Shoot all the bluejays you want, if you can hit ‘em, but remember it’s a sin to kill a mockingbird.” – Atticus Finch in Harper Lee’s To Kill a Mockingbird."

Capital punishment is reserved for the most heinous of crimes. The “death penalty” can also be implemented on entities for egregious behavior when other remedies fail to rectify the situation. In 1987, the NCAA instituted the “death penalty” on Southern Methodist University’s football program and, in 2002, accounting firm Arthur Andersen was effectively sentenced to death in the wake of multiple accounting scandals at its clients, including Enron and WorldCom.

Last month the Securities and Exchange Commission (SEC) “killed” the Colorado-based accounting firm BF Borgers CPA PC. Referring to the firm as a “sham audit mill” and noting deliberate and systemic failures to follow PCAOB auditing standards, the SEC permanently barred both the firm and its owner from appearing and practicing before the Commission as accountants.

Did BF Borgers deserve to die? Or was the firm like Tom Robinson, the fictional character defended by Atticus Finch in To Kill a Mockingbird, who was wrongly accused and sentenced to death, a sacrificial lamb in an industry where 4 out of 10 public company audits are deficient?

Ladies and gentlemen of the jury, here are the facts in this case.

BF Borgers first came to my attention with glowing headlines like these in Accounting Today:

• BF Borgers tops list of new SEC clients again (May 4, 2020)
• BF Borgers leads in new SEC clients for Q2 (August 11, 2021)
• BF Borgers dominates 2021 SEC client rankings (March 25, 2022)

I had never heard of them, so I made a few inquiries to friends in the industry. Their responses were a mixture of scoffs and sneers, accompanied by comments like “Oh, those guys!” Intrigued, I decided to do a little research on the firm for Episode #7 of our GAAP Chats podcast which aired February 22, 2023.

BF Borgers added 39 new SEC clients during 2021, more than any other firm, bringing their total issuer audit clients to over 80. However, at the time, the firm’s LinkedIn page listed the company size at 2-10 employees and their website showed only one Managing Partner and one Audit Director.

How does a firm with only 10 employees and two “partners” perform quality audits on over 80 SEC registrants? Well, as we’re about to found out, they didn’t!

It seems all the positive press didn’t go unnoticed by the regulators, who were asking similar questions about audit quality at BF Borgers. On May 24, 2022, the PCAOB sanctioned the firm’s Audit Director for violating PCAOB rules and standards in four audits of three public companies, ordering him to pay a $25,000 civil penalty and barring him from being associated with a registered public accounting firm for a period of two years.

What did he do to deserve being barred from public accounting? The better question is what he didn’t do and that is perform required audit procedures!

Here’s just one example of numerous infractions noted in the PCAOB’s disciplinary order:

Failure to perform sufficient audit procedures to evaluate management’s qualitative assessment of goodwill impairment

On one audit goodwill represented 37% of total assets and was deemed a “high risk” audit area by the engagement team. Management, relying on a valuation report prepared by a third-party specialist, performed a qualitative assessment and concluded that goodwill was not impaired. The Audit Director simply accepted management’s representation without performing any audit procedures despite the engagement team concluding that there was substantial doubt about the client’s ability to continue as a going concern due to the company’s recurring losses, illiquidity, and accumulated deficit. The only thing the engagement team did do was to obtain the valuation report, but they didn’t even test the data and assumptions used by the third-party specialist, namely cash flow projections, which were given to it by the client.

Continuing its growth, BF Borgers eventually exceeded 100 issuer clients, which required it to be subject to annual PCAOB inspections beginning with the 2022 inspection cycle. We reviewed the firm’s 2022 PCAOB inspection report as part of our research for the 6^th edition of our comprehensive eBook, Learn from PCAOB Inspections – Your Prescription for Better Audits and noted that the firm had a 100% deficiency rate! This means that the firm failed to provide sufficient audit evidence to support their opinion in all the audits selected by the PCAOB as part of their inspection.

We’ve been analyzing PCAOB inspection reports for over 15 years and we’ve never seen a 100% deficiency rate associated with an annually inspected filer, let alone for two consecutive years. That’s why in this post, dated March 6, 2024, we asked whether the PCAOB had a death penalty.

Here’s a sample of the PCAOB findings:

• The firm did not perform any substantive procedures to test certain receivables related to revenue. In addition, the firm did not perform any substantive procedures to test the issuer’s allowance for doubtful accounts.
• The firm did not identify and selected journal entries and other adjustments for testing to address the potential for material misstatement due to fraud.
• The firm did not perform substantive procedures to test revenue beyond comparing it to a schedule provided by the issuer.

They were collecting fees and providing an audit opinion, without performing much, if any, of the procedures required by PCAOB auditing standards. That’s like paying for a home inspection and receiving a “clean report” without the home inspector going into the musty, insect-invested crawl space. You’re not going to find the water leak or termite damage without doing the dirty work. It’s a sham and the SEC agreed, which is why they shut them down!

In summation, BF Borgers wasn’t a mockingbird. The firm and its founding partner were bluejays and the SEC just put them out of their misery. Good riddance!

Interestingly, BF Borgers still touts that it audits public companies on its website! Somebody might want to investigate that!

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