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| UNITED STATES OF AMERICA |
| Before the |
| SECURITIES AND EXCHANGE COMMISSION |
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| SECURITIES EXCHANGE ACT OF 1934 |
| Release No. 91475 / April 5, 2021 |
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| ACCOUNTING AND AUDITING ENFORCEMENT |
| Release No. 4207 / April 5, 2021 |
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| ADMINISTRATIVE PROCEEDING |
| File No. 3-20256 |
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| In the Matter of |
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| Christopher E. Knauth, CPA, |
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| Respondent. |
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| ORDER INSTITUTING 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 Christopher |
| E. Knauth, CPA (“Respondent” or “Knauth”) pursuant to Sections 4C1 and 21C of the Securities |
| Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and (iii) of the Commission’s |
| Rules of Practice.2 |
| |
| 1 Section 4C provides, in relevant part, that: |
| 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 the |
| person is found . . . (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 |
| thereunder. |
| 2 Rule 102(e)(1)(ii) provides, in pertinent part, that: |
| The Commission may censure a person or deny, temporarily or permanently, the privilege of |
| appearing or practicing before it . . . to any person who is found to be lacking in character or |
| integrity or to have engaged in unethical or improper professional conduct. |
| Rule 102(e)(1)(iii) provides, in relevant part, that: |
| The Commission may censure a person, or deny, temporarily or permanently, the privilege of |
| appearing or practicing before it in any way to any person who is found . . . to have willfully |
| |
| 2 |
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| II. |
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| After an investigation, the Division of Enforcement and the Office of the Chief Accountant |
| alleges that: |
| Summary |
| 1. This proceeding arises from wholesale failures by Christopher E. Knauth in conducting |
| the fiscal year 2018 audit and quarterly reviews for the periods ended June 30, 2018, September |
| 30, 2018, and March 31, 2019, for Issuer A on behalf of Audit Firm A. At the outset, Knauth |
| failed to register Audit Firm A, of which he was a principal, with the Public Company Accounting |
| Oversight Board (“PCAOB”). Further, the work Knauth performed during the audit and quarterly |
| reviews for Issuer A failed to comply with multiple PCAOB auditing standards, in that Knauth |
| (1) failed to properly plan the audit and to identify and assess risks of material misstatement; (2) |
| failed to exercise due professional care and professional skepticism (including through the failure |
| to obtain required engagement quality reviews (“EQRs”)); (3) failed to obtain sufficient |
| appropriate audit evidence; and (4) failed to prepare adequate audit documentation. |
| |
| 2. On behalf of Audit Firm A, Knauth falsely represented to Issuer A that it was |
| registered with the PCAOB when conducting the audit and interim reviews for Issuer A, including |
| in Audit Firm A’s audit report. Knauth also falsely represented in Audit Firm A’s audit report that |
| Audit Firm A conducted its audit in compliance with PCAOB standards. |
| |
| 3. As a result of Knauth’s conduct, Knauth willfully aided and abetted and caused Audit |
| Firm A’s violations of Section 102(a) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley |
| Act”), willfully aided and abetted and caused Audit Firm A’s violation of Rule 2-02 (b)(1) of |
| Regulation S-X, and willfully aided and abetted and caused Issuer A’s violations of Section 13(a) |
| of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. Knauth’s conduct also constituted |
| improper professional conduct pursuant to Section 4C of the Exchange Act and Rule 102(e) of the |
| Commission’s Rules of Practice. |
| |
| A. RESPONDENT |
| 4. Christopher Knauth, age 53, is a resident of Plano, Texas. Knauth was a founder and |
| principal of Audit Firm A from October 2017 until December 2019. Prior to that, Knauth was a |
| partner at three other accounting firms since 2003. Knauth has been licensed as a Certified Public |
| Accountant in Texas since 1995. |
| B. OTHER RELEVANT ENTITIES |
| 5. Audit Firm A was a Texas professional limited liability company headquartered in |
| Frisco, Texas, and founded in October 2017. While structured as a professional limited liability |
| company, in practice, Knauth and his co-principal in Audit Firm A solely shared office space and |
| certain limited overhead expenses, each maintaining separate clients and keeping revenue from his |
| |
| violated, or willfully aided and abetted the violation of any provision of the Federal securities |
| laws or the rules and regulations thereunder. |
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| 3 |
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| own client engagements. Audit Firm A was never registered with the PCAOB. Audit Firm A |
