Can Auditors Be Barred From Service For Missing Fraud?

In a landmark case that it sure to send shockwaves throughout the accounting profession, the SEC is seeking to bar two accountants from a Big 5 firm from signing off on public company audits because they failed to detect a massive fraud at California Micro Devices five years ago.

The CPAs gave Cal Micro a clean bill of health, but an internal investigation weeks later uncovered an enormous employee fraud resulting in over one third of the company's revenue being erroneous. The stock plunged 40% upon disclosure of the fraud.

The SEC claims that the two CPAs in question "conducted the audit in a vacuum, recklessly ignoring unmistakable red flags," and wants to restore the safety of the investing public by barring them from signing off on audits of publicly held companies.

The case is fraught with accusations of who authorized what in terms of the accounting procedures, but the SEC is determined to do what it must to ensure investor confidence, and plans to pursue the case to the fullest extent of the law.

An SEC administrative law judge will review the case next month.

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