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Commission Dismisses Case Against CPAs

Kevin Hall, CPA, Rosemary Meyer, CPA, Exchange Act Rel. 61162, December 14, 2009

Time since appeal – 1 year 10 months 8 days
Time since last brief – 1 year 6 months 24 days

The ALJ found no improper conduct by these two accounts and the Division of Enforcement appealed. The Commission dismissed the case – a very significant loss for enforcement.

One has to wonder why it took so long for the Commission to rule on this matter. The ALJ's initial decision was in January 2008. It is simply wrong for the Commission to delay resolution of these cases for so long. Here, two auditors' careers have been terribly damaged as a result of the Commission's failure to take its responsibilities seriously. It is simply not in the public interest for the Commission to delay resolution of these administrative cases. The public interest demands more. The audit that resulted from these proceedings was for fiscal year 1999, so final resolution of this matter took nine years.

Hall was the KPMG engagement partner and Meyer the senior manager on the audit of U.S. Foodservice, Inc. in 1999. Hall and Meyer were charged with violations of the Commissions Rule 102(e) that allows it to administratively discipline CPAs in connection with public company audits. It was uncontested that the company had engaged in a fraudulent earnings management scheme involving its accounting for promotional allowances from vendors. Two company officers were criminally convicted.

In order to prevail enforcement must prove that the auditors engaged in:

"'improper professional conduct [which] for accountants includes '[r]epeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the Commission.' The term 'unreasonable' signifies an ordinary or simple negligence standard. Discipline under Rule 102(e) may be appropriate when the repetition of such negligent conduct shows an accountant's lack of competence to practice before the Commission. The negligence-based standards in Rule 102(e)(iv)(B) are objective, measured by the degree of the departure from professional standards rather than the intent of the accountant. In applying these standards, the Commission does not evaluate actions or judgments in the light of hindsight; it focuses, instead, on what the accountant knew or should have known at the time an action was taken or a decision was made." (footnotes omitted)

Much of the opinion involves the details of GAAS requirements for the confirmation process. The auditors noted various discrepancies and according to the Commission did not engage in "best audit practices." The Commission nevertheless concluded that their conduct was not unreasonable. Some third party confirmations were not included in the work papers and there was no way to verify the auditor's testimony about their claimed exculpatory contents. However since GAAS does not require auditors to maintain all documents they rely on in their workpapers there was no basis for the Commission to find the conduct unreasonable.

The Commission rejected the ALJ's suggestion that the Commission has no jurisdiction over accountants who review but do not audit a company's quarterly financial statements.

The Commission rejected due process claims by Hall and Meyer based on the fact that the Commission, unknown to them, was conducting and investigation of their then counsel during the investigation. That investigation was concluded without any action being taken.