| audited Issuer A’s financial statements for the company’s fiscal year ended December 31, 2018, |
| and conducted interim reviews for Issuer A for the quarters ended June 30, 2018, September 30, |
| 2018, and March 31, 2019.3 Knauth entered into the engagement with Issuer A and performed all |
| of the audit work for Issuer A. Knauth’s co-principal in Audit Firm A was unaware of the Issuer A |
| engagement. Audit Firm A ceased operations in December 2019 and officially dissolved in |
| September 2020. |
| 6. Issuer A is a Nevada corporation headquartered in Plano, Texas. Issuer A was at all |
| relevant times an issuer as defined by the Sarbanes-Oxley Act. Issuer A’s common stock was |
| registered with the Commission pursuant to Exchange Act Section 12(g). Issuer A’s common |
| stock was quoted on the OTCQB tier of the OTC Markets. Issuer A filed periodic reports, |
| including Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange |
| Act and the related rules thereunder. On October 24, 2019, Issuer A filed for bankruptcy. As part |
| of the Delinquent Filings Program and unrelated to this action, on September 21, 2020, the |
| Commission instituted an administrative proceeding against Issuer A pursuant to Section 12(j) of |
| the Exchange Act and instituted a trading suspension pursuant to Section 12(k) of the Exchange |
| Act. On November 23, 2020, the Commission accepted Issuer A’s offer of settlement and, |
| pursuant to Section 12(j) of the Exchange Act, revoked the registration of each class of Issuer |
| A’s securities. |
| |
| C. FACTS |
| i. Engagement by Issuer A |
| 7. On June 6, 2018, Knauth, on behalf of Audit Firm A, entered into an engagement |
| agreement with Issuer A to perform the audit for the year ended December 31, 2018, as well as |
| interim quarterly reviews for 2018. In addition to conducting the annual audit for the year ended |
| December 31, 2018, Knauth conducted interim reviews on behalf of Audit Firm A for Issuer A for |
| the second and third quarters of 2018, and the first quarter of 2019. |
| 8. In that engagement agreement, signed by Knauth, Audit Firm A represented to Issuer |
| A: “We are responsible for conducting our integrated audit of the financial statements and internal |
| control over financial reporting in accordance with the standards established by the Public |
| Company Accounting Oversight Board (PCAOB).” |
| 9. The engagement agreement also provided that “Chris Knauth is the engagement |
| partner and is responsible for supervising the engagement and signing the [audit] report or |
| authorizing another individual to sign it.” |
| ii. Failure to Register with the PCAOB |
| 10. Prior to Audit Firm A’s engagement by Issuer A, neither Audit Firm A nor Knauth |
| had performed any audit work for a public company, and at the time of Audit Firm A’s |
| engagement by Issuer A in June 2018, Audit Firm A was not registered with the PCAOB. On |
| |
| 3 Issuer A is the only public company and/or registered broker-dealer for whom Audit Firm A |
| conducted any audits or interim reviews. |
| |
| 4 |
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| August 16, 2018, Knauth signed and submitted to the PCAOB a Form 1, Application for |
| Registration, on behalf of Audit Firm A. Knauth did not confer with his co-principal in Audit Firm |
| A regarding the engagement with Issuer A or the PCAOB registration application. |
| 11. On August 28, 2018, after its initial review of the application, PCAOB staff sent an |
| email to Knauth with requests for corrections and additional information, and, on September 17, |
| 2018, the PCAOB issued a letter to Knauth requesting additional information regarding the |
| application for registration. In the September 17, 2018 letter, the PCAOB made clear that the |
| application had not been approved, warning that “[i]f [Audit Firm A] declines to provide the |
| requested information, the Board may deem the application incomplete, as described in PCAOB |
| Rule 2106(b)(2), may deem the application not to have been received in accordance with PCAOB |
| Rule 2102, or may take other such action as the Board deems appropriate.” |
| 12. Between October 2018 and April 2019, PCAOB staff sent seven follow-up emails |
| to Knauth, attaching a copy of the September 17, 2018 letter and requesting to be advised of “[his] |
| plans to resubmit [his] firm’s application for registration.” Additionally, in a March 15, 2019 |
| telephone call initiated by Knauth, PCAOB staff reiterated to Knauth that he needed to respond |
| to the PCAOB’s requests for information. Knauth did not provide responses to the PCAOB’s |
| requests for information. |
| 13. On May 9, 2019, the PCAOB informed Knauth by letter that, because the PCAOB |
| had not received the additional requested information, the PCAOB deemed the application as not |
| received. On the same day, Knauth informed PCAOB staff in a telephone call that he intended to |
| “re-submit a new application” and that he would address the PCAOB’s questions related to the |
| original application. Knauth never resubmitted an application for registration or provided |
