| UNITED STATES OF AMERICA |
| Before the |
| SECURITIES AND EXCHANGE COMMISSION |
| |
| SECURITIES EXCHANGE ACT OF 1934 |
| Release No. 92378 / July 13, 2021 |
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| ACCOUNTING AND AUDITING ENFORCEMENT |
| Release No. 4225 / July 13, 2021 |
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| ADMINISTRATIVE PROCEEDING |
| File No. 3-20394 |
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| In the Matter of |
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| PAUL L. CHANCEY, |
| JR., CPA, |
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| Respondent. |
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| ORDER INSTITUTING PUBLIC |
| ADMINISTRATIVE AND CEASE- |
| AND-DESIST PROCEEDINGS PURSUANT TO |
| SECTIONS 4C AND 21C OF THE SECURITIES |
| EXCHANGE ACT OF 1934 AND RULE 102(e) |
| OF THE COMMISSION’S RULES OF |
| PRACTICE AND NOTICE OF HEARING |
| |
| |
| I. |
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| The Securities and Exchange Commission (“Commission”) deems it appropriate that public |
| administrative and cease-and-desist proceedings be, and hereby are, instituted against Paul L. |
| Chancey, Jr., CPA (“Respondent” or “Chancey”) pursuant to Sections 4C1 and 21C of the |
| Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s |
| Rules of Practice.2 |
| |
| 1 Section 4C provides, in relevant part, that: |
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| The Commission may censure any person, or deny, temporarily or permanently, to any |
| person the privilege of appearing or practicing before the Commission in any way, if that |
| person is found . . . (1) not to possess the requisite qualifications to represent others; (2) |
| to be lacking in character or integrity, or to have engaged in unethical or improper |
| professional conduct; or (3) to have willfully violated, or willfully aided and abetted the |
| violation of, any provision of the securities laws or the rules and regulations issued |
| thereunder. |
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| 2 Rule 102(e)(1)(ii) provides, in pertinent part, that: |
| 2 |
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| II. |
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| After an investigation, the Division of Enforcement and the Office of the Chief Accountant |
| allege that: |
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| A. SUMMARY |
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| 1. Paul L. Chancey, Jr., a certified public accountant (“CPA”), engaged in improper |
| professional conduct, within the meaning of Section 4C of the Exchange Act and Rule 102(e) of the |
| Commission’s Rules of Practice, during the audits of the 2015 and 2016 financial statements of |
| MiMedx Group, Inc. (“MiMedx”). MiMedx later restated these financial statements. |
| |
| 2. For both years, Chancey served as the lead audit engagement partner for Cherry |
| Bekaert, LLP (“CB”), the accounting firm performing these audits, but he ignored evidence |
| indicating that sales between MiMedx and one of its largest distributors (“Distributor”) were made |
| on a consignment basis, and that MiMedx had therefore prematurely recognized revenue for these |
| transactions at the time of shipment. For the 2015 audit, this evidence included written allegations |
| from MiMedx’s controller that highlighted the consignment nature of these transactions and |
| challenged MiMedx’s revenue recognition. For the 2016 audit, the Distributor itself explained the |
| contingent payment terms for these transactions, demonstrating their consignment nature, in a |
| confirmation response. |
| |
| 3. However, rather than considering the consignment nature of these transactions or |
| performing additional audit procedures to determine if revenue on Distributor transactions was |
| reported in conformity with generally accepted accounting principles (“GAAP”), and without |
| documenting any analysis of the consignment issue in CB’s workpapers, Chancey improperly relied |
| on MiMedx executives’ false representations that revenue recognition was appropriate. Chancey’s |
| conduct violated several Public Company Accounting Oversight Board (“PCAOB”) standards, |
| including standards requiring Chancey to act with due professional care and obtain sufficient, |
| appropriate audit evidence. |
| |
| 4. Chancey also caused CB to violate Rule 2-02(b) of Regulation S-X. In connection |
| with the 2015 and 2016 audits, CB issued audit reports in which it represented that CB had |
| conducted the audits in accordance with the standards of the PCAOB, and further represented that, |
| based on its opinion, MiMedx’s financial statements presented fairly, in all material respects, the |
| company’s financial condition and results of its operations in conformity with GAAP. Chancey |
| approved the issuance of CB’s audit reports that contained these unqualified opinions when he knew |
| |
| |
| The Commission may . . . deny, temporarily or permanently, the privilege of appearing or |
| practicing before it . . . to any person who is found . . . to have engaged in unethical or |
| improper professional conduct. |
| |
| 3 |
| or should have known that CB’s representations were false because CB’s audits were not performed |
| in accordance with PCAOB standards. |
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| B. RESPONDENT |
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| 5. Paul L. Chancey, Jr., age 57, resides in Fayetteville, Georgia, and is a CPA |
| licensed in Georgia and Mississippi. Chancey has been a partner at Cherry Bekaert, LLP, since |
| 2006 and has less than a 5% ownership interest in the firm. Chancey was the lead engagement |
| partner on each audit and interim review of MiMedx’s financial statements from at least the first |
| quarter of 2013 through the second quarter of 2017. |
| |
| C. OTHER RELEVANT ENTITIES |
| |
| 6. Cherry Bekaert, LLP is a limited liability company based in Richmond, Virginia, |
| and a public accounting firm registered with the PCAOB. CB has 13 offices in the United States |
