Publicly traded companies have to follow the generally acceptable accounting principles (GAAP). The Security Exchange Commission (SEC) is responsible for regulating public companies, ensuring that no company violates the principles outlined in the GAAP. Publicly traded companies may violate the principles to mislead creditors and investors about the health of a company. One of the companies found to engage in fraud is Accelera Innovations Inc. The SEC filed charges against the company on Sept 29. 2017, with the allegation that Accelera Innovations Inc. made public filings with revenues of a separate company that it did not own. The complaint further alleged that Accelera falsely portrayed itself as a provider of software but did not (“U.S. SEC Litigation Release No. 23969”, 2017). This report will analyze the CPA firm's audit report issues, violations of the GAAP, compare the responsibility of the management and auditors, and analyzes sanctions under the Sarbanes-Oxley Act.
About Accelera Innovations
Accelera Innovations Inc. is a healthcare company that provides cloud-based services to the healthcare industry. The company aims to make use of technology to reduce healthcare costs and improve the quality of service. It also provides a wide range of services such as practice management, administrative services, and billing services for doctors and clinicians. Accelera Innovations was audited by Anton & Chia LLP between 2013 and 2015. The two companies were found criminally liable for falsifying their financial statements and audit reports in the given years.
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Audit Report Issued by the CPA
The audit report issued by the Certified Public Accounts (CPA) for Accelera Innovations Inc. was fraudulent. Anton & Chia LLP audited the company and included revenues of Behavioral Health Care Associates (BHCA), a separate company Accelera did not own. Accelera revenues went up by 90% and it sold approximately $1.7 million worth of stock to investors (“U.S. SEC Litigation Release No. 23969”, 2017). The financial report of Accelera revealed that the company reported revenues of $1,333,715 in 2015. After the separate company BHCA was removed in 2016, the revenues became 2,750. The gross profit reported by the company was $976,004 in 2015 and $2,750 in 2016. The operating expenses were $1,900,962 in 2015 and $1,900,962 in 2016 (“Form 10-K Accelera Innovations, Inc.”, 2017). The financial statements' data showed that Accelera Innovations had inflated its financial statements in the year 2015. Anton & Chia LLP audited the company without revealing any errors in the financial statements showing that they had violated auditing standards.
Violations of the GAAS
The Generally Accepted Auditing Standards (GAAS) are a set of principles that auditors should follow when reviewing a company’s financial records. Anton & Chia LLP made multiple violations of the GAAS in their report. The GAAS is divided into three main provisions that include general standards, standards of fieldwork, and standards of reporting. Anton & Chia LLP violated the provisions of standards of reporting. The first element in the standards of reporting is that the auditor should identify in their auditor’s report whether financial statements are in accordance with the generally accepted accounting principles (GAAP) (“Generally Accepted Accounting Standards”, 2001). Accelera Innovations never followed the GAAP standards but Anton & Chia falsely claimed that the company followed them.
Another provision in the standards of reporting requires that the auditor state whether information disclosures are not adequate (“Generally Accepted Accounting Standards”, 2001). Accelera Innovations had inflated its revenues, but Anton & Chia did not report the adjusted revenues in their auditor’s report and its executives signed the report. The audit firm was thus charged for fraud by the SEC as the reports were an indicator of fraudulent activities (“Audit Firm Charged with Fraud Relating to Auditing of Penny Stock Companies”, 2017). The violations provide a case where an organization can engage in fraudulent auditing and financial reporting. A further analysis of the case should determine whether the management or auditors bear a more significant burden on the liability.
Responsibility of Management and the Auditor
The management and the auditors are responsible for ensuring that the financial report is accurate and not misleading. Anton & Chia LLP did not perform an accurate audit of the financial statement. The level of fraud undertaken by Accelera Innovations was significant. Had the auditing company performed the audit well, the falsified sales would have been easily discovered. Anton & Chia were liable because their actions was grossly negligent. The auditing firm might have engaged in the fraudulent activities with the management who should also be held responsible.
The management should have a greater burden in bearing the company's criminal liability as they engineered the complete falsification of the company records. The leadership and management deals with the company's daily administration and is better positioned to understand its administration in terms of its liabilities, assets, and transactions (Vasile & Gruia, 2018). In the given case, Geoffrey J. Thompson, the Chairman, founder, CFO, and CEO of Accelera, signed the company’s annual reports for 2013, 2014, and 2015. He signed the documents with the full knowledge that the materials were false and misleading. On the other hand, the knowledge of the auditor could be limited based on the information presented during the audit. The management is also responsible for presenting financial data with integrity and fairness. The auditor's key responsibility is to issue a warning if they find inconsistencies or evidence of fraud. However, it can be difficult to identify errors and evidence of fraud. While the auditors and the management should be held liable, the management should carry the greater burden.
Sanctions Under SOX and Key Actions of PCAOB to hold the Company Accountable
The Sarbanes-Oxley Act provides various regulations that public companies should observe. Section 404 of the provides the procedures for internal control. The management is responsible for maintaining and establishing an adequate internal control structure and process for financial reporting. The internal control procedure can involve using a registered public accounting firm that can issue an audit report to attest to the management's financial information. Section 802 of the act further outlines penalties for destruction, falsification, and alteration of records. The penalty involves being fined under the title of being imprisoned for not more than 20 years. Section 904 also indicates that corporate officers' failure to certify financial reports can result in monetary fines of up to $5,000,000 and being imprisoned for not more than 20 years (“Sarbanes-Oxley Act”, 2002). Public companies are under SOX and can be held liable for any offenses.
The Public Company Accounting Oversight Board (PCAOB) was established under Section 101 of the SOX act. The board is responsible for investigating and disciplining firms for violating federal security laws when preparing and issuing audit reports. In the given situation, the PCAOB will be involved in holding Anton & Chia LLP, an audit firm, criminally liable for fraudulently presenting its audit report.
Conclusion
The analysis of the audit report and financial statements for Accelera Innovations revealed fraud in the audit report and violations of the GAAS. The primary responsibility was in the management that falsified its financial information to deceive the public. The sanctions under the SOX show that both the management and the audit firm are criminally liable. The given case emphasizes the need for audit firms to present their audit report with truthfulness and integrity. In case auditors do not highlight falsified financial statements, investors could be deceived, and the management and auditors will be held criminally liable. The recommendation is for auditors to be thorough with their analysis of financial reports and financial statements to prevent the possibility of deceiving the public and being charged with fraudulent acts under the SOX.
References
Audit firm charged with fraud relating to auditing of penny stock companies. (2017). Security Exchange Commission . https://www.sec.gov/news/press-release/2017-220
Form 10-K Accelera Innovations, Inc. (2017). Security Exchange Commission. https://sec.report/Document/0001493152-17-003990/
Generally accepted accounting standards. (2001). AICPA. https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00150.pdf
Sarbanes-Oxley Act. (2002). PCAOB. https://pcaobus.org/About/History/Documents/PDFs/Sarbanes_Oxley_Act_of_2002.pdf
U.S. SEC litigation release no. 23969. (2017). Security Exchange Commission. https://www.sec.gov/litigation/litreleases/2017/lr23969.htm
Vasile, E., & Gruia, P. (2018). The importance of financial accounting auditing in the identification of economic criminal activities. Audit Financiar , 16 (151). http://dx.doi.org/10.20869/AUDITF/2018/151/019
