UNITED STATES OF AMERICA
|In the Matter of
WILLIAM D. TETSWORTH, JR., CPA
|ORDER INSTITUTING PROCEEDDINGS AND ORDER AND OPINION PURSUANT TO RULE 102(e)OF THE COMMISSION'S RULES OF PRACTICE|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted against William D. Tetsworth, Jr., CPA ("Tetsworth"), pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice. 1
In anticipation of the institution of these proceedings, Tetsworth has submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purpose of these proceedings 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 any findings set forth in this Order Instituting Proceedings and Opinion and Order Pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order"), except that Tetsworth admits the jurisdiction of the Commission over him and over the subject matter of these proceedings, Tetsworth consents to the entry of the findings and to the imposition of the remedial sanctions set forth below.
On the basis of this Order and Tetsworth's Offer of Settlement, the Commission makes the following findings: 2
WILLIAM D. TETSWORTH, JR., age 42, is a certified public accountant licensed in Florida. Tetsworth is one of two partners in the firm Tetsworth & Tetsworth ("T&T"), located in Boynton Beach, Florida.
HOLLYWOOD TRENZ, INC. ("HTI") is a Delaware corporation headquartered in Fort Lauderdale, Florida. In 1993, HTI's common stock was registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 and has traded in the over-the-counter market since September 1993.
C.TETSWORTH ENGAGED IN IMPROPER PROFESSIONAL CONDUCT
This proceeding addresses the conduct of Tetsworth in connection with T&T's audits of the financial statements of Interstate Finance and Trust, Co. ("Interstate"). On May 6, 1993, HTI filed with the Commission a Form 8-K which disclosed that on or about April 9, 1993, HTI's predecessor Dimension Group, Inc. had acquired 100% of the outstanding stock of Interstate and had changed its name to HTI. The Form 8-K contained Interstate's audited financial statements for the periods ended April 27, 1992 and December 31, 1992, accompanied by an unqualified audit report dated April 13, 1993 issued by T&T.
For these periods, Interstate's assets consisted primarily of a portfolio of defaulted financial institution loans ("the receivables"). The receivables represented a portion of two packages of defaulted loans that the FDIC originally sold to a private investor in 1987, and which had been collected upon and resold or transferred a number of times before being acquired by Interstate. Interstate's financial statements for the periods ended April 27, 1992 and December 31, 1992 valued the receivables at $7,391,029 and $7,834,256, respectively. These financial statements, which had been audited by Tetsworth, were not in accordance with generally accepted accounting principles ("GAAP"), as Interstate's assets and shareholders' equity were materially overstated. Moreover, Tetsworth departed from generally accepted auditing standards ("GAAS") in assessing the valuation and existence of the receivables, and in issuing a report containing an unqualified opinion on Interstate's financial statements for the periods ended April 27, 1992 and December 31, 1992.
Tetsworth knew at the outset of his engagement for Interstate that his audit reports on Interstate's financial statements would be used in connection with planned filings by a public company. Tetsworth also specifically authorized HTI to include T&T's unqualified audit report in the Form 8-K filed with the Commission in May 1993.
1.Failure to Obtain Sufficient Evidence Concerning Predecessor's Cost
Interstate's audited financial statements in the May 1993 Form 8-K for the periods ended April 27, 1992 and December 31, 1992 reported the receivables at a value that represented more than 99 percent of Interstate's assets at each balance sheet date. As of April 27, 1992, Interstate recorded the receivables at "predecessor's cost," with the predecessor's cost being lower than the fair market value as determined by Tetsworth, and representing the amount purportedly paid by Interstate's founding shareholder to acquire the receivables. As of December 31, 1992, Interstate reported the receivables' value at purported predecessor's cost plus fifty percent of the interest accrued on the portfolio during the eight-month period between balance sheet dates.