| and more than 1,250 professional employees providing accounting, advisory, and consulting |
| services. CB acted as MiMedx’s independent auditor from June 9, 2008, to August 4, 2017. CB |
| issued audit reports on the financial statements of MiMedx for each fiscal year from 2008-2016. |
| |
| 7. MiMedx Group, Inc. is a Florida corporation with its primary operations in |
| Marietta, Georgia. MiMedx’s stock is currently registered with the Commission under Section |
| 12(g) of the Exchange Act and trades on the NASDAQ exchange under the symbol MDXG. The |
| Commission previously charged MiMedx for, among other things, fraudulently misstating its 2015 |
| and 2016 financial statements in violation of GAAP. The Commission accepted MiMedx’s offer |
| of settlement, whereby MiMedx consented to an order permanently enjoining future violations of |
| certain securities laws and imposing a civil penalty of $1.5 million. The district court entered final |
| judgment against MiMedx on December 4, 2019. See SEC v. MiMedx Group, In., et. al., No. 1:19- |
| cv-10927-NRB (S.D.N.Y.). |
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| D. FACTS |
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| Background |
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| 8. MiMedx is a public company that sells medical products made from human |
| placental tissue. MiMedx’s 2015 and 2016 audited financial statements were included in filings |
| MiMedx made with the Commission on Form 10-K. MiMedx’s sales to customers in 2015 and |
| 2016 included direct sales to distributors. MiMedx generally recognized revenue on those sales at |
| the time of shipment. |
| |
| 9. CB was engaged by MiMedx as its independent auditor to conduct the annual |
| audits of the 2015 and 2016 financial statements. CB’s 2015 and 2016 audit reports contained |
| unqualified opinions in which CB represented that it had conducted the audits in accordance with |
| PCAOB audit standards, that MiMedx’s financial statements fairly presented the financial condition |
| and results of operations in all material respects, and that the financial statements had been prepared |
| in conformity with GAAP. |
| 4 |
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| 10. As the lead audit engagement partner, Chancey had responsibility for the conduct of |
| the audits, including planning, supervising team members, and ensuring compliance with PCAOB |
| standards. |
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| MiMedx Improperly Recognized Revenue on Transactions with Distributor |
| |
| 11. Distributor arranged sales of MiMedx product to the U.S. Department of Veterans |
| Affairs and U.S. Department of Defense medical facilities (collectively, the “VA”). MiMedx and |
| Distributor had a written distribution agreement that provided that risk of loss passed to Distributor |
| upon shipment of product, that Distributor had a specific number of days to pay invoices, and that |
| Distributor could return product only if it was defective. |
| |
| 12. When Distributor and MiMedx first entered into this distribution agreement, |
| Distributor purchased very limited quantities of MiMedx product and followed the terms of the |
| written distribution agreement. MiMedx issued an invoice to Distributor upon shipment of product |
| and recognized revenue at that time. |
| |
| 13. However, in late 2012, MiMedx asked Distributor to make bulk orders of product |
| to stock at the VA. Distributor was willing to make bulk orders based on an arrangement that |
| ensured Distributor would not be liable for payment to MiMedx until the VA used the products and |
| committed to pay Distributor. As a result, MiMedx excused Distributor from payment until the |
| VA issued a purchase order (“PO”) to Distributor for the product, which occurred after the VA |
| used the product. This side arrangement was contrary to and replaced the terms of the written |
| distribution agreement. |
| |
| 14. MiMedx also did not transfer risk of loss to Distributor until Distributor received a |
| PO from the VA. Instead, MiMedx managed the inventory held at VA facilities and credited |
| Distributor for any lost, dropped, or missing products stocked at the VA. |
| |
| 15. The side agreement between MiMedx and Distributor effectively transformed |
| MiMedx’s arrangement with Distributor into one where the product was shipped on a consignment |
| basis. As a result, under GAAP, MiMedx should have delayed recognizing revenue until it was |
| realized or realizable and earned, which occurs only when each of the following conditions is met: |
| (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been |
| rendered; (iii) the seller’s price to the buyer is fixed or determinable; and (iv) collectibility is |
| reasonably assured. However, MiMedx improperly continued recognizing revenue upon shipment |
| of the product, rather than delaying revenue recognition until Distributor was obligated to purchase |
| the product. |
| |
| 16. The side arrangement, which lasted from at least late 2012 through 2017, was well |
| known at MiMedx. MiMedx had a “Reconciliation Group” that closely tracked Distributor’s |
| receipt of POs from the VA, which obligated the VA to pay Distributor for products used. Under |
| the side arrangement, Distributor’s obligation to pay arose later than the MiMedx invoice date, |
| which was contrary to the terms of the written distribution agreement. |
| 5 |
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| 17. Every weekday from late 2012 to the end of the relationship between MiMedx and |
| Distributor in 2017, Distributor sent the Reconciliation Group a daily report listing each tissue for |
| which the VA submitted a PO to Distributor. The Reconciliation Group then sent a daily email to |
| MiMedx management providing the dollar value of the POs the VA had submitted to the |
| Distributor. The Reconciliation Group then compiled the daily figures into a “Weekly Revenue” |
| table circulated each Monday to MiMedx management and the accounting department. |
| |
