UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39148 / September 30, 1997 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 969 / September 30, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9451 : In the Matter of : ORDER INSTITUTING : PROCEEDING PURSUANT TO MARY BRENNAN, : SECTION 21C OF THE : SECURITIES EXCHANGE ACT Respondent. : OF 1934, MAKING FINDINGS : AND IMPOSING A CEASE-AND- : DESIST ORDER : I. The Securities and Exchange Commission (the "Commission") deems it appropriate that a public administrative proceeding be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Mary Brennan ("Brennan"). Accordingly, IT IS HEREBY ORDERED that said proceeding be, and hereby is, instituted. II. In anticipation of the institution of this administrative proceeding, Brennan has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings herein, except that Brennan admits the jurisdiction of the Commission over her and over the subject matter of this proceeding, Brennan consents to the entry of this Order Instituting Proceeding Pursuant to Section 21C of the Securities ======END OF PAGE 1====== Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order ("Order") and to the entry of the findings and imposition of the sanction as set forth below. III. On the basis of this Order and the Offer, the Commission makes the following findings<(1)>: A. Brennan, age 38, is a certified public accountant who resides in Los Angeles, California. She was the Vice President/ Controller of IDB Communications Group, Inc. during all relevant periods. B. IDB Communications Group, Inc. ("IDB") is a telecommunications company that, during all relevant periods, was based in the Los Angeles, California area. Until IDB was acquired in 1995, its common stock was registered with the Commission under Section 12(g) of the Exchange Act and traded on the over-the-counter market through NASDAQ. Brennan's Efforts To Inflate Falsely IDB's 1994 First Quarter Earnings C. In early 1994, analysts were projecting that IDB would earn approximately $15 million (pre-tax) for the first quarter of 1994. The analysts made these earnings projections based on false information provided to them by certain IDB senior managers other than Brennan. In early 1994, Brennan, IDB's Controller, knew that IDB would not meet the analysts' earnings projections. D. To hide IDB's expected earnings shortfall, Brennan took steps to falsely inflate IDB's 1994 first quarter earnings to approximately $15 million. As discussed below, at the direction of senior IDB managers, Brennan searched IDB's records and found numerous adjustments that, when entered on IDB's records, improperly increased IDB's first quarter earnings to approximately $15 million. E. Between approximately April 12 and 15, 1994, Brennan, at the direction of senior IDB managers, directed an IDB accountant to make adjusting entries on IDB's records that would increase its earnings by approximately $10.5 million. Brennan knew that certain of the adjustments were improper under Generally Accepted Accounting Principles ("GAAP"). Brennan also knew when she directed the IDB accountant to make the adjusting <(1)> The findings herein are made pursuant to Brennan's Offer and are not binding on any other person or entity named as a respondent in this or any other proceeding. ======END OF PAGE 2====== entries on IDB's records that many of the entries were not supported with sufficient documentation as required by GAAP. F. Shortly thereafter, on April 22, 1994, Brennan told IDB's independent auditor that the auditor should examine closely recent adjustments made to IDB's records. At that time, the independent auditor was conducting a quarterly review of IDB's books and records. Later in the day on April 22, 1994, the independent auditor presented Brennan with a list of adjustments that did not have adequate supporting documentation. Brennan confirmed to the independent auditor that the auditor had found all of the questionable adjustments. G. On April 26, 1994, IDB issued a press release falsely announcing that it had earned approximately $15 million during the first quarter. H. In early May 1994, after the independent auditor had disallowed most of the insupportable and/or improper adjustments described in paragraph III.E above, Brennan, at the direction of senior IDB managers, directed an IDB accountant to make new adjusting entries on IDB's records that increased its earnings by approximately $4.5 million. Brennan knew when she directed the IDB accountant to make the adjusting entries that some of the entries were improper under GAAP and were not supported by adequate documentation. I. On May 23, 1994, IDB's independent auditor resigned after having disallowed numerous income-increasing adjustments, including many of those described in paragraphs III.E and III.H above. Later that day, IDB filed a Form 10-Q with the Commission falsely reporting that it had earned $15 million during the first quarter. Brennan Violated Section 13(b)(5) Of The Exchange Act And Rule 13b2-1 Thereunder, And Was A Cause Of IDB's Violations Of Section 13(b)(2)(A) Of The Exchange Act J. Section 13(b)(2)(A) of the Exchange Act requires an issuer filing reports with the Commission to make and keep books and records that accurately and fairly reflect the issuer's transactions. Section 13(b)(5) of the Exchange Act provides, among other things, that no person shall knowingly circumvent a system of internal accounting controls maintained by a reporting issuer, or knowingly falsify any book, record or account maintained by such an issuer. A Controller can violate Section 13(b)(5) by directing a subordinate to make false or improper entries on the corporation's records in circumvention of its system of internal controls. Similarly, Exchange Act Rule 13b2-1 ======END OF PAGE 3====== provides that no person shall, directly or indirectly, falsify or cause the falsification of any book, record or account of a reporting issuer. K. Brennan knowingly falsified IDB's records in violation of Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1. As described in paragraphs III.C through III.I above, in April and May 1994, she directed an IDB accountant to make insupportable and/or improper adjusting entries on IDB's records in circumvention of IDB's internal controls. L. Brennan's actions in falsifying IDB's records, as described in paragraphs III.C through III.I above, also caused IDB's records to be inaccurate and not fairly reflect IDB's transactions. Therefore, Brennan also was a cause of IDB's violations of Section 13(b)(2)(A) of the Exchange Act. IV. Based on the foregoing, the Commission deems it appropriate to impose the remedial sanction specified in Brennan's Offer. In determining to accept Brennan's Offer, the Commission considered remedial acts promptly undertaken by Brennan and cooperation afforded the Commission staff. Therefore, effective immediately, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Brennan cease and desist from committing or causing violations and any future violation of Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1, and cease and desist from causing violations and any future violation of Section 13(b)(2)(A) of the Exchange Act. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 4======