The U.S. Securities and Exchange Commission (SEC) recently announced that a New York-based audit firm and a senior partner agreed to settle charges that they issued fraudulent audit reports in connection with municipal bond offerings by the town of Ramapo, New York, and its local development corporation.

According to the agency, PKF O’Connor Davies and Domenick F. Consolo allowed Ramapo to record a $3.08 million receivable in its general fund for a property sale that Consolo knew had not occurred. Consolo also ignored red flags and relied upon what turned out to be false representations by Ramapo officials about certain other receivables, interfund transfers and liabilities.

Allegedly, PKF O’Connor Davies failed to take appropriate steps to mitigate the risk of material misstatements, even after senior management became aware that Ramapo’s financial statements were the subject of multiple law enforcement investigations and Consolo received complaints about possible fraud.

Andrew M. Calamari, director of the SEC’s New York Regional Office, commented:

When audit reports are used to sell municipal bonds, investors expect those reports to be accurate. Consolo failed to exercise professional skepticism and PKF O’Connor Davies issued false unmodified audit reports, and they left investors without an accurate picture of the town’s finances and its ability to repay bondholders.

Ramapo, its local development corporation and four town officials were charged with fraud earlier this year and accused of hiding a deteriorating financial situation from municipal bond investors.

Consolo and PKF O’Connor Davies consented to the SEC’s order without admitting or denying the findings. The firm agreed to forfeit roughly $380,000 in audit fees and interest and pay a $100,000 penalty. PKF O’Connor Davies also must engage an independent consultant.

Consolo agreed to pay a $75,000 penalty and be suspended from practicing public company accounting. He’s also prohibited from acting as the engagement partner or engagement quality control reviewer on any municipal audit for five years.

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