| 18. Approximately 10 days after the close of each week, Distributor paid MiMedx the |
| exact total cash amount identified in the Weekly Revenue table. The Reconciliation Group |
| confirmed that Distributor’s payment matched the anticipated amount. Distributor paid MiMedx |
| only the value of Distributor’s sales to the VA, its end customer. |
| |
| 19. MiMedx and Distributor agreed that Distributor’s payments would be applied to the |
| oldest outstanding invoice, regardless of which specific products Distributor had sold through. |
| |
| 20. As a result of the side arrangement, MiMedx prematurely recognized revenue on |
| transactions with Distributor for several years, including 2015 and 2016. Distributor was one of |
| MiMedx’s largest customers, and sales to Distributor represented roughly 24% and 9% of |
| MiMedx’s total revenue in 2015 and 2016, respectively. |
| |
| 21. In 2020, MiMedx restated its financial statements for several reporting periods due |
| to its nonconformance with GAAP. MiMedx’s restatements included material changes for revenue |
| prematurely recognized on sales to Distributor in 2015 and 2016. |
| |
| Chancey Violated PCAOB Audit Standards When Conducting the 2015 and 2016 |
| Audits |
| |
| 22. During the audits of MiMedx’s 2015 and 2016 financial statements, CB and |
| Chancey identified revenue as one of MiMedx’s most significant financial statement accounts and |
| an area with heightened risk of material misstatement due to both error and fraud. PCAOB |
| standards required CB to presume that improper revenue recognition was a fraud risk. Since |
| revenue recognition was an area that required heightened scrutiny, CB had enhanced obligations |
| under PCAOB standards to perform additional audit procedures. |
| |
| 23. MiMedx management made false representations to CB during each audit, in |
| management representation letters and other documents, denying that MiMedx had a side |
| arrangement with Distributor. During both the 2015 and 2016 audits, Chancey improperly relied |
| on these management representations without appropriate corroboration, even though these |
| representations directly contradicted information Chancey had received from reliable sources, |
| including MiMedx’s controller and Distributor itself. |
| |
| 24. Chancey did not perform additional substantive audit procedures or obtain |
| sufficient, appropriate audit evidence to reduce the risk of material misstatement to an |
| 6 |
| appropriately low level as required by PCAOB standards. Chancey’s conduct demonstrated the |
| following audit failures in violation of PCAOB standards: (1) failure to exercise due professional |
| care; (2) failure to obtain an understanding of MiMedx’s business; (3) failure to plan the audits |
| based on assessment of risk; (4) failure to obtain sufficient appropriate audit evidence; (5) failure to |
| evaluate audit results; and (6) failure to document audit work. |
| |
| 25. As a result of these violations, Chancey engaged in (1) a single instance of highly |
| unreasonable conduct in circumstances for which heightened scrutiny is warranted; and (2) |
| repeated instances of unreasonable conduct that indicate his lack of competence. |
| 2015 Audit Failures |
| |
| 26. Early in the 2015 audit, MiMedx’s chief financial officer showed Chancey and |
| MiMedx’s Audit Committee an email from MiMedx’s controller alleging improper revenue |
| recognition relating to transactions with Distributor and others. |
| |
| 27. The controller alleged that Distributor “implicitly doesn’t pay MiMedx until the |
| tissue has been implanted, so revenue should be recognized on a consignment model.” The |
| controller referenced in his email “information[,]” “sales and collections data[,]” and “accounting |
| research” that he had collected to support his conclusions. |
| |
| 28. Chancey read the email and knew about the controller’s specific allegations, but |
| Chancey made the decision not to obtain a copy of the controller’s email for inclusion in the CB |
| workpapers. Chancey also did not document, or ensure documentation of, the controller’s |
| allegations, or any related evaluation or resolution of the allegations, in the CB workpapers. |
| |
| 29. Chancey also knew that the controller declined to sign the management |
| representation letter that CB had requested as part of its 2015 audit procedures. However, Chancey |
| also did not document, or ensure documentation of, this significant fact in the CB workpapers. |
| |
| 30. Chancey never attempted to contact the controller to gain a better understanding of |
| the controller’s allegations, nor did Chancey request the supporting information the controller |
| referenced in his email, even though CB was in regular contact with the controller in the course of |
| performing 2015 audit procedures. |
| |
| 31. Chancey also did not attempt to obtain information about the possible consignment |
| arrangement from Distributor, the VA, or even MiMedx personnel involved in collecting payments |
| from Distributor. |
| |
| 32. While CB performed some testing during its audits, this testing was insufficient to |
| allow CB to conclude whether MiMedx was appropriately recognizing revenue for its sales to |
| Distributor. In particular, CB’s procedures to test sales transactions, accounts receivable, the Days |
| Sales Outstanding (“DSO”) metric, the sales returns allowance, and sales commissions either failed |
| to provide sufficient appropriate evidence that was relevant to the consignment issue or, instead, |
| raised additional red flags or contradictory evidence suggesting that the arrangement with |
| Distributor could be a consignment. |
| 7 |
| |
| 33. The DSO analysis, for example, reflected that Distributor was paying much later |
| than, and in a manner that was not consistent with, the terms of the written distribution agreement. |
| Additionally, the sales return allowance procedures reflected that the risk of loss had not |
| transferred to Distributor upon shipment because MiMedx incurred losses for tissue that was |
| subsequently lost, dropped, or missing. Further, the sales commissions procedures showed that |
