PCAOB Sanctions Three Individuals for Violating PCAOB Standards on Relationships Between a Company and Its Related Parties

The PCAOB found that the engagement partners, Reams and Keyes, and engagement quality reviewer, Budge, failed to adhere to PCAOB standards during two audits. The PCAOB found that Reams and Keyes, who identified and knew that there were risks of material misstatement with respect to revenues and margin loans receivable related to transactions with a related party, failed to adequately respond to risks of material misstatement. Reams and Keyes failed to: 

• Comply with PCAOB auditing standards when evaluating Freedom’s identification of and accounting for the relationship and transactions between Freedom and a related party; 

• Identify that Freedom’s 2019 and 2020 financial statements did not contain necessary disclosures regarding a related party and its relationship with Freedom and its CEO;  

• Gather sufficient appropriate audit evidence to evaluate Freedom’s reported margin loans to a related party;  

• Gather sufficient appropriate audit evidence to evaluate commission revenue from securities transactions processed by Freedom on behalf of a related party; and  

• Evaluate whether a related party was a variable interest entity that, potentially, may have needed to be consolidated with Freedom.  

In addition, Budge failed to exercise due professional care in performing his engagement quality review.  

Without admitting or denying the findings, the parties settled with the PCAOB and consented to a disciplinary order. The order bars Reams and Keyes from being associated persons of a registered firm, with a right to apply for reassociation after two years. It also imposes a $35,000 civil money penalty each on Reams and Keyes. The order also bars Budge from being an associated person of a registered firm, with a right to apply for reassociation after one year. It also imposes a $25,000 civil money penalty on Budge.  

PCAOB enforcement staff members Stefan Hagerup, Jerry Folk, Judy Fish, and Tiffany Johnson conducted the investigation. Kyra Armstrong and Raymond Hamm supervised this matter. 

The PCAOB oversees auditors’ compliance with the Sarbanes-Oxley Act, provisions of the securities laws relating to auditing, professional standards, and PCAOB and SEC rules. Further information about the PCAOB Division of Enforcement and Investigations is available on the PCAOB website.