SPAC Audit Kings: How Soaring IPO Market Ensnared Marcum, Withum
The fortunes of two mid-sized accounting firms rose and fell with the SPAC craze, sending auditors into overdrive as they vetted the financial statements of a surge of blank-check companies hunting for Wall Street’s next big deal.
Those two firms, Marcum LLP and Withum Smith+Brown PC, reaped millions in special purpose acquisition company audit fees. As their revenues soared, so did their workloads. Missed deadlines and pervasive errors mounted as overloaded partners churned out audit after audit, a Bloomberg Tax analysis found.
Now that work is under scrutiny as regulators pursue SPAC auditors for shoddy work and craft rules to put tighter restrictions on blank check companies. Those rules from the Securities and Exchange Commission, aimed at preventing future investor losses, could be coming as soon as this fall.
Marcum in June paid $13 million to settle charges it flouted basic audit rules and the SEC separately sanctioned a senior leader earlier this month for widespread failures in the firm’s audit compliance system. Regulators have not taken action against Withum.
“There has been an increased focus on the role auditors play in keeping companies honest,” said Poppy Alexander, partner and whistleblower attorney at Constantine Cannon LLP. “It would not surprise me to see more of these kinds of cases.”
Withum and Marcum did not respond to requests for comment.
The firms, in past interviews, have championed their work. Withum touted its “underdog” status in rising to the top of the SPAC audit market while Marcum said it performed seamless SPAC audits like a “conveyor belt.” Marcum, in response to the regulator penalties, agreed to accept no more than three new clients a quarter, hire an independent consultant to review the firm’s policies, and retrain audit staff to comply with any changes.
100 Audits Per Year
SPACs are publicly traded shell companies whose sole purpose is to raise money and seek a business to take public via merger. The trend hit peak popularity in 2021. Marcum, which audited the SPACs that took public the likes of Virgin Galactic Holdings and DraftKings Inc., buckled from the strain and struggled to find staff to audit the blank-check companies, according to the Public Company Accounting Oversight Board and the SEC.
The SEC described “systemic” failures in how the firm trained its auditors, vetted potential clients, and documented its work. Auditors were “working 90+ hour weeks,” a Marcum partner warned firm leaders in February 2021. “Many of them are at their breaking point and just simply need more help and more resources,” according to the firm’s settlement order with the SEC.
“They probably won’t have enough time in their day to actually conduct the audit,” said Daniel Aobdia, associate professor in accounting at Penn State University.
Marcum auditors weren’t the only ones struggling, according to a Bloomberg Tax review of the PCAOB’s audit partner data, coupled with restatement and late filing notices filed with the SEC.
Withum partners also had a heavy workload, the findings show, as they audited the financials of shells that took public automaker Nikola Corp., luxury fashion house Ermenegildo Zegna NV, and battery maker Dragonfly Energy Corp., among others.
Six Withum partners signed 100 audits or more in 2020, as did a single partner the following year, according to PCAOB records identifying the lead partner. The records capture the partner who signs audit reports that companies file with the SEC plus any revised audit reports.
At Marcum, however, a pair of partners shouldered the brunt of the new work. One of them signed 297 audits during the first year of SPAC mania, the data shows.
Errors Surge
SPAC audits are, in theory, simple. The blank-check firms are essentially big pots of investor money—with lurking risks. Accounting for that money turned out to be complicated.
SPACs “are always going to be more risky than your normal sort of audit,” said Jeff Murphy, director at advisory firm Stout.
More than two-thirds of Marcum and Withum’s SPAC audits required either a restatement or late filing, according to Audit Analytics data. Restatements, or redos of past financial statements, typically warn the market of problems at a company.
Accounting corrections also offer a gauge of audit quality and a rash of restatements across clients could undermine an audit firm’s reputation, Aobdia said.
SEC accounting guidance issued in April 2021 surprised the market and revealed that SPACs almost universally incorrectly accounted for money-raising tools called warrants. Hundreds of SPACs had to restate their past financials, temporarily chilling the market. The vast majority were Marcum and Withum clients.
Marcum auditors resorted to “copying and pasting” from other audit clients without updating the details or tying to other documents, according to the SEC.
Another round of errors related to how SPACs classified their equity followed later that year.
Marcum previously argued that SPACS had accounted for investor incentives the same way for years without raising questions, but acknowledged the final say of the SEC.
Fee Whiplash
SPAC fees made up a sizable portion of Marcum and Withum’s audit revenues from 2020 through 2021.
SPACs generated half of Withum’s $70 million in public company audit fees during the two boom years. Marcum’s SPAC clients contributed a fifth of its $184 million in audit fees, according to Audit Analytics data.
Relying too heavily on fees from a single client or type of client is risky, said Steven Mintz, professor emeritus at California Polytechnic State University in San Luis Obispo, who called it a “red flag.” “They go down, you go down,” Mintz said. “You lose a lot of your revenues.”
But the risks extend beyond any revenue whiplash. A single client or fees from a service that dominate a firm’s revenues can also weaken auditors’ resolve to serve as an independent and objective check on management.
“Did you wipe out all your profits from this?” said Sandy Peters, senior head of global advocacy for the CFA Institute. “Was it worth it?”
Ballooning Market Share
The pair’s share of the SPAC market ballooned, overtaking much larger audit firms. That included the Big Four firms, which largely steered clear of the blank check companies. Each of those hundreds of new clients needed audits and quarterly reviews.
Marcum almost tripled its SPAC clients from 2020 to 2021. Withum boasted a 55% increase in clients over the same period, according to Audit Analytics.
“Is the level of performance up to speed or is it suffering in those areas? I would think its suffering,” Mintz said. “You can’t spread yourself so thin.”
Firms and their top leaders are supposed to vet new clients by considering who they are doing business with and whether the firm has both the expertise and enough staff to complete the audit, under PCAOB audit rules.
Those checks fell short at Marcum and so did oversight from top leaders, according to the SEC.
The partner who oversaw such compliance safeguards, Alfonse Gregory Giugliano, agreed earlier this month to a three-year bar from serving in a leadership position and a $75,000 civil penalty, according to the SEC.
SPAC State of Play
Rising interest rates, a shaky market, and poor performance among many of the operating companies that went public via blank-check merger tarnished the allure of SPACs.
Less than two dozen SPACs have gone public so far this year, compared to more than 600 in 2021, the market peak. The deflation of the SPAC bubble puts less market pressure on auditors but not from regulators dealing with the fallout from the boom.
Pending SEC regulations also helped to chill the once-hot market. The 2022 proposal would require blank check companies to provide investors with more details about SPAC sponsor compensation, conflicts of interest, stock dilution, and more.
Despite the downturn in the popularity of SPACs, and the stream of litigation that has followed, tougher rules still are needed to curtail manipulation by SPAC sponsors, Alexander said.
“These regulations need to protect investors of the future. Unfortunately it might be a little too late for some of the investors of today,” she said. “That’s why we have SEC enforcement actions to try to catch up.”
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— With assistance from Bailey Lipschultz of Bloomberg News
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