| MiMedx paid commissions to sales personnel only after the VA had implanted tissue, suggesting |
| that the transaction was incomplete until that time. |
| |
| 34. MiMedx’s Audit Committee conducted a limited review of the controller’s |
| allegations and concluded that MiMedx’s accounting was appropriate based largely on the written |
| distribution agreement, which MiMedx’s management misrepresented as controlling the terms of |
| the transactions with Distributor. Chancey attended an Audit Committee meeting where the Audit |
| Committee reported the conclusions of its review, but he did not know what investigative steps the |
| Audit Committee took in its review. Chancey did not implement any additional audit procedures |
| to verify or corroborate the Audit Committee’s work. Chancey also did not document, or ensure |
| documentation of, the Audit Committee’s review of the controller’s allegations. |
| |
| 35. Despite the evidence he had, Chancey did not plan, perform, or document any |
| additional substantive procedures for the 2015 audit to test whether a side arrangement with |
| Distributor existed. |
| |
| 36. CB’s 2015 workpapers did include a memo CB created as part of its audit |
| procedures to summarize sales to Distributor. However, rather than documenting evidence |
| obtained from substantive procedures performed to test the existence of a consignment |
| arrangement, the memo referenced amendments to the written agreement that were not relevant |
| and sales commission expense procedures that indicated a consignment arrangement might exist. |
| The memo concluded, without sufficient basis, that “[c]onsistent with prior years, CB considers all |
| four revenue recognition criteria to have been met on [Distributor’s] sales.” |
| |
| 37. At the conclusion of the 2015 audit, Chancey caused CB to issue an audit report |
| that inaccurately stated that the audit was performed in accordance with PCAOB standards. |
| MiMedx filed CB’s inaccurate audit report with MiMedx’s 2015 Form 10-K on February 29, 2016. |
| |
| 2016 Audit Failures |
| |
| 38. During the 2016 audit, Chancey obtained new evidence, this time directly from |
| Distributor, that further demonstrated MiMedx’s consignment arrangement with Distributor. |
| |
| 39. In its 2016 accounts receivable audit confirmation response to CB, Distributor |
| specifically stated that Distributor “does not pay MiMedx for tissues until such a time as the [VA] |
| issues a purchase order to [Distributor].” |
| |
| 40. Also during the 2016 audit, Chancey learned that Distributor made the same |
| representation (of payment due to MiMedx only upon the issuance of a PO from the VA) during a |
| 8 |
| MiMedx Audit Committee internal investigation into allegations of fictitious sales. As a result of |
| that investigation, Chancey also learned that Distributor further represented that: (1) MiMedx had |
| historically given Distributor credit for lost, dropped, and missing inventory; and (2) MiMedx |
| applied Distributor’s payments to the oldest invoices first, regardless of whether the VA made |
| payments to Distributor for the products reflected in those invoices. |
| |
| 41. In addition, consistent with the evidence obtained in the 2015 audit, CB’s |
| procedures to test sales transactions, accounts receivable, the DSO metric, the sales returns |
| allowance, and sales commissions either failed to provide sufficient appropriate evidence that was |
| relevant to the consignment issue or, instead, raised additional red flags or contradictory evidence |
| suggesting that the arrangement with Distributor was a consignment. |
| |
| 42. Despite this evidence, and the evidence from the 2015 audit, Chancey did not plan, |
| perform, or document any additional substantive procedures for the 2016 audit to test whether a |
| side arrangement existed. For example, he did not ask Distributor about the existence of a side |
| arrangement or for any evidence Distributor might have to support its position that its obligation to |
| pay MiMedx was contingent on a PO from the VA. Chancey also did not speak with anyone else |
| at MiMedx or the VA who was involved in the sales and collection processes. |
| |
| 43. As part of its 2016 audit procedures, CB requested and obtained a revenue |
| recognition memo from MiMedx management that supported MiMedx’s revenue recognition for |
| transactions with Distributor at the time of shipment. However, that memo did not provide |
| sufficient appropriate evidence about revenue recognition considering the side agreement. |
| Chancey improperly relied on management’s representations that the written distribution |
| agreement established the terms of the transactions, rather than performing incremental audit |
| procedures specifically directed at testing the alleged side agreement. |
| |
| 44. At the conclusion of the 2016 audit, Chancey again caused CB to issue an audit |
| report that inaccurately stated that the audit was performed in accordance with PCAOB standards. |
| MiMedx filed CB’s inaccurate audit report with MiMedx’s 2016 Form 10-K on March 1, 2017. |
| |
| PCAOB Audit Standards3 Chancey Violated During the 2015 and 2016 Audits |
| |
| Failure to Exercise Due Professional Care |
| |
| 45. PCAOB AS 1015 (AU 230) Due Professional Care in the Performance of Work |
| states, “the exercise of due professional care allows the auditor to obtain reasonable assurance |
| about whether the financial statements are free of material misstatement, whether caused by error |
| |
| 3 Effective after the 2015 audit of MiMedx’s financial statements, the PCAOB reorganized |
| the structure and numbering of auditing standards. The reorganized standards did not impose |
| new requirements or change the substance of the requirements on auditors. This document |
| references the reorganized PCAOB auditing standards in effect during the audit of MiMedx’s |
| 2016 financial statements with the pre-reorganization references (related to the 2015 audit) |
| provided parenthetically. |
| 9 |
| or fraud” and “[a]lthough not absolute assurance, reasonable assurance is a high level of |
