Marcum Dinged on Independence Failures

Oh lord, we have another contestant for most unfortunate business misconduct of 2019. The audit firm Marcum has been sanctioned for violating rules for audit firm independence, where poor oversight from Marcum’s partner in charge of audit firm independence played a starring role. 


The PCAOB hit Marcum with a fine of $450,000, plus another $50,000 fine for a subsidiary firm. It also imposed a $25,000 fine on Alfonse Gregory Giugliano, 57, who worked as a leader in Marcum’s assurance practice and was the partner in charge of the firm’s compliance with independence rules when the offenses happened. Marcum also agreed to hire an independent consultant who will review the firm’s independence policies and procedures, and to implement any changes that person might recommend.

This is the first time the PCAOB has (1) sanctioned a registered public accounting firm for publicly advocating its audit clients as investment opportunities; (2) sanctioned an annually inspected firm’s head of independence for substantially contributing to the firm’s independence violations; and (3) mandated the retention of an independent consultant.

Here’s what went down, per the PCAOB’s settlement order. From 2012 through 2015, two senior partners at Marcum made public statements advocating the investment potential of companies presenting at the firm’s annual Microcap Conference. Sixty-two of those firms that got plugs were also Marcum audit  clients. 

Likewise, in 2013 and 2014, Marcum Bernstein & Pinchuk (a subsidiary of the parent firm) advocated the investment potential of companies participating in the firm’s China Conference — seven of which were also Marcum clients. 

Such actions are violations of PCAOB Rule 3520 and Rule 2-01(b) of Regulation S-X, which both spell out the criteria for an audit firm’s independence from its clients. Rule 2-01(b) specifically says an audit firm cannot maintain its independence when providing a service that “places the accountant in a position of being an advocate for the audit client.” 

So that rules out plugging clients at an investment conference you’re running, where advocating for companies on display is, ya know, the whole point. 

Throughout this period, Giugliano had been Marcum’s partner in charge of compliance with audit firm independence rules. (He has since stepped down from leadership roles at the firm, but still works there.) In the first half of 2012 as other Marcum partners assembled that first investor conference, the organizers did call Giugliano to ask his advice about independence issues. Giugliano did said that Marcum shouldn’t be involved in specific company presentations or one-on-one meetings with investors. (And for the record, Marcum didn’t do those things.)

Still, that’s pretty much all Giugliano did. He didn’t consider how Marcum and its partners would market the conference, or whether Marcum would tout the investment potential of the presenting companies as one overall group. Nor did he document his call with the conference organizers or his rationale that the event wouldn’t endanger independence because, as the PCAOB said, “he did not believe that the matter required any substantial deliberation.” 

Meanwhile, Marcum’s marketing team did the usual marketing thing with its promotional materials. In 2012, for example, the event’s marketing materials touted the appearing companies as “promising high growth companies, the top picks by some of the most astute analysts.” Marcum said the conference would be “a unique opportunity for investors to uncover ‘hidden gem’ investment opportunities.”

Oh dear. Flowery language like that about your audit clients does sound like “being an advocate for the audit client,” as Rule 2-01(b) advises audit firms not to be. 

Worse, Giugliano attended these investment conferences in person, year after year, while the firm’s marketing department continued to churn out materials about “top picks” and “the very best” and “invitation only” and similar enthusiastic phrases. Yes, a separate investor relations firm helped presenting companies with their specific presentations, but Marcum’s marketing team still had its fingerprints all over the effort to promote participating firms as bright investment opportunities. 

Enter the Inspectors

The PCAOB inspected Marcum in 2015 and warned the firm about its independence issues related to the marketing conference. Giugliano and others then made some half-hearted attempts to solve the problem, but again, that’s pretty much all they did, which wasn’t enough.

For example, Giugliano did talk with some Marcum personnel about removing older flowery press releases from past years from the conference website, but those releases never actually got removed well into 2017. The firm also adopted a new policy for Giugliano to review any public statements about audit clients, but that policy didn’t apply to statements drafted by third parties that might be attributable to Marcum — like, say, flowery statements others made about Marcum’s audit clients, which Marcum then posted to its conference website. 

So in total, we have years’ worth of independence rule violations because Marcum didn’t think expansively about what sorts of statements might violate those rules. And when the PCAOB warned Marcum of potential trouble after that 2015 inspection, the firm didn’t follow through to confirm that good remediation steps (like scrubbing past press releases) were actually carried out.

All of this was magnified by Giugliano’s role. He was a senior leader at the firm, supposedly trained to consider these issues, and he didn’t consider them thoroughly enough. One can’t help but think of the Justice Department’s guidance on effective compliance programs, and the section on gatekeepers who have a higher duty: 

Giugliano certainly had approval authority. Others in the firm followed his advice, and that advice was lacking. It’s not nearly as crazy as Apple’s ex-corporate secretary getting nailed on insider trading charges, but it’s an egregious failure in its own right.

Leave a Comment

You must be logged in to post a comment.