The firm’s activities may not violate the letter of the law but they seem to break its spirit.
I have been reviewing the activity of audit firm Marcum LLP on an ongoing basis for a number of reasons.
While writing earlier this week about the rhetoric of U.S. regulators and lawmakers regarding Chinese companies listed on US stock exchanges, I took a fresh look. I identified two instances where it appears Marcum LLP may be violating the spirit of a bar imposed on the firm by the PCAOB in 2020.
I have written about Marcum LLP and its sister firm Marcum, Bernstein & Pinchuk, also referred to as Marcum BP, more than once before.
On September 24, 2020, the PCAOB released a settled disciplinary order against Marcum LLP for a matter dating back to November 2016. That’s when Marcum LLP issued a single unqualified opinion for the 2013, 2014, and 2015 financial statements of a company incorporated in Delaware, but headquartered and operating primarily located in China.
Marcum’s engagement team signed the opinion for an audit where its affiliate, Marcum BP, performed the work on the ground. The PCAOB alleged that Marcum BP inappropriately acquiesced to management and should not have offered an unqualified opinion of their financial statements.
The disciplinary order contains all the interesting details and we encourage you to read it for yourself. However, the gist of it is:
By this Order, the Public Company Accounting Oversight Board is: (1) censuring Marcum LLP; (2) imposing a civil money penalty of $250,000 on Marcum; (3) prohibiting Marcum, for a period of three years from the date of this Order, from issuing an audit report for an issuer client with substantially all of its operations in the People’s Republic of China; and (4) requiring Marcum to undertake a review of its quality control policies and procedures regarding initial acceptance of, and audits performed for, certain issuer clients.
Marcum BP is a joint venture between Marcum LLP and Bernstein & Pinchuk LLP specializing mostly in Chinese clients. However, Marcum LLP and Marcum BP are based in New York and are inspected by the PCAOB only every three years.
When Marcum BP was inspected in 2018, the PCAOB found serious problems with Marcum BP’s audit of one issuer (likely a Chinese-based issuer.) In that report, the PCAOB identified seven different areas where the issuer was significantly deficient. The lack of sufficient testing to establish effective internal controls over financial reporting (ICFR) featured prominently in the report.
According to the PCAOB:
[I]n this audit, the auditor issued an opinion without satisfying its fundamental obligation to obtain reasonable assurance about whether the financial statements were free of material misstatement and the issuer maintained effective IFCR.
That was not the only bad news that Marcum BP received from the PCAOB during that period. In September 2019, the PCAOB fined the firm $50,000 to the firm for practices in 2013 and 2014 that had undermined auditor independence. Marcum BP had participated in conferences where they had promoted seven of their audit clients to potential investors, creating conflicts concerning their auditor independence.
Marcum BP was not alone; Marcum LLP also was assessed a $450,000 fine relating to the same conferences. The PCAOB singled out Marcum BP and Marcum LLP for this auditor independence issue, even though The Dig has pointed out that audit firms have held similar conferences in the past that included audit clients.
Marcum LLP and WithumSmith + Brown PC are the dominant auditors of SPACs, the blank-check companies creating record volumes of IPOs and mergers and acquisitions in the last two years. Since everyone all over the world is getting on the gold rush, we’re seeing that many of the SPACs with Marcum LLP and Withum’s audit opinion signatures are also China-based.
That raised a question for me:
How can Marcum LLP sign off on any China-based audits after September 24, 2020?
Well, in many cases, those audits have already changed hands after Marcum LLP was sanctioned by the PCAOB, sometimes to Marcum BP. But not all.
I asked for a clarification on a few and got this background answer:
If a pre-merger SPAC has no operations, in China or otherwise, Marcum is not precluded from issuing an audit report for a pre-merger SPAC even if it eventually combines with a company with China operations. If a SPAC combines with such a company, however, Marcum is prohibited from serving as the combined entity’s auditor.
So, given the number of Marcum LLP client SPACs based in China that had not chosen a merger partner I began a “wait and see” vigil.
One China-based Marcum LLP client with Chinese owners and Chinese board members, Magnum Opus Acquisition Limited, acquired Forbes Media recently. Forbes Media had a majority Chinese owner but a US headquarters. The new combined firm has a US headquarters but continues to have a Chinese majority shareholder and Chinese board members. It has not yet been announced whether Marcum LLP or Forbes’ auditor, Grant Thornton in New York, will become the permanent auditor.
However, during our review earlier this week on the ongoing efforts of China-affiliated operating firms with Chinese auditors, I identified two Marcum LLP audits that appear to violate the spirit if not the letter of the law of the PCAOB bar.
Natural Health Trends Corp is based in Hong Kong.
Marcum signed an audit opinion for the year end December 31, 2020, billing $253,000.
According to its recent 10-K, Natural Health had revenues of $62 million in 2020, including $49.2 million from Hong Kong and $2.9 million from mainland China.
“Substantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China.”
Hong Kong is a high-risk place these days.
Prime Acquisition Corp is registered in the Cayman Islands, headquartered in China.
Its primary income is derived from real estate holdings in Italy.
Prime Acquisition last reported its financial information in 2018. Its revenues have been fairly consistent during the prior five years.
In early 2020 told the SEC that since its primary activities are in Italy it would be working remotely — in China? — and its filings would be delayed.
Prime Acquisition Corp. (the “Company”) is providing the following update on the filing of its Form 20-F for the fiscal year ended December 31, 2019. As a result of the global outbreak of the COVID-19, the Company is unable to meet the filing deadline of the Form 20-F. The Company’s business and facilities are located in Italy. In order to avoid the risk of the virus spreading, the Company has been following the recommendations of local health authorities to minimize exposure risk for its team members for the past several weeks, including the temporary closures of its corporate offices and having team members work remotely. As such, the Form 20-F will not be completed by the filing deadline, due to insufficient time to facilitate the internal and external review process.
There have been no updates since. There are no filings signaling a change in audit firm.
The General Counsel for Marcum LLP, Leslie Adler, emailed The Dig:
Based on the information we have, Marcum believes it is in compliance with the 9/24/2020 PCAOB Order.
A spokeswoman from the PCAOB emailed:
We have no comment.
A spokesman for the SEC emailed:
We would decline to comment on a specific company.
© Francine McKenna, The Digging Company LLC, 2022