| responses to the PCAOB’s requests for information. |
| 14. Despite failing to complete Audit Firm A’s registration with the PCAOB, Knauth |
| conducted the annual audit of Issuer A’s financial statements for the fiscal year 2018. Knauth |
| prepared and caused Audit Firm A to issue an audit report dated April 15, 2019, which Issuer A |
| included in its Form 10-K for the year ended December 31, 2018 filed with the Commission. The |
| audit report signed by Audit Firm A, through Knauth, falsely stated that “[w]e are a public |
| accounting firm registered with the [PCAOB].” |
| 15. Knauth also performed interim reviews on behalf of Audit Firm A for Issuer A for |
| the quarters ended June 30, 2018, September 30, 2018, and March 31, 2019, despite Audit Firm A |
| not being registered with the PCAOB. |
| 16. On August 1, 2019, following initial notification from the PCAOB and subsequent |
| discussions with Knauth regarding Audit Firm A’s failure to register with the PCAOB, Issuer A |
| filed a Form 8-K with the Commission announcing that (i) Issuer A’s financial statements for fiscal |
| year 2018 and quarters ended June 30, 2018, September 30, 2018, and March 31, 2019, which |
| were included in Issuer A’s annual report on Form 10-K or quarterly reports on Form 10-Q, should |
| no longer be relied upon because they were not audited or reviewed by a registered public |
| accounting firm; and (ii) Issuer A had dismissed Audit Firm A and retained a new firm as its |
| independent registered public accounting firm. Issuer A has not filed updated reports with the |
| Commission. |
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| 5 |
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| 17. Audit Firm A received $49,000 in fees, all of which went to Knauth, for its audit |
| and review work for Issuer A. Between August and September 2019—after being contacted by |
| Commission Staff—Knauth agreed to pay Issuer A a total of $140,000 to reimburse it for the audit |
| fees and for additional costs associated with Audit Firm A’s failure to register with the PCAOB. |
| iii. Failure to Conduct Audit and Reviews in Accordance with |
| PCAOB Standards |
| 18. In conducting the fiscal year 2018 audit and the June 30, 2018, September 30, 2018 |
| and March 31, 2019 interim reviews of Issuer A, Knauth’s work was deficient and failed to comply |
| with multiple PCAOB auditing standards. The audit work papers lack sufficient documentation to |
| determine what, if any, work was conducted. The work papers reflect no audit planning. It |
| appears from the existing documentation that Knauth merely obtained certain limited documents |
| from Issuer A and did not perform further analysis sufficient to identify and appropriately assess |
| the risks of material misstatement or exercise sufficient professional skepticism, including by |
| conducting further questioning. Further, no engagement quality reviews, as required under |
| PCAOB standards, were performed on Knauth’s audit or interim review work. |
| 19. Specifically, Knauth (1) failed to properly plan the audit and to identify and assess |
| risks of material misstatement; (2) failed to exercise due professional care and professional |
| skepticism (including through the failure to obtain required EQRs); (3) failed to obtain sufficient |
| appropriate audit evidence; and (4) failed to prepare adequate audit documentation. |
| 20. As the engagement partner on the audit and reviews of Issuer A, Knauth was |
| responsible for compliance with PCAOB standards. PCAOB Auditing Standard No. 1201, |
| Supervision of the Audit Engagement (“AS No. 1201”); AS No. 1201.03. |
| 21. Knauth aided and abetted and caused Audit Firm A to issue an audit report |
| containing an unqualified audit opinion for Issuer A for the year ended December 31, 2018. The |
| audit report falsely stated that the audit was performed “in accordance with the standards of the |
| PCAOB,” when, as described below, the audit failed to comply with PCAOB standards. |
| Failure to Properly Plan the Audit (AS No. 2101) and Interim Reviews (AS No. 4105) and to |
| Identify and Assess Risks of Material Misstatement (AS No. 2110) |
| 22. PCAOB Auditing Standard No. 2101, Audit Planning (“AS No. 2101”), establishes |
| requirements regarding planning an audit. AS No. 2101.01. “Planning 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.” AS No. 2101.05. |
| 23. The auditor should develop and document an audit plan that includes a description |
| of: the planned nature, timing, and extent of the risk assessment procedures; the planned nature, |
| timing, and extent of tests of controls and substantive procedures; and other planned audit |
| procedures required to be performed so that the engagement complies with PCAOB standards. AS |
| No. 2101.10. |
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| 6 |
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| 24. “The purpose and objective of planning the audit are the same for an initial audit or |
| a recurring audit engagement. However, for an initial audit, the auditor should determine the |
