New Jersey Bank’s Biggest Secret Is Its Own Name

Nov. 23 (Bloomberg) -- It has been almost four years since Unity Bancorp Inc. 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.

Clear Clues

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.

Official Sanctions

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.” The allegations, he said, don’t “impact the financial statements or the credibility of the audit.” Additionally, Hughes said the directors on Unity’s audit committee “did what they felt was in the best interests of the shareholders and the company” when they decided to keep McGladrey as Unity’s auditor.

“The right decision was made,” Hughes said. At least the bank’s shareholders can now make more-informed decisions for themselves on whether to agree with him.

(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)

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