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UNITED STATES OF AMERICA
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In the Matter of
Respondent.
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: |
ORDER INSTITUTING PROCEEDINGS MAKING FINDINGS AND IMPOSING A SANCTION PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice against Nanette Miller ("Miller").1
II.
In anticipation of the institution of these administrative proceedings, Miller has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, Miller, without admitting or denying the findings, except as to jurisdiction, which is admitted, consents to the issuance of this Order Instituting Proceedings, Making Findings And Imposing A Sanction Pursuant To Rule 102(e) Of The Commission's Rules Of Practice ("Order") and to the imposition of the remedial sanction set forth below.
III.
FINDINGS
On the basis of this Order and the Offer submitted by Miller, the Commission finds that:
BACKGROUND
A. Miller is 40 years old and has been licensed as a certified public accountant since November 1984 in the State of Maryland. At the time of the transactions and events described in this Order, Miller was a partner in Chadbourne & Miller ("C&M"), then a public accounting firm with offices located in Washington, D.C.
B. C&M was the outside auditor for Underwriters' Financial Group, Inc. ("UFG"), formerly a public company engaged in the insurance brokerage business with principal offices located in New York, New York. At the time of the transactions and events described in this Order, UFG's common stock was registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act") and traded on the American Stock Exchange.
C. In May 1995, UFG filed its annual report on Form 10-K for the year ended December 31, 1994 ("1994 Form 10-K"). In financial statements that were contained in the 1994 Form 10-K, UFG reported pre-tax net income of $521,192, which was overstated by approximately $5,687,000. This overstatement was attributable to UFG's falsification of the books and records from which the financial statements were prepared and other fraudulent conduct described in subparagraph D below.
D. During its year ended December 31, 1994 ("YE 1994"), UFG misappropriated several million dollars from premium finance companies and other parties with whom UFG transacted insurance business. UFG used the misappropriated funds to pay UFG's operating expenses and for other purposes. UFG failed to record the liability arising from the misappropriation of funds and, instead, recorded a portion of the misappropriated funds as income to UFG. During YE 1994, UFG also improperly purged certain accounts payable from its books and records and simultaneously recognized those purged amounts as income.
E. C&M audited the financial statements that were contained in UFG's 1994 Form 10-K and issued an audit report that was included in the 1994 Form 10-K. Miller participated in the field work done in connection with the audit and signed C&M's name to the audit report. C&M's audit report contained an opinion in which it represents that it conducted an audit in accordance with Generally Accepted Auditing Standards ("GAAS") and that UFG's financial statements, presented fairly, in all material respects, UFG's financial position and results of operations in conformity with Generally Accepted Accounting Principles ("GAAP"). Both of these representations were inaccurate.
DEPARTURES FROM GAAS
Failure to Obtain Sufficient Competent Evidential Matter
F. GAAS states that "[s]ufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit." American Institute of Certified Public Accountants, Professional Standards § 326.01 (1997). "When evidential matter can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than that secured solely within the entity." Professional Standards § 326.21a.
G. Miller failed to obtain sufficient competent evidential matter to determine whether UFG's financial statements accurately recorded, in all material respects, UFG's actual income and accounts payable. Miller relied extensively on information provided by UFG, often in the form of oral representations of management, and failed to obtain sufficient documentary and other evidence from independent sources to verify management's representations. Miller's failure to obtain sufficient competent evidential matter to support the audit report resulted from her failure to exercise due professional care in the performance of the audit, her failure to maintain an attitude of professional skepticism and her lack of independence.
Failure to Exercise Due Professional Care
H. GAAS requires auditors to exercise due professional care in performing an audit and preparing the report. Professional Standards § 230.01. In the course of performing an audit, the auditor must employ "such skill as [he or she] possess[es] with reasonable care and diligence . . . undertak[ing] for good faith and integrity, but not for infallibility." Professional Standards § 230.03. The matter of due professional care concerns what the auditor does and how well he does it. Professional Standards § 230.04.
I. Miller and another C&M accountant requested that UFG management provide to C&M specific documentary evidence supporting a sampling of a material amount of commission income recorded by UFG. Management represented to Miller that the requested documentation was unavailable and agreed to write-off the unsupported commission income. Miller did not exercise due professional care regarding this circumstance because she failed to (i) question why the supporting documents were unavailable and why UFG agreed to write-off a material amount of purportedly bona fide income; and (ii) conduct further procedures to determine whether there was other income that lacked sufficient competent evidential support.
J. UFG was also unable to produce documentation requested by C&M accountants relating to other aspects of the audit. In those cases, Miller and another C&M accountant performed alternative audit procedures that were not adequately designed and did not produce sufficient competent evidential matter to support the original audit objectives.
Failure to Maintain an Attitude of Professional Skepticism
K. GAAS states that audits should be planned and performed with an attitude of professional skepticism. GAAS requires that "[t]he auditor neither assumes that management is dishonest nor assumes unquestioned honesty. Rather, the auditor recognizes that conditions observed and evidential matter obtained, including information from prior audits, need to be objectively evaluated to determine whether the financial statements are free of material misstatement." Professional Standards § 316A.16.
L. Miller failed to maintain an attitude of professional skepticism during the audit. Miller accepted, without adequate inquiry, management's explanation that in order to clear accounts payable from the general ledger, UFG had to write a check to itself. Miller did not take adequate steps to determine whether UFG's debts to creditors had been properly satisfied and whether income was being improperly recorded when these checks were deposited.
Failure to Maintain An Independence In Mental Attitude
M. GAAS requires that "[i]n all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors." Professional Standards § 150.02. The Commission requires compliance with substantially the same standard in Section 210.2-01(b) of Regulation S-X. The threat of litigation by a client against the auditor in connection with audit work for the client is presumed to place the auditor in a situation in which normal audit communication will be affected by legal considerations. Codification of Financial Reporting Policies § 602.02.i.ii. "Accordingly, the . . . expressed threat of such litigation would adversely affect the independence of the accountant." Id.
N. Miller failed to maintain an independence in mental attitude with respect to the UFG audit. Before field work was complete, Miller and another C&M accountant advised counsel for UFG that they had concerns about possible illegal conduct at UFG and that C&M was considering the possibility of withdrawing from the audit. In response, counsel raised the possibility of litigation against C&M if C&M withdrew from the audit. As a result of this threat, Miller requested UFG to agree to hold C&M harmless in the event of a withdrawal.
O. The threat of litigation adversely affected Miller's independence and objectivity. Nevertheless, C&M completed the audit and, through Miller, issued an unqualified audit report.
* * *
P. The financial statements that were contained in UFG's 1994 Form 10-K did not present fairly, in all material respects, UFG's financial position and results of operations for YE 1994 in conformity with GAAP.
CONCLUSION
Q. By reason of the foregoing, (i) the audit of UFG's financial statements for YE 1994 was not conducted in accordance with GAAS; and (ii) Miller engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice with respect to the audit of UFG's financial statements for YE 1994.
IV.
ORDER IMPOSING SANCTIONS
Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the sanction specified in the Offer submitted by Miller, and accordingly,
IT IS HEREBY ORDERED, effective immediately, that Miller is denied the privilege of appearing or practicing before the Commission as an accountant.
By the Commission.
Jonathan G. Katz
Secretary
1 Paragraph (1)(ii) of Rule 102(e) provides, in relevant part, as follows: (1) The Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice of and opportunity for hearing in the matter . . . (ii) to be lacking in character or integrity or to have engaged in . . . improper professional conduct.
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