| additional planning activities necessary to establish an appropriate audit strategy and audit plan, |
| including determining the audit procedures necessary to obtain sufficient appropriate audit |
| evidence regarding the opening balances.” AS No. 2101.19. |
| 25. PCAOB Auditing Standard No. 4105, Reviews of Interim Financial Information |
| (“AS No. 4105”), requires that, “[i]n an initial review of interim financial information, the |
| accountant should perform procedures that will enable him or her to obtain sufficient knowledge of |
| the entity’s business and its internal control.” AS No. 4105.12. In planning a review of interim |
| financial information (following an initial review), the accountant should perform procedures to |
| update his or her knowledge of the entity’s business and internal control to aid in determining |
| inquiries to be made and analytical procedures to be performed, and to identify particular events, |
| transactions, or assertions to which the inquiries may be directed or analytical procedures applied. |
| AS No. 4105.11. |
| 26. Knauth failed to engage in any meaningful audit planning process in connection |
| with Audit Firm A’s audit of Issuer A’s fiscal year 2018 financial statements and interim reviews |
| for June 30, 2018, September 30, 2018, and March 31, 2019. Among other things, Knauth failed |
| to develop any audit plan that included a description of the planned nature, timing, and extent of |
| the risk assessment procedures; the planned nature, timing, and extent of tests of controls and |
| substantive procedures; and any other planned audit procedures required to be performed. Nor did |
| Knauth perform any planning procedures to obtain knowledge of, or to update his knowledge of, |
| Issuer A’s business and internal control. In failing to engage in such planning, Knauth failed to |
| comply with AS No. 2101 and AS No. 4105, among others. |
| 27. PCAOB Auditing Standard No. 2110, Identifying and Assessing Risks of Material |
| Misstatement (“AS No. 2110”), requires the auditor to “perform risk assessment procedures that |
| are sufficient to provide a reasonable basis for identifying and assessing the risks of material |
| misstatement, whether due to error or fraud.” AS No. 2110.04. |
| 28. In addition, under AS No. 4105, if the accountant has not audited the most recent |
| annual financial statements, the accountant should perform procedures to obtain knowledge of an |
| entity’s internal control, including knowledge of the relevant aspects of the control environment, |
| the entity’s risk assessment process, control activities, information and communication, and |
| monitoring, as those terms are defined in AS No. 2110. AS No. 4105.13; see also AS No. |
| 4105.10; AS No. 4105.12 (“[i]n an initial review of interim financial information, the accountant |
| should perform procedures to enable him or her to obtain sufficient knowledge of the entity’s |
| business and its internal control,” including considering the nature of any risks of material |
| misstatement due to fraud identified by the predecessor auditor). |
| 29. “Risks of material misstatement can arise from a variety of sources, including |
| external factors, such as conditions in the company’s industry and environment, and company- |
| specific factors, such as the nature of the company, its activities, and internal control over financial |
| reporting.” AS No. 2110.05. “Thus, the audit procedures that are necessary to identify and |
| appropriately assess the risks of material misstatement include consideration of both external |
| factors and company-specific factors.” AS No. 2110.05. |
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| 7 |
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| 30. Knauth did not perform sufficient risk assessment procedures, and did not perform |
| steps, such as obtaining an understanding of Issuer A’s activities, environment or internal control |
| over financial reporting. As such, Knauth failed to comply with AS No. 2110 and AS No. 4105. |
| Failure to Exercise Due Professional Care and Professional Skepticism (AS No. 1015) and |
| Failure to Obtain Engagement Quality Reviews (AS No. 1220) |
| 31. PCAOB Auditing Standard No. 1015, Due Professional Care in the Performance of |
| Work (“AS No. 1015”), requires auditors to exercise due professional care in the planning and |
| performance of the audit and the preparation of the report and in conducting interim reviews. AS |
| No. 1015.01; AS No. 4105.01 (noting that AS No. 1015 applies to interim reviews). Auditors are |
| required further to exercise professional skepticism, which is an attitude that includes “a |
| questioning mind and a critical assessment of audit evidence.” AS No. 1015.07 |
| 32. In addition, the auditor should “consider the competency and sufficiency of the |
| evidence. Since evidence is gathered and evaluated throughout the audit, professional skepticism |
| should be exercised throughout the audit process.” AS No. 1015.08. |
| 33. In addition, PCAOB Auditing Standard No. 1220, Engagement Quality Review |
| (“AS No. 1220”), provides that for both audits and interim reviews, an engagement quality |