| assurance.” The standard requires the auditor to: |
| a. exercise professional skepticism, “an attitude that includes a questioning mind and |
| a critical assessment of audit evidence”; |
| b. “consider the competency and sufficiency of the [audit] evidence”; |
| c. neither assume that management is dishonest nor assume “unquestioned honesty” |
| and “the auditor should not be satisfied with less than persuasive evidence because |
| of a belief that management is honest”; and |
| d. adhere to the standard during the planning and throughout the audit process. |
| |
| 46. PCAOB AS 2401 (AU 316) Considera tion of Fraud in a Financial Statement Audit |
| requires that the auditor exercise professional skepticism when considering fraud risks and |
| “conduct the engagement with a mindset that recognizes the possibility that a material |
| misstatement due to fraud could be present, regardless of any past experience with the entity and |
| regardless of the auditor’s belief about management’s honesty and integrity. Furthermore, |
| professional skepticism requires an ongoing questioning of whether the information and evidence |
| obtained suggests that a material misstatement due to fraud has occurred.” |
| |
| 47. During both the 2015 and 2016 audits, Chancey had evidence that contradicted |
| management representations about MiMedx’s transactions with Distributor. Yet , he improperly |
| relied on management representations when concluding that MiMedx’s financial statements were |
| free of material misstatement. Furthermore, Chancey failed to corroborate management |
| representations or perform any additional substantive procedures to reconcile the contradictory |
| evidence he had received from reliable sources and CB’s other audit procedures, and thus failed to |
| reduce the risk of material misstatement to an appropriately low level. |
| |
| 48. As a result, Chancey failed to exercise due professional care, which was required by |
| PCAOB standards, during the audits of MiMedx’s 2015 and 2016 financial statements. |
| |
| Failure to Obtain an Understanding of MiMedx’s Business |
| |
| 49. PCAOB AS 1015 (AU 230) Due Professional Care in the Performance of Work |
| requires that the engagement partner “be knowledgeable about the client.” |
| |
| 50. PCAOB AS 2110 (AS 12) Identifying and Assessing Risks of Material |
| Misstatement requires the auditor to “obtain an understanding of the company and its environment |
| (‘understanding of the company’) to understand the events, conditions, and company activities that |
| might reasonably be expected to have a significant effect on the risks of misstatement.” |
| |
| 51. Chancey failed to become knowledgeable about MiMedx’s relationship with |
| Distributor, which was one of MiMedx’s most significant customers. Among other things, |
| Chancey failed to obtain an understanding of the following significant events, conditions, and |
| activities impacting MiMedx’s transactions with Distributor: |
| a. During the 2015 audit, the controller’s allegations about MiMedx’s consignment |
| arrangement; |
| 10 |
| b. During both the 2015 and the 2016 audits, Distributor’s practice of paying much |
| later than the contract terms allowed; |
| c. During both the 2015 and the 2016 audits, MiMedx’s practice of incurring losses |
| for sales of tissue to Distributor, contra ry to terms of the distribution agreement, |
| when tissues were lost, dropped, or missing after shipment; and |
| d. During the 2016 audit, Distributor’s representations that payment terms with |
| MiMedx were contingent on sales to the VA. |
| |
| 52. As a result, Chancey failed to obtain an understanding of MiMedx’s business, |
| which was required by PCAOB standards, during the audits of MiMedx’s 2015 and 2016 financial |
| statements. |
| |
| Failure to Plan the Audits Based on Assessment of Risk |
| |
| 53. PCAOB AS 2101 (AS 9) Audit Planning states that “[p]lanning the audit includes |
| establishing the overall audit strategy for the engagement and developing an audit plan, which |
| includes, in particular, planned risk assessment procedures and planned responses to the risks of |
| material misstatement. Planning is not a discrete phase of an audit but, rather, a continual and |
| iterative process that might begin shortly after (or in connection with) the completion of the |
| previous audit and continues until the completion of the current audit.” Moreover, “[t]he auditor |
| should modify the overall strategy and the audit plan as necessary if circumstances change |
| significantly during the course of the audit, including changes due to a revised assessment of the |
| risks of material misstatement or the discovery of a previously unidentified risk of material |
| misstatement.” |
| |
| 54. PCAOB AS 2110 (AS 12) Identifying and Assessing Risks of Material |
| Misstatement requires the auditor to “presume that there is fraud risk involving improper revenue |
| recognition and evaluate which types of revenue, revenue transactions, or assertions may give |
| rise to such risks.” |
| |
| 55. PCAOB AS 1101 (AS 8) Audit Risk provides that “reasonable assurance is obtained |
| by reducing audit risk to an appropriately low level through applying due professional care, |
| including obtaining sufficient appropriate audit evidence.” |
| |
| 56. During both the 2015 and 2016 audits, Chancey learned of red flags and |
| contradictory evidence indicating that a side arrangement with Distributor existed, but CB did not |
| perform additional procedures to determine if revenue was misstated. Even after Chancey learned |
| during the 2015 audit that the controller had challenged MiMedx’s revenue recognition for |
| transactions with Distributor and that the controller would not sign the management representation |
| letter, and, during the 2016 audit, that Distributor had described its contingent payment terms with |
| MiMedx in its audit confirmation response, Chancey did not modify CB’s audit plan to respond to |
| the increased risk of material misstatement. This was true even though CB had previously |
