Withum fined over SPAC audit problems

In case you needed more proof that the SPAC boom is over, the PCAOB just sanctioned one of the firms that made it happen. It charged WithumSmith+Brown, one of the dominant players in the SPAC auditing market, with “pervasive quality control violations” in its SPAC practice. Withum, which neither accepted nor denied responsibility, agreed to pay a $2 million civil penalty, have its staff undergo training, and allow its quality control to be reviewed by an independent consultant.

Withum’s audit practice swelled nearly 500% in 2021 during the SPAC boom, the PCAOB said. It oversaw nearly 450 audit reports that year, compared with around 80 in 2020. But the firm didn’t increase staff levels to compensate: It only assigned 50% more partners to audits, going from 15 to 23.

Withum isn’t the only firm to face regulatory scrutiny over its SPAC work: In June 2023, the SEC and PCAOB together fined Marcum $13 million over audit deficiencies, mostly related to SPACs. At one point, its SPAC practice helped make it the fifth-largest public-company auditing firm in the nation.

The firms’ staff lacked the experience and training necessary to handle SPAC audits, which can be complex, Steven Mintz, an ethicist and professor emeritus of accounting at California Polytechnic State University, told CFO Brew. “A lot of the firm personnel were not really skilled, knowledgeable, or competent enough in dealing with the issues specific to SPACs,” he said.

High workloads, combined with the compressed timelines characteristic of SPACs, could lead auditors to cut corners, Mintz said. SPACs, unlike traditional IPOs, typically only have around 24 months to acquire a target company before the trust must return investors' money.

In fact, the engagement quality reviewer at Crowe, a UK firm the SEC disciplined for audit issues around a SPAC, said he didn’t conduct a thorough review because he was under pressure from the engagement team to meet the SPAC’s deadline, Mintz wrote in a CPA Journal article. About a third of Marcum’s engagement quality reviews sign-offs were signed after issuance or were missing altogether, the SEC found.

Part of the problem, Mintz said, is that because SPACs didn’t become very popular until 2020, few auditors had experience with them.

“Any unique form of investment typically creates a lot of problems in the initial stages,” he noted. As both regulators and auditors become more conversant with SPACs, though, he’s hopeful the problems will ebb. “My guess is that things will start to clean up a bit as the number of new SPACs goes down, and as auditors get competent in the field, get training, and learn from their experience,” Mintz said.