New Jersey bank's big­gest se­cret is its own name

The Pak Banker - - Front Page - Jonathan Weil

IT has been al­most four years since Unity Ban­corp Inc. (UNTY) got $21 mil­lion of bailout funds as part of the government's Trou­bled As­set Re­lief Pro­gram. The small New Jersey lender hasn't re­paid the money. But it has stayed out of trou­ble, un­like some peo­ple who once au­dited its books. Last week the Pub­lic Com­pany Ac­count­ing Over­sight Board sanc­tioned three ac­coun­tants who used to au­dit Unity's fi­nan­cial re­ports for McGladrey LLP, one of the largest ac­count­ing firms out­side the Big Four. The board ac­cused Dale Hotz, Jyothi Manohar and Michael Fad­ner of al­ter­ing their work pa­pers and mis­lead­ing the agency's staff dur­ing an in­spec­tion of one of their au­dits. They set­tled with­out ad­mit­ting to or deny­ing the board's al­le­ga­tions. McGladrey wasn't ac­cused of any vi­o­la­tions.

In­vestors should have ev­ery right to know of any reg­u­la­tory ac­tions against the peo­ple au­dit­ing the books at com­pa­nies where they own se­cu­ri­ties. And Unity's name cer­tainly shouldn't be a se­cret from tax­pay­ers, con­sid­er­ing that the bank still has the government's money. If you can't trust a com­pany's au­di­tors, you may not be able to trust the com­pany's num­bers.

The board's dis­ci­plinary or­der didn't name the au­dit client in ques­tion, which should be manda­tory in cases like this. But it did con­tain enough clues for me to fig­ure out that the com­pany was Unity by us­ing a data­base main­tained by Au­dit An­a­lyt­ics, a Sut­ton, Mas­sachusetts-based re­search firm.

For in­stance, the or­der noted the month McGladrey was hired as the bank's au­di­tor (March 2007) and the cities where the ac­coun­tants worked. The or­der also cited spe­cific pages from the mys­tery client's 2009 an­nual report that matched Unity's. The bank's chief ex­ec­u­tive of­fi­cer, James Hughes, con­firmed that Hotz and the oth­ers worked on Unity's au­dits in prior years and were pulled off by McGladrey for dis­ci­plinary rea­sons.

The lack of trans­parency also goes to the heart of the ac­count­ing board as an in­sti­tu­tion. Back in late 2010, when the mis­con­duct al­legedly oc­curred, McGladrey's na­tional di­rec­tor of ac­count­ing was Jay Han­son. He now serves as one of the five mem­bers of the ac­count­ing over­sight board.

The board won't say if Han­son had a role in over­see­ing the three McGladrey ac­coun­tants while he was at the firm. It won't say if Han­son was a wit­ness in the board's in­ves­ti­ga­tion. In­cred­i­bly, it won't even say if he re­cused him­self from vot­ing on the mat­ter as a board mem­ber. Han­son, who was ap­pointed to the ac­count­ing board by the Se­cu­ri­ties and Ex­change Com­mis­sion in Jan­uary 2011, de­clined to com­ment.

Of­fi­cially, the board's mis­sion is to "pro­tect the in­ter­ests of in­vestors." In this case it seems to be McGladrey's in­ter­ests that the board is pro­tect­ing. Hid­ing Unity's iden­tity min­i­mizes the risk that McGladrey might lose the com­pany as a client.

There's noth­ing in the law that pro­hib­ited the board from dis­clos­ing Unity's name. Un­like with its in­spec­tion re­ports, the board's usual prac­tice when is­su­ing dis­ci­plinary or­ders against ac­coun­tants and their firms is to name the au­dit clients in ques­tion. Asked why it didn't do so this time, a spokes­woman for the ac­count­ing board, Colleen Bren­nan, said the board "does not iden­tify au­dit clients in or­ders im­pos­ing sanc­tions solely for con­duct that is sep­a­rate from the con­duct of the au­dit."

That rea­son­ing is a stretch. The or­der ac­cused Hotz, Manohar and Fad­ner of vi­o­lat­ing the board's stan­dards through the "im­proper cre­ation, ad­di­tion, al­ter­ation and/or back­dat­ing of au­dit doc­u­men­ta­tion prior to a board in­spec­tion." If the board's al­le­ga­tions are to be be­lieved, the three McGladrey ac­coun­tants were caught try­ing to cover up prob­lems in the way they per­formed and doc­u­mented their work. That's re­lated to the au­dit, not sep­a­rate.

Manohar is the only one of the three still em­ployed by McGladrey. Hotz, who was the lead part­ner on the au­dit, was barred from be­ing as­so­ci­ated with a PCAOB-reg­is­tered ac­count­ing firm for at least two years. All three were cen­sured.

Hotz, Fad­ner and Manohar ei­ther de­clined to com­ment or didn't re­turn phone calls. Their at­tor­ney, Elissa Pre­heim of Arnold & Porter in Washington, de­clined to com­ment. A McGladrey spokes­woman, Terri An­drews, said, "McGladrey dis­cov­ered this sit­u­a­tion, im­me­di­ately no­ti­fied the PCAOB and con­cur­rently be­gan our own in­ter­nal in­ves­ti­ga­tion of the facts." She de­clined to com­ment on the firm's au­dit work for Unity. Bren­nan, the ac­count­ing board's spokes­woman, de­clined to com­ment when asked why McGladrey wasn't dis­ci­plined. Hughes, the CEO of Clin­ton, New Jersey-based Unity, said Hotz, Manohar and Fad­ner "were very, very pro­fes­sional at all times dur­ing the en­gage­ment, and I have noth­ing but the high­est level of re­spect for them."

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