| reviewer should, among other things, “evaluate the significant judgments made by the engagement |
| team and the related conclusions reached in forming the overall conclusion on the engagement.” |
| AS 1220.09 and .14. “Documentation of an engagement quality review should be included in the |
| engagement documentation.” AS 1220.20. |
| 34. Beyond merely obtaining certain limited documents from Issuer A, Knauth did not |
| conduct sufficient audit procedures to assess such audit evidence. As such, Knauth failed to |
| exercise due professional care and professional skepticism in violation of AS No. 1015, among |
| others. |
| 35. Further, Audit Firm A did not perform the procedures described in AS No. 1220 |
| and did not obtain any EQR with regard to the audit and interim reviews. As such, Audit Firm A |
| violated AS No. 1220, and, by failing to arrange for the EQRs, Knauth further failed to exercise |
| due professional care. |
| Failure to Obtain Sufficient Appropriate Audit Evidence (AS No. 1105) |
| 36. PCAOB Auditing Standard No. 1105, Audit Evidence (“AS No. 1105”) requires an |
| auditor to “plan and perform audit procedures to obtain sufficient appropriate audit evidence to |
| provide a reasonable basis for his or her opinion.” AS No. 1105.04. “Audit evidence is all the |
| information, whether obtained from audit procedures or other sources, that is used by the auditor in |
| arriving at the conclusions on which the auditor’s opinion is based.” AS No. 1105.02. |
| 37. By merely obtaining certain limited documents from Issuer A, without performing |
| sufficient audit procedures to assess that audit evidence, Knauth failed to obtain sufficient |
| appropriate audit evidence to support Audit Firm A’s issuance of the audit report for Issuer A’s |
| fiscal year 2018 financial statements. As such, Knauth failed to comply with AS No. 1105, among |
| others. |
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| 8 |
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| Failure to Prepare Adequate Documentation |
| for the Audit (AS No. 1215) and Interim Reviews (AS No. 4105.52) |
| 38. In conducting an audit or interim review, an auditor must document the procedures |
| performed, evidence obtained, and conclusions reached with respect to relevant financial statement |
| assertions. PCAOB Auditing Standard No. 1215, Audit Documentation (“AS No. 1215”). Audit |
| documentation must clearly demonstrate that the work was in fact performed and “must contain |
| sufficient information to enable an experienced auditor, having no previous connection with the |
| engagement (a) to understand the nature, timing, extent, and results of the procedures performed, |
| evidence obtained, and conclusions reached, and (b) to determine who performed the work and the |
| date such work was completed as well as the person who reviewed the work and the date of such |
| review.” AS No. 1215; AS No. 1215.06. |
| 39. In connection with interim reviews, in addition to the requirements under AS No. |
| 1215, under AS No. 4105 “the documentation should (a) enable members of the engagement team |
| with supervision and review responsibilities to understand the nature, timing, extent, and results of |
| the review procedures performed; (b) identify the engagement team member(s) who performed and |
| reviewed the work; and (c) identify the evidence the accountant obtained in support of the |
| conclusion that the interim financial information being reviewed agreed or reconciled with the |
| accounting records.” AS No. 4105.52. |
| 40. As described above, Audit Firm A’s work papers contain no audit program and lack |
| documentation to determine what, if any, procedures were performed or conclusions reached with |
| respect to the audit and interim reviews of Issuer A. As such, Knauth failed to comply with AS |
| No. 1215 and AS No. 4105, among others. |
| D. VIOLATIONS |
| 41. Section 102(a) of the Sarbanes-Oxley Act provides that “it shall be unlawful for any |
| person that is not a registered public accounting firm to prepare or issue, or to participate in the |
| preparation or issuance of, any audit report with respect to any issuer.”4 Audit Firm A was not |
| registered with the PCAOB when it performed the audit and interim reviews of Issuer A and, |
| accordingly, violated Section 102(a) of the Sarbanes-Oxley Act. Knauth willfully aided and |
| abetted and caused Audit Firm A’s violations of Section 102(a) of the Sarbanes-Oxley Act. |
| |
| 42. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state “the |
| applicable professional standards under which the audit was conducted.” 17 CFR 210.2-02(b)(1). |
| An auditor violates Regulation S-X Rule 2-02(b)(1) if it issues a report stating it has conducted its |
| audit in accordance with PCAOB standards when it has not. Audit Firm A violated Rule 2- |
| 02(b)(1) of Regulation S-X by issuing an audit report for Issuer A’s fiscal year 2018 audit stating |
| that it had conducted the audit in accordance with PCAOB standards when it had not. Knauth |
| |
| 4 A violation of the Sarbanes-Oxley Act or any rule that the PCAOB issues under the Sarbanes- |
