Last week the Securities and Exchange Commission charged Friedman LLP with with improper professional conduct for failing to comply with the standards of the Public Company Accounting Oversight Board while conducting audits of two public companies from 2017 through 2020. Friedman has agreed to settle the charges and will pay approximately $1.5 million in total monetary relief.
Here’s what happened, according to the SEC order. In its fiscal 2017 to 2020 audit of supermarket chain iFresh, Inc., Friedman failed to design and perform audit procedures that would have detected numerous undisclosed related party transactions by iFresh. The SEC’s order finds that Friedman did not exercise professional skepticism during its review of the work papers and failed to recognize red flags that indicated undisclosed related parties. Friedman also failed to obtain sufficient appropriate audit evidence, respond to fraud risks, and perform procedures to identify related party transactions during its audits of iFresh.
This past May, iFresh was charged by the SEC with “repeatedly filing materially inaccurate financial statements that failed to fully disclose related party transactions, specifically alleging that iFresh engaged in undisclosed transactions with entities that were either controlled by the CEO of iFresh or owned by the CEO’s brother.” In that matter, the SEC says between 2017 and 2020, from 18% to 54% of iFresh’s accounts receivable were from undisclosed related party transactions. The complaint further alleges that between 2016 and 2020, iFresh failed to disclose over $12 million in payments to a company owned by Deng’s brother. Finally, the complaint alleges that by misrepresenting information about iFresh’s related party transactions, iFresh deprived investors of the true scope of iFresh and Deng’s intertwined business interests. Deng put out a statement via press release in June which reads “Mr. Deng, who had no prior experience with US public companies, hired professionals internally to iFresh in financial reporting leadership roles and externally as independent auditors and lawyers to make certain that the Company’s financial statements and disclosures complied fully with US federal securities laws. We are confident that the evidence will be that Mr. Deng relied on the advice and counsel of these professionals, and that a jury in this civil case will find that Mr. Deng is not responsible for the violations that the Commission alleges were committed in connection with the Company’s financial reporting. The evidence also will be that Mr. Deng did not profit personally as a result of the allegations.”
The SEC’s press release on the Friedman fine mentions another public issuer but not by name. According to the SEC’s order, Friedman once again did not exercise professional skepticism and due professional care and failed to obtain sufficient appropriate audit evidence in connection with multiple transactions and relationships it encountered during its audit of that company. Friedman also failed to properly audit related party transactions made by that company. In addition, the SEC’s order finds that Friedman failed to design, implement, and monitor an adequate system of quality control, and that it failed to adopt and implement adequate policies and procedures regarding audit documentation.
The order against Friedman finds that it engaged in improper professional conduct within the meaning of Section 4C(a)(2) of the Securities Exchange Act of 1934 and Rule 102(e) of the SEC’s Rules of Practice, and violated Section 10A(a)(2) of the Exchange Act and Rule 2-02(b)(1) of Regulation S-X. Without admitting or denying the SEC’s findings, Friedman agreed to be censured, implement undertakings concerning the training of its staff, and pay disgorgement of $524,138, pre-judgment interest of $40,574, and a monetary penalty of $1,000,000.
Full complaint can be found below if you have absolutely nothing better to do than read about an audit firm failing in its professional duties.
Friedman LLP SEC Order by Adrienne Gonzalez on Scribd
