensing body CPA Ontario reached an out-of-court settlement with Marcum LLP that cost the firm $1.2 million CDN. The Canadian Public Accountability Board (their version of the PCAOB) had already censured Marcum earlier that year, also prohibiting the firm from taking on new “high risk” clients in Canada, including those clients resulting from initial public offerings, reverse takeovers, or other transactions.

GoingConcern.com wrote at the time:

It is an unusual and rare censure by CPAB. Unusual because the limited information provided may lead some to speculate that the accounting firm was not using Canadian audit standards at all in the engagements inspected by CPAB. Rare because CPAB has averaged just one public censure per year in the last two years.

Marcum has not yet been shut down. Why not? During its supposed prohibitions on doing work for Chinese companies, it still did a lot of work for Chinese companies.

I can only speculate that Marcum LLP serves a useful purpose for the audit ecosystem, unlike Borgers, when it does work no one else will do and jumps in, for a price, when others feel the heat until the heat subsides.

In February 2024 the PCAOB slammed WithumSmith+Brown, PC with sanctions and a $2 million fine for "Pervasive Quality Control Violations Involving SPAC Audits".

Washington, DC, Feb. 21, 2024

The Public Company Accounting Oversight Board (PCAOB) today announced a settled disciplinary order(PDF) sanctioning WithumSmith+Brown, PC (“the firm”) for violations of PCAOB rules and quality control standards.

From January 2020 through December 2021, WithumSmith+Brown, PC accepted a substantial number of special purpose acquisition company (SPAC) audit clients, resulting in a dramatic increase in its issuer audit practice and putting a significant strain on its quality control system.

In 2021, for example, the firm’s issuer audit practice increased almost 500%, from approximately 80 audit reports to almost 450. Yet the number of partners assigned to these audits increased by only 50% (from 15 to 23). The firm’s quality control system failed to provide reasonable assurance that its personnel complied with applicable professional standards and regulatory requirements, including those related to appropriately staffing issuer audits.

“Growth must not come at the expense of quality. The PCAOB will hold firms accountable for upholding quality control systems that protect investors,” said PCAOB Chair Erica Y. Williams.

The Borgers problem had been festering for a long time. Here's Jim Barratt on LinkedIn:

The PCAOB has conducted and prepared six inspection reports on BF Borgers since 2012. In the 2022 report for inspection year 2021, the PCAOB report states:

“The continued high level of instances of non-compliance with PCAOB standards or rules and quality control defects noted in both the 2021 and 2019 inspections raises concerns about the effectiveness of the firm’s system of quality control and the firm’s ability to consistently perform audits in accordance with PCAOB standards and rules.”

“Despite the high rate of deficiencies, the firm significantly increased its number of issuer audit clients in the last two years without a corresponding increase in the number of firm partners…”

“As a result, the firm’s leadership does not appear to be sufficiently balancing firm growth with ensuring audit quality.”

“The firm significantly increased its number of issuer audit clients from 80 in 2019 to 168 at the outset of the 2021 inspection (or by 110%). In accepting these new clients, the firm did not take into account the level of proficiency required for the firm’s partners in the circumstances as well as competing time demands on the partners assigned to lead and execute the audits and perform the engagement quality reviews for all of its issuer audits. For example, during the year, there was one engagement partner who was responsible for 147 issuer audits.”

“The firm has not established policies and procedures for EQR partners to document their review of work papers. Specifically, the firm uses a single user sign-on account for EQR partners to document their reviews of work papers that are evidenced by the initials “DA,” regardless of which EQR partner reviewed the work papers. Further, multiple firm personnel, including engagement partners, are able to access the user rights to this single user sign-on account and evidence a review by “DA.””

The inspection report for 2022 and 2021 reflected a 100% deficiencies rate in the collective 21 audits reviewed for those years.

