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CPA Firm Sanctioned for Audits of Broker-Dealers Where Daughter Served as FINOP


The SEC upheld sanctions against a broker-dealer because the concurring partner’s daughter served as the subjects’ financial operations principal, thereby violating independence requirements.  The auditing firm, a solo practice, hired an independent contractor to serve as Engagement Quality Reviewer (EQR) with respect to 14 audits of 7 broker-dealers over a 2-year period.  Although the firm knew that the EQR’s daughter served as FINOP of the broker-dealers, the SEC opines that the respondents acted at least recklessly by failing to understand that the relationship violated independence rules.  The SEC faulted the respondents for failing to consult either the regulators or private advisors.  The SEC also rejected the argument that the financial statements complied with applicable rules, because the failure to ensure independence is itself a violation of accounting rules.  The SEC notes the close relationship between the EQR and his daughter, who learned the business from her father and assumed several FINOP engagements following her father’s withdrawal due to FINRA sanctions.

Accounting firms cannot provide FINOP services for the broker-dealer clients for whom they also provide auditing services.  In case there was any doubt, this case makes clear that the EQR is part of the engagement team, and a close familial relationship with the FINOP violates independence.