| identified revenue as an area with heightened risk of material misstatement due to error or fraud. |
| |
| 11 |
| 57. As a result, Chancey failed to plan the audits and revise risk assessments |
| appropriately, as required by PCAOB standards, during the audits of MiMedx’s 2015 and 2016 |
| financial statements. |
| |
| Failure to Obtain Sufficient Appropriate Audit Evidence |
| |
| 58. PCAOB AS 1105 (AS 15) Audit Evidence states that, “[t]o be appropriate, audit |
| evidence must be both relevant and reliable in providing support for the conclusions on which the |
| auditor’s opinion is based.” Relevance depends on “whether [the audit procedure] is designed to |
| (1) test the assertion or control directly and (2) test for understatement or overstatement and the |
| timing of the audit procedure used to test the assertion or control.” Additionally, “the reliability of |
| evidence depends on the nature and source of the evidence and the circumstances under which it is |
| obtained.…Evidence obtained from a knowledgeable source that is independent of the company is |
| more reliable than evidence obtained only from internal company sources.” Furthermore, the |
| standard requires the auditor to: |
| a. “plan and perform audit procedures to obtain sufficient appropriate audit evidence |
| to provide a reasonable basis for his or her opinion”; |
| b. “test the accuracy and completeness of the information” produced by the company; |
| and |
| c. “perform audit procedures necessary to resolve the matter” when “audit evidence |
| obtained from one source is inconsistent with that obtained from another, or if the |
| auditor has doubts about the reliability of information to be used as audit evidence” |
| (emphasis added). |
| |
| 59. PCAOB AS 2805 (AU 333) Management Representations states that management |
| representations “are not a substitute for the application of auditing procedures necessary to afford a |
| reasonable basis for an opinion regarding the financial statements under audit” and, “[i]f a |
| representation made by management is contradicted by other audit evidence, the auditor should |
| investigate the circumstances and consider the reliability of the representation made” (emphasis |
| added). |
| |
| 60. PCAOB AS 2310 (AU 330) The Confirmation Process explains that the purpose of |
| confirmation is to obtain evidence from “third parties about financial statement assertions made by |
| management.” The auditor should evaluate the evidence provided in the confirmation to obtain an |
| understanding about the existence and details of significant oral modifications to written |
| agreements and perform alternative procedures and additional testwork to obtain sufficient |
| evidence. Further, nonresponses “do not provide audit evidence about the financial statement |
| assertions being addressed.” |
| |
| 61. PCAOB AS 2301 (AS 13) The Auditor’s Responses to the Risks of Material |
| Misstatement states that “assessed risks of material misstatement, particularly fraud risks, should |
| involve the application of professional skepticism in gathering and evaluating audit evidence[,]” |
| which includes “obtaining sufficient appropriate evidence to corroborate management’s |
| explanations or representations concerning important matters.” The standard also requires the |
| auditor to: |
| 12 |
| a. design the audit procedures performed to “[o]btain more persuasive evidence the |
| higher the auditor’s assessment of risk [and] [t]ake into account the types of |
| potential misstatements that could result from the identified risks and the likelihood |
| and magnitude of potential misstatement”; |
| b. “perform substantive procedures for each relevant assertion of each significant |
| account”; |
| c. obtain more evidence from substantive procedures “as the assessed risk of material |
| misstatement increases”; and |
| d. modify the planned audit procedures, in response to fraud risk, “to obtain more |
| reliable evidence regarding relevant assertions.” |
| |
| 62. PCAOB AS 2401 (AU 316) Consideration of Fraud in a Financial Statement Audit |
| indicates that, if there is a risk of improper revenue recognition, the auditor consider “[c]onfirming |
| with customers certain relevant contract terms and the absence of side agreements, because the |
| appropriate accounting often is influenced by such terms or agreements. For example, acceptance |
| criteria, delivery and payment terms, the absence of future or continuing vendor obligations, the |
| right to return product, guaranteed resale amounts, and cancellation or refund provisions often are |
| relevant in such circumstances.” |
| |
| 63. Chancey obtained reliable evidence from MiMedx’s controller during the 2015 |
| audit, and from Distributor’s confirmation response during the 2016 audit, indicating that MiMedx |
| and Distributor had a side arrangement. Additionally, during both audits, CB’s procedures |
| concerning the DSO metric, the sales returns allowance, and sales commissions provided evidence |
| suggesting that the arrangement MiMedx had with Distributor could be a consignment. This |
| evidence contradicted MiMedx management’s representations claiming that the written distribution |
| agreement controlled the terms of the transactions with Distributor. |
| |
| 64. Chancey failed to perform any incremental procedures to investigate the |
| circumstances of this contradictory evidence or appropriately test the reliability of the |
| representations made by MiMedx management. Chancey further failed to evaluate the |
| contradictory audit evidence to obtain sufficient appropriate evidence for CB’s audit conclusions. |
| |
| 65. As a result, Chancey failed to obtain sufficient appropriate audit evidence, as |
| required by PCAOB standards, during the audits of MiMedx’s 2015 and 2016 financial |
| statements. |
| |
| Failure to Evaluate Audit Results |
| |
| 66. PCAOB AS 2810 (AS 14) Evaluating Audit Results requires the auditor to “obtain |
| corroboration for management’s explanations regarding significant, unusual, or unexpected |
| transactions, events, amounts, or relationships. If management’s responses to the auditor’s |
