SEC Trends & Developments - Winter 2011 - Recent SEC Enforcement Actions

SEC Asserts Purported Confirmation Was Improperly Used  

S was the audit partner of an independent accounting firm that audited the fiscal 2004-5 financial statements of F, an L.P.  F was in the business of investing in securities and other financial instruments.  N was the general partner of F and the investment advisor to F.  P was the founder of N and the President/CEO of N.  The large majority of the financial assets of F were held at G, a related party. 

During the audit of F's financial statements for 2004-5, S obtained representations from P, in his capacity as President of G, to “confirm” the value of F's assets held by G.  The SEC concluded that S did no further work to verify the amounts of those assets and that the confirmations obtained by S “were of almost no value from an audit perspective” because the confirmations should have been sent to third parties, not to a related party that was “in substance the very same party,” thereby violating generally accepted auditing standards.  The Commission said that, when planning the audit of F, S identified G as a fraud risk, but additional steps to consider that risk were not taken during the audit of F. 

As part of a consent decree, S agreed to accept a cease and desist order with respect to applicable provisions of the Securities Act, the Securities Exchange Act, and the Investment Company Act of 1940 and to pay disgorgement of $4,521 and interest, all without agreeing to or denying the SEC's findings. 

(Accounting and Auditing Enforcement Release No. 3303, July 14, 2011).

Inadequate Internal Controls over Estimated Costs 

L designed and manufactured electronics components for use in military, aviation and other industrial equipment.  L applied percentage of completion accounting to certain long-term contracts. 

Here, the SEC concluded that L did not have adequate internal controls to insure that plant personnel who estimated costs calculated those estimated costs correctly or correctly entered estimated costs into L's accounting system.  The Commission further determined that the effects of cumulative catch-up adjustments of prior estimates were not recognized, that L did not maintain contemporaneous documentation supporting changes of prior cost estimates and that L did not verify compliance with its internal control system. 

Without admitting or denying the SEC's conclusions, L agreed to cease and desist from violations of the Securities Exchange Act of 1934 and to pay $200,000. 

(Accounting and Auditing and Enforcement Release No. 3297, June 30, 2011). 

Related Party Transactions Improperly Reported  

In August, 2011, pursuant to the terms of a consent decree, the SEC suspended from practice before it for at least three years, and fined, a CFO of reporting company (the “Employer Corporation”) for allegedly: (1) failing to disclose the related-party status between the CFO's Employer Corporation and the publisher of a catalogue used to value collectables that had been sold by the Employer Corporation (the former parent entity of the Employer Corporation and the former CEO of the Employer Corporation allegedly controlled the prices in the catalogue for stamp collections sold by the Employer Corporation to the former parent of the Employer Corporation and those relationships allegedly had not been disclosed); (2) falsely representing that the Employer Corporation sold to its former parent several large stamp archives at prices determined by references to independent stamp catalogues and appraisals when the former CEO of the Employer Corporation set the catalogue prices and influenced and edited the appraisals; (3) improperly booking the sale of certain antiques. 

(Accounting and Auditing Enforcement Release No. 3322, September 21, 2011). 

Sam Gunther is a CPA and attorney in New York. He consults and testifies as an expert witness on accounting and auditing matters. 

SEC Trends & Developments - Winter 2011 Issue  

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