The Securities and Exchange Commission has fined NY-based firm PKF O’Connor Davies over claims that it allowed a client to record a $3.08 million receivable in its general fund for a property sale that the audit partner knew had not occurred. The case involved a municipal bond offering from the town of Ramapo, NY and its local development corporation. The town and its local development corporation had previously been charged with fraud in April, when the SEC said it cooked its books in order to falsely depict positive balances while, in truth, it was actually in debt by nearly $14 million due to the construction of a $60 million baseball stadium, as well as declining sales and property tax revenues. 

The SEC order said that the town's 2009 financial statements included a $3.08 million receivable for the sale of a piece of land known as the "Hamlets," which accounted for 75 percent of the town's general fund balance for that year. When auditing these statements, the partner, Domenick F. Consolo, learned that this sale had not actually been completed. Despite this fact, however, Consolo still allowed it to be booked, and further issued unmodified audit reports for the town's and development corporation's 2010-2014 financial statements, which continued to reflect the fraudulent sale. In so doing, according to the SEC, Consolo failed to exercise due professional care and skepticism, and did not obtain sufficient appropriate audit evidence. He also failed to respond appropriately when employees in the town's finance department expressed concerns regarding the financial statements, and declined to complete a fraud questionnaire. 

The SEC also said that senior management at the firm learned that the town was under investigation by the FBI, US Attorney, and the SEC over the $3.08 million receivable. Despite this, according to the SEC, the firm did not appropriately respond to the heightened fraud risk, and in fact continued to issue unmodified audit reports reflecting the inflated general fund balance. 

“When audit reports are used to sell municipal bonds, investors expect those reports to be accurate,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Consolo failed to exercise professional skepticism and PKF O’Connor Davies issued false unmodified audit reports, and they left investors without an accurate picture of the town’s finances and its ability to repay bondholders.”

Consolo and PKF O’Connor Davies consented to the SEC’s order without admitting or denying the findings.  The firm agreed to forfeit approximately $380,000 in audit fees and interest and pay a $100,000 penalty.  O’Connor Davies also must engage an independent consultant.  Consolo agreed to pay a $75,000 penalty and be suspended from practicing public company accounting.  He’s also prohibited from acting as the engagement partner or engagement quality control reviewer on any municipal audit for five years.