| inquiries appear to be implausible, inconsistent with other audit evidence, imprecise, or not a |
| sufficient level of detail to be useful, the auditor should perform procedures to address the matter” |
| (emphasis added). |
| |
| 13 |
| 67. Because Distributor was one of MiMedx’s largest distributors at the time, |
| MiMedx’s transactions with Distributor were significant. Despite the significance of the |
| transactions, Chancey relied on management representations that were inconsistent with other audit |
| evidence, without obtaining appropriate corroboration from other sources, during the audits of |
| MiMedx’s 2015 and 2016 financial statements. Although Chancey obtained contradictory |
| evidence in two consecutive audits, he still failed to take action to reduce audit risk to an |
| appropriately low level. |
| |
| 68. As a result, Chancey failed to evaluate audit results properly, as required by |
| PCAOB standards, during the audits of MiMedx’s 2015 and 2016 financial statements. |
| |
| Failure to Document Audit Work |
| |
| 69. PCAOB AS 1215 (AS 3) Audit Documentation requires the auditor to document: |
| a. “significant findings or issues, actions taken to address them (including additional |
| evidence obtained), and the basis for the conclusions reached in connection with |
| each engagement”; |
| b. “information the auditor has identified relating to significant findings or issues that |
| is inconsistent with or contradicts the auditor’s final conclusions” (emphasis |
| added); and |
| c. “risks of material misstatement that are determined to be significant risks and the |
| results of the auditing procedures performed in response to those risks.” |
| |
| 70. During both the 2015 and 2016 audits, CB had reliable information that was |
| inconsistent with CB’s audit conclusions and raised significant risks about material misstatements |
| in MiMedx’s financial statements. However, Chancey failed to document, or ensure the |
| documentation of, any analysis of the consignment issues raised and the basis for CB’s audit |
| conclusions in light of those issues. Notably, Chancey failed completely to document the |
| controller’s allegations and refusal to sign the management representation letter, much less any |
| audit response to these issues, in CB’s 2015 audit workpapers. He also failed to document in the |
| 2016 audit workpapers any analysis or response to Distributor’s representations about contingent |
| sales terms. Futhermore, for both audits, he failed to document any analysis of the consignment |
| issues raised by additional red flags and contradictory evidence obtained from the DSO analysis, |
| the sales return allowance testwork, and the sales commission testwork. |
| |
| 71. As a result, Chancey failed to document audit work, as required by PCAOB |
| standards, during the audits of MiMedx’s 2015 and 2016 financial statements. |
| |
| CB’s Inaccurate Audit Reports |
| 72. Despite Chancey’s multiple departures from PCAOB audit standards, as described |
| above, CB, through Chancey, issued audit reports that contained unqualified opinions on |
| MiMedx’s 2015 and 2016 financial statements. Those reports contained CB’s opinion that |
| MiMedx’s financial statements presented fairly, in all material respects, the company’s financial |
| 14 |
| position and results of operations in conformity with GAAP, and CB’s representation that its audits |
| were conducted in accordance with PCAOB audit standards. |
| |
| 73. As the lead engagement partner on the audits, Chancey approved the issuance of |
| these audit reports. Chancey knew that MiMedx would file CB’s audit reports with the |
| Commission with MiMedx’s Forms 10-K. |
| |
| 74. Chancey caused CB’s audit reports to inaccurately state that the audits were |
| conducted in accordance with PCAOB audit standards. |
| |
| E. VIOLATIONS |
| 75. As a result of the conduct described above, Chancey engaged in improper |
| professional conduct within the meaning of Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) |
| of the Commission’s Rules of Practice. Section 4C(a)(2) and Rule 102(e)(1)(ii) provide, in |
| pertinent part, that the Commission may censure or deny, temporarily or permanently, the privilege |
| of appearing or practicing before the Commission to any person who is found by the Commission |
| to have engaged in improper professional conduct. Exchange Act Section 4C(b) and Rule |
| 102(e)(1)(iv) define improper professional conduct with respect to persons associated with public |
| accounting firms and persons licensed to practice as accountants, respectively, as (1) a single |
| instance of highly unreasonable conduct in circumstances for which heightened scrutiny is |
| warranted; or (2) repeated instances of unreasonable conduct that indicate a lack of competence. |
| |
| 76. As a result of the conduct described above, Chancey caused the violation of Rule 2- |
| 02(b)(1) of Regulation S-X, which requires an audit report to accurately state whether the audit |
| was made in accordance with generally accepted auditing standards. The phrase “generally |
| accepted auditing standards” refers to the standards issued by the PCAOB. See Act Rel. No. 33- |
| 8422. Under Exchange Act Section 21C, a person is a “cause” of another’s primary violation if the |
| person knew or should have known that his act or omission would contribute to the primary |
| violation. |
| III. |
| |
| In view of the allegations made by the Division of Enforcement and the Office of the Chief |
| Accountant, the Commission deems it necessary and appropriate in the public interest that public |
| administrative and cease -and-desist proceedings be instituted to determine: |
| |
| A. Whether the allegations set forth in Section II hereof are true and, in connection |
| therewith, to afford Respondent an opportunity to establish any defenses to such allegations; |
| |
| B. What, if any, remedial action is appropriate against Respondent pursuant to Section |
| 4C of the Exchange Act and Rule 102(e)(1) of the Commission’s Rules of Practice; and |
