Auditors Swept Up in SPAC Regulation

Like other trendy investment vehicles that skyrocketed in popularity and then faced a sharp decline, special purpose acquisition companies (SPACs) are seeing yet another indication that they are subject to the laws of financial gravity. New regulatory developments show auditors may also get caught up in the SPAC crash.

SPACs are created to avoid the traditional process of holding an initial public offering. Instead, sponsors list them as shell companies on exchanges to raise money to acquire private companies in deals referred to as “de-SPAC” transactions. After de-SPACing, the private company has gone public without incurring the costs of a standard IPO. SPACs soared in popularity in 2020 and 2021, but saw a precipitous decline shortly thereafter – at roughly the same time regulators and politicians began to take notice of them.

In another sign that the SPAC honeymoon may in fact be over, the Securities and Exchange Commission and Public Company Accounting Oversight Board (PCAOB) both fined audit firm Marcum LLP in late June for significant quality control violations related to SPAC audits. According to the PCAOB release announcing the disciplinary action, Marcum accepted hundreds of SPAC audits from January 2020 through October 2021, but the firm’s quality control system “did not provide reasonable assurance that it could execute these audits with competence.”

The SEC dinged Marcum for $10 million, while the PCAOB’s $3 million penalty is the largest it has imposed on an audit firm that is not a member of a global network. In addition, the PCAOB is requiring Marcum to make functional changes to its quality control supervisory structure by creating a new chief quality officer position and an audit oversight committee. It marks the first time a PCAOB-settled disciplinary order has required functional changes to a registered firm’s quality control structure, the agency noted.

The Marcum news is just the latest development in a tough stretch for the accounting industry. The PCAOB in May released the results of its first inspections of audits of U.S.-listed Chinese companies, finding “unacceptable deficiencies” in audits performed by KPMG’s Chinese arm and PricewaterhouseCoopers’ office in Hong Kong. Inspectors found high rates of what the agency calls “Part I.A deficiencies,” which are of such significance that PCAOB staff believe the audit firms “failed to obtain sufficient appropriate audit evidence to support its work on the public company’s financial statements or internal control over financial reporting.”

Considering the severity of the penalties doled out to Marcum and the criticisms of audit work done by two global accounting firms for U.S.-listed Chinese companies, it seems fair to wonder whether regulators are uncovering evidence of a few bad apples or widespread problems in the sector. Either way, accounting firms will likely see increased regulatory vigilance and grim consequences for noncompliance going forward.