On Friday, SEC Enforcement charged audit firm BF Borgers CPA PC and its owner, Benjamin F. Borgers, with “massive fraud” involving “deliberate and systemic failures” to comply with PCAOB standards in auditing and reviewing financial statements incorporated into more than 1,500 SEC filings from January 2021 through June 2023. The charges also included “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.” In settlement, the audit firm agreed to pay a $12 million civil penalty, and Benjamin Borgers agreed to pay a $2 million civil penalty, along with censures, cease-and-desists and permanent suspensions from appearing and practicing before the SEC as accountants. According to SEC Enforcement Director Gurbir S. Grewal,

“Ben Borgers and his audit firm, BF Borgers, were responsible for one of the largest wholesale failures by gatekeepers in our financial markets….As a result of their fraudulent conduct, they not only put investors and markets at risk by causing public companies to incorporate noncompliant audits and reviews into more than 1,500 filings with the Commission, but also undermined trust and confidence in our markets. Because investors rely on the audited financial statements of public companies when making their investment decisions, the accountants and accounting firms that audit those statements play a critical role in our financial markets. Borgers and his firm completely abandoned that role, but thanks to the painstaking work of the SEC staff, Borgers and his sham audit mill have been permanently shut down.”

This case has received an unusual amount of press—for an audit firm that many have never even heard of before—because Borgers was the auditor for the social media company of a certain former president. (See, e.g., the NYT, CNBC, CBS News) But, as we’ve often seen in other contexts, such as auditor independence (see, e.g., this PubCo post), this case also illustrates the importance for companies to keep in mind that these types of violations may have serious consequences not only for the audit firm, but also for the audit clients. In fact, in this case, the staff of Corp Fin and the Office of Chief Accountant issued this Staff Statement on Issuer Disclosure and Reporting Obligations in Light of Rule 102(e) Order against BF Borgers CPA PC.

It’s actually a bit mindboggling to read the press release’s recitation of the allegations, which included the following, among other things:  

“[T]he Respondents failed to adequately supervise and review the work of the team performing the audits and reviews; did not properly prepare and maintain audit documentation, known as ‘workpapers’; and failed to obtain engagement quality reviews, without which an audit firm may not issue an audit report. According to the SEC’s order, of 369 BF Borgers clients whose public filings from January 2021 through June 2023 incorporated BF Borgers’s audits and reviews, at least 75 percent of the filings incorporated BF Borgers’s audits and reviews that did not comply with PCAOB standards. The SEC’s order further finds that, at Benjamin Borgers’s direction, BF Borgers staff copied workpapers from previous engagements for their clients, changing only the relevant dates, and then passed them off as workpapers for the current audit period. As a result, the order finds, BF Borgers’s workpapers falsely documented work that had not been performed. Among other things, the workpapers regularly documented purported planning meetings—required to discuss a client’s business and consider any potential risk areas—that never occurred and falsely represented that both Benjamin Borgers, as the partner in charge of the engagement, and an engagement quality reviewer had reviewed and approved the work.”

In their Statement, the staff report that BF Borgers “deliberately and systematically failed to conduct audits and quarterly reviews” in accordance with applicable PCAOB standards and “fraudulently issued audit reports that falsely represented that audits had been performed” in accordance with PCAOB standards. In addition, the firm “caused audit clients to violate certain provisions of the Exchange Act and rules thereunder, including Exchange Act Sections 13(a) and 15(d).” 

More specifically, the Order indicates, among other things, that an issuer violates Section 13(a) or 15(d) of the Exchange Act and related rules, when it files annual or quarterly reports with the SEC “that fail to include financial statements audited or reviewed by an independent public accountant in accordance with PCAOB standards.”  As a result, certain issuer clients violated those rules when they filed annual and quarterly reports with financial statements that had not been audited or reviewed by the audit firm in accordance with PCAOB standards.  The Order charges that “Respondents knew both that they had not audited or reviewed those financial statements in accordance with PCAOB standards and that their clients would include those financial statements in filings with the Commission. Thus, Respondents knew or should have known that their actions would contribute to their clients’ violations, and, as  a result, Respondents caused their clients’ violations of Sections 13(a) and 15(d) and related rules, as well as Sections 17(a) and 17(e) of the Exchange Act and Rule 17a-5 thereunder.”

The Statement is designed to “assist issuers in complying with their disclosure and reporting obligations in light of the Order.”  Those obligations include:

• Filing an Item 4.01 Form 8-K when BF Borgers resigns or is dismissed, including information required by Reg S-K Item 304; companies will be permitted to disclose that the “prior auditor is not currently permitted to appear or practice before the Commission in lieu of including a letter from BF Borgers stating whether it agrees with the Item 304 disclosures.”  
• For Form 10-K filings made on or after the date of the Order, engaging a new qualified, independent, PCAOB-registered public accountant that is permitted to appear or practice before the SEC to provide new audit reports for each fiscal year presented; the filings “may not include audit reports from BF Borgers.” Similar requirements apply to Form 20-F filings.
• For Form 10-Q filings made on or after the date of the Order, engaging the new qualified, independent, PCAOB-registered public accountant to review each quarterly period presented; the filings “may not present financial information that has been reviewed by BF Borgers.”

According to the Statement, “Exchange Act reports that were filed before the date of the Order do not necessarily need to be amended solely because of the Commission’s entry of the Order. However, issuers should consider whether their filings may need to be amended to address any reporting deficiencies arising from the BF Borgers engagement.”

Similarly, with regard to Securities Act registration statements, the staff advise that any issuer with a pending registration statement that “contains or incorporates by reference financial information audited or reviewed by BF Borgers would need to file a pre-effective amendment to include financial information audited or reviewed, as applicable, by a qualified, independent accountant that is permitted to appear or practice before the Commission.” In addition, if an issuer has submitted a draft registration statement for nonpublic review that includes an audit opinion or consent from BF Borgers, the issuer must now retain a qualified, independent accountant to perform the required audit of financial information before publicly filing the registration statement. Finally, the staff caution that “issuers with effective Securities Act registration statements are reminded that any sales must be preceded or accompanied by a Securities Act Section 10(a)-compliant prospectus, which 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.”  Similar guidance applies with respect to granting of qualification requests for pending Reg A offering statements requiring audited financial statements in which any financial statements have been previously audited by BF Borgers. 

Corp Fin and the Office of the Chief Accountant expect to carefully monitor future developments. While the BF Borgers situation may seem egregious, it’s important for companies—including audit committees and other gatekeepers— to keep in mind that auditor issues can end up on the plate of the company client with consequences like those identified above—or even worse.

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