| |
| C. Whether, pursuant to Section 21C of the Exchange Act, Respondent should be |
| ordered to cease and desist from committing or causing violations of and any future violations of |
| 15 |
| Rule 2-02(b)(1) of Regulation S-X, and whether Respondent should be ordered to pay a civil |
| penalty pursuant to Section 21B(a) of the Exchange Act. |
| |
| IV. |
| |
| IT IS ORDERED that a public hearing before the Commission for the purposes of taking |
| evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days |
| and not later than 60 days from service of this Order at a time and place to be fixed by further order |
| of the Commission, pursuant to Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. |
| § 201.110. |
| |
| IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations |
| contained in this Order within twenty (20) days after service of this Order, as provided by Rule |
| 220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). |
| |
| IT IS FURTHER ORDERED that the Division of Enforcement and Respondent shall |
| conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, 17 |
| C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The parties may meet in |
| person or participate by telephone or other remote means; following the conference, they shall file |
| a statement with the Office of the Secretary advising the Commission of any agreements reached at |
| said conference. If a prehearing conference was not held, a statement shall be filed with the Office |
| of the Secretary advising the Commission of that fact and of the efforts made to meet and confer. |
| |
| If Respondent fails to file the directed Answer, or fails to appear at a hearing or conference |
| after being duly notified, the Respondent may be deemed in default and the proceedings may be |
| determined against him upon consideration of this Order, the allegations of which may be deemed |
| to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of |
| Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. |
| |
| This Order shall be served forthwith upon Respondent by any means permitted by the |
| Commission’s Rules of Practice. |
| |
| The Commission finds that it would serve the interests of justice and not result in prejudice |
| to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. |
| § 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to service of |
| paper copies, service to the Division of Enforcement of all opinions, orders, and decisions |
| described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), 17 C.F.R. |
| § 201.150(a), in these proceedings shall be by email to the attorneys who enter an appearance on |
| behalf of the Division, and not by paper service . |
| |
| Attention is called to Rule 151(a), (b) and (c) of the Commission’s Rules of Practice, 17 |
| C.F.R. § 201.151(a), (b) and (c), providing that when, as here, a proceeding is set before the |
| Commission, all papers (including those listed in the following paragraph) shall be filed |
| electronically in administrative proceedings using the Commission’s Electronic Filings in |
| Administrative Proceedings (eFAP) system access through the Commission’s website, |
| 16 |
| www.sec.gov, at http://www.sec.gov/eFAP. Respondent also must serve and accept service of |
| documents electronically. All motions, objections, or applications will be decided by the |
| Commission. |
| |
| The Commission finds that it would serve the interests of justice and not result in prejudice |
| to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. |
| § 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to filing with or |
| disposition by a hearing officer, all filings, including those under Rules 210, 221, 222, 230, 231, |
| 232, 233, and 250 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, |
| 231, 232, 233, and 250, shall be directed to and, as appropriate, decided by the Commission. This |
| proceeding shall be deemed to be one under the 120-day timeframe specified in Rule of Practice |
| 360(a)(2)(i), 17 C.F.R. § 201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and |
| 250, 17 C.F.R. §§ 201.233 and 250. |
| |
| The Commission finds that it would serve the interests of justice and not result in prejudice |
| to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. |
| § 201.100(c), that the Commission shall issue a decision on the basis of the record in this |
| proceeding, which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of |
| Practice, 17 C.F.R. § 201.350(a), and any other document or item filed with the Office of the |
| Secretary and accepted into the record by the Commission. The provisions of Rule 351 of the |
| Commission’s Rules of Practice, 17 C.F.R. § 201.351, relating to preparation and certification of a |
| record index by the Office of the Secretary or the hearing officer are not applicable to this |
| proceeding. |
| |
| The Commission will issue a final order resolving the proceeding after one of the |
| following: (A) The completion of post-hearing briefing in a proceeding where the public hearing |
| has been completed; (B) The completion of briefing on a motion for a ruling on the pleadings or a |
| motion for summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 |
| C.F.R. § 201.250, where the Commission has determined that no public hearing is necessary; or |
| (C) The determination that a party is deemed to be in default under Rule 155 of the Commission’s |
| Rules of Practice, 17 C.F.R. § 201.155, and no public hearing is necessary. |
| |
| In the absence of an appropriate waiver, no officer or employee of the Commission engaged |
| in the performance of investigative or prosecuting functions in this or any factually related |
| proceeding will be permitted to participate or advise in the decision of this matter, except as witness |
| or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within |
| the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the |
| provisions of Section 553 delaying the effective date of any final Commission action. |
| |
| By the Commission. |
| |
| |
| |
| Vanessa A. Countryman |
| Secretary |