| Oxley Act is treated for all purposes in the same manner as a violation of the Exchange Act, including |
| with respect to penalties. Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7202(b)(1). |
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| 9 |
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| willfully aided and abetted and caused Audit Firm A’s violations of Rule 2-02(b)(1) of Regulation |
| S-X. |
| 43. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers with |
| equity securities registered under Section 12 to file annual reports with the Commission that have |
| been audited by an independent public accountant registered with the PCAOB.5 Exchange Act |
| Rule 13a-13 requires the same companies to file with the Commission accurate quarterly reports |
| on Form 10-Q. Rule 10-01(d) of Regulation S-X requires the interim financial statements included |
| in a Form 10-Q to be reviewed by an independent public accountant registered with the PCAOB. |
| 17 C.F.R. § 210.10-01(d); see also 17 C.F.R. § 210.8-03. Issuer A filed an annual report on Form |
| 10-K for fiscal year 2018 and quarterly reports on Form 10-Q for the quarters ended June 30, 2018, |
| September 30, 2018, and March 31, 2019, all of which were either audited or reviewed by Audit |
| Firm A when Audit Firm A was not registered with the PCAOB. Knauth willfully aided and |
| abetted and caused Issuer A’s violations of Section 13(a) of the Exchange Act and Rules 13a-1 and |
| 13a-13 thereunder. |
| 44. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s |
| Rules of Practice provide, in part, that the Commission may censure a person 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. With respect to |
| persons licensed to practice as accountants, “improper professional conduct” includes “intentional |
| or knowing conduct, including reckless conduct, that results in a violation of applicable |
| professional standards.” See Rule 102(e)(1)(iv)(A). In addition, “improper professional conduct” |
| includes either of the following two types of negligent conduct: (i) “a single instance of highly |
| unreasonable conduct that results in a violation of applicable professional standards in |
| circumstances in which an accountant knows, or should know, that heightened scrutiny is |
| warranted;” or (ii) “repeated instances of unreasonable conduct, each resulting in violations of |
| applicable professional standards, that indicate a lack of competence to practice before the |
| Commission.” See Rule 102(e)(1)(iv)(B)(1) and (2). By failing to comply with PCAOB |
| standards in the audit and interim reviews of Issuer A, as described above, Knauth engaged in |
| improper professional conduct as defined in Rule 102(e)(1)(iv). |
| 45. Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s |
| Rules of Practice provide, in part, that the Commission may censure a person or deny, temporarily |
| or permanently, the privilege of appearing or practicing before the Commission to any person who |
| is found by the Commission “[t]o have willfully violated, or willfully aided and abetted the |
| violation of, any provision of the Federal securities laws or the rules and regulations thereunder.” |
| Through the conduct described above, Knauth willfully aided and abetted violations of the federal |
| securities laws and rules and regulations thereunder within the meaning of Section 4C(a)(3) of the |
| Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. |
| |
| |
| 5 See also 15 U.S.C. § 78c(a)(59); 15 U.S.C. § 7201(12) (defining registered public accounting |
| firm as a public accounting firm registered with the PCAOB). |
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| III. |
| |
| In view of the allegations made by the Division of Enforcement and the Office of the Chief |
| Accountant, the Commission deems it appropriate 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 |
| Section 102(a) of the Sarbanes-Oxley Act; Rule 2-02(b)(1) of Regulation S-X; Section 13(a) of the |
| Exchange Act and Rules 13a-1 and 13a-13 thereunder; 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 any 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. |
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| This Order shall be served forthwith upon Respondent Knauth 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(b) and (c) of the Commission’s Rules of Practice, 17 C.F.R. |
| § 201.151(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 with the Office of the |
| Secretary and all motions, objections, or applications will be decided by the Commission. The |
| Commission requests that an electronic courtesy copy of each filing should be emailed to |
| APFilings@sec.gov in PDF text-searchable format. Any exhibits should be sent as separate |
| attachments, not a combined PDF. |
| |
| 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. |
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| 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. |
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| |
| |
| Vanessa A. Countryman |
| Secretary |
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