In addition, on October 31, 2019, the PCAOB took disciplinary action against a BF Borgers audit director and suspended them from being an associated person at a registered public accounting firm for one year and required ten hours of continuing professional education.  On May 24, 2022, the PCAOB took disciplinary action and barred a BF Borgers engagement partner from associating with a registered public accounting firm, imposed a $25,000 civil money penalty, and required 50 hours of continuing professional education.

It is unknown how long the SEC Enforcement team was investigating Borgers but presumably they benefited from the findings in the more recent PCAOB inspection reports.

Just like Marcum, Borgers was also banned in Canada, via Barratt:

The Canadian counterpart to the PCAOB, the Canadian Public Accountability Board, in 2023, found BF Borgers in violation of various professional standards and required certain remediation.  On April 15, 2024, the Canadian Public Accountability Board terminated BF Borgers from participating as an audit firm...

Borgers, like Marcum and Prager Metis, was, for some reason, SEC enforcement material while WithumSmith + Brown is PCAOB fodder only.

Certainly the US can't be seen to be weaker than the Canadians!

It may also have been inevitable that Borgers would get beanballed once the FT's US Accountancy reporter set his sights on the firm. I recall wondering aloud why Foley wanted to write about this minor firm, one whose only claim to fame was Trump Media. My question really answers itself. I urge you to re-read all of Foley's and his colleagues’ reporting on Borgers and Trump Media's other auditors.

Following that lead, I am glad I got in a good dig while pressure on regulators to act could still be exerted.

Many audit firms, especially the smaller ones who think of themselves as small business owners, are not interested in being scrutinized by the PCAOB. They, dadgummit, resent the heck out of the PCAOB. There are firms doing a lot of business out there, allowed to do a lot of business by regulators, who troll the PCAOB. This firm, in my opinion, has corrupted the PCAOB's data making it more difficult to use, and leading to tainted analytical results. Just look at which company this firm audits, which is why he drew the attention of FT journalist Stephen Foley. That made other FT journalists poke into his affairs to see what else they could find.

And what about the collateral damage? The SEC issued guidance, reminiscent of when Arthur Andersen's audit clients had to scramble to find new firms after it abruptly closed its doors when it was indicted for destroying documents related to the Enron fraud.

The Order denies BF Borgers the privilege of appearing or practicing before the Commission as an accountant. As a result, BF Borgers may not participate in or perform the audit or review of financial information included in Commission filings, issue audit reports included in Commission filings, provide consents with respect to audit reports, or otherwise appear or practice before the Commission.

A significant number of issuers have engaged BF Borgers to audit or review financial information contained in their Commission filings and will be impacted by the Order. We are issuing this statement to assist issuers in complying with their disclosure and reporting obligations in light of the Order. We encourage all issuers that have previously engaged BF Borgers as their independent auditor to consider the findings and sanctions discussed in the Order, taking into account their disclosure obligations under the federal securities laws.

Since the news broke, more than one person has remarked to me that smaller firms — those owned/run by just one or a few partners — feel that the PCAOB, and therefore the SEC, would like to put them out of business.

I've certainly said before that, contrary to my anti-monopoly instincts, fewer firms doing the majority of public audits makes regulating easier and more cost-effective. It's one way that less competition in the audit business is arguably good for investors, but that’s assuming the regulatory process is effective.

The bad news is that the Public Company Accounting Oversight Board (PCAOB), which checks auditor quality via an inspection process, looks at smaller audit firms—those that audit fewer than 100 issuers—only every three years, and there are so many more of them to review than larger audit firms.

That means there’s some reason to be glad that there is concentration among auditors for the largest public companies. Audit work at those firms—Deloitte, KPMG, EY, and PwC—is inspected by the PCAOB every year and the inspections are rigorous.

In my opinion, if most of Borgers' pink sheet and penny stock clients, including Trump Media, have trouble finding another audit firm and are unable to continue raising money from retail for a while it will be a cherry on top of the SEC's Borgers enforcement cheesecake.

© Francine McKenna, The Digging Company LLC, 2024

(I am enjoying this month’s special selection of Shirley MacLaine films on The Criterion Channel.)

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