In conducting an audit, GAAS requires that an auditor must obtain sufficient competent evidential matter through inspection, inquiries and confirmations to afford a reasonable basis for an opinion regarding financial statements under audit. Codification of Statements on Auditing Standards ("AU") 326.01. The validity and sufficiency of required evidence depends on the circumstances and the auditor's judgment. AU 326.19 and .20. With respect to such judgment, an auditor must maintain an attitude of professional skepticism and assess the risk that errors and irregularities may cause the financial statements to contain a material misstatement. AU 316.05 and 316.21. In connection with the audits Tetsworth performed of financial statements included by HTI in filings with the Commission, Tetsworth failed to perform adequate audit procedures, and failed to exercise the professional skepticism required by GAAS.
To corroborate the recorded predecessor's cost, Tetsworth relied on two affidavits which represented that Interstate's founding shareholder had purchased the receivables for $7,391,029. Tetsworth never received any additional evidence, such as sales agreements, cancelled checks or wire transfer receipts, to support the representations made in these affidavits, although he made requests for such evidence.
In these circumstances, and given the materiality of the receivables' value to Interstate's financial statements, Tetsworth should have sought additional corroborating evidence of predecessor cost, but he failed to do so. By failing to perform additional procedures to corroborate predecessor cost, Tetsworth did not discover that the predecessor cost stated in the affidavits was materially overstated.
2.Failure to Exercise Due Care in Testing the Existence of the Receivables
In order to corroborate Interstate's ownership of the loans comprising the receivables, Tetsworth physically inspected the loan files. This inspection, done by Tetsworth and temporary employees acting under his supervision, entailed an examination of the actual documentation supporting the loans and matching the loan files to a printout that was prepared by a data processing firm from a data base for the receivables which had been created for a predecessor owner of the receivables. This printout reflected a total uncollected principal and accrued interest of $22,741,628 as of April 27, 1992.
As a result of this physical inspection, Tetsworth discovered that there were no files supporting approximately $6.8 million, or 30%, of the total uncollected principal and accrued interest of the receivables. Representatives of HTI and Interstate told Tetsworth that these missing files would be provided at a later date. However, Tetsworth never received them.
GAAS requires that an auditor exercise due professional care in performing the audit and preparing the report. AU § 230.01. Because loan files were missing, Tetsworth should have questioned the existence and value of a substantial portion of the receivables as well as Interstate's apparent lack of internal controls assuring the accountability of its assets. Tetsworth, however, performed no additional audit procedures relating to the missing loan files. Tetsworth's failure to perform additional procedures reflects a failure to exercise due care and a departure from GAAS.
3.Failure to Perform Audit Procedures Required When Relying on the Work of a Specialist
As evidence to support the valuation of the receivables, Tetsworth relied upon a written opinion of a "specialist." The individual that Tetsworth relied upon as a specialist had undertaken efforts to collect upon the receivables in the past and was thus familiar with the receivables. Based on the specialist's opinion, Interstate's audited financial statements disclosed that "(t)he collection of the Items through professional, proper and lawful collection procedures has been estimated by independent third-party collection professionals to be approximately fifty percent collectible."
GAAS requires that an auditor consider the specialist's relationship, if any, to the client and the impact the relationship may have on the specialist's objectivity. AU 336.05 and .07. 3 In addition, an auditor should gain an understanding of the methods and assumptions used by the specialist to determine whether the findings are suitable for corroborating the representations in the financial statements and should make a determination that the specialist's findings are not unreasonable. AU 336.08.
Tetsworth departed from GAAS by failing to sufficiently investigate the specialist's purported independence. In fact, the specialist believed he had an ownership interest in the receivables. In these circumstances, an auditor should assume the specialist's objectivity to be impaired, rendering his opinion unreliable unless substantial corroborating evidence is found.
While the specialist demonstrated to Tetsworth a general familiarity with the receivables, Tetsworth did not adequately test the specialist's assertion in his written opinion that he had recently reviewed the portfolio. In fact, the specialist's loan review had taken place in 1989 and thus was unsuitable for use in auditing Interstate's financial statements as of April 27, 1992.
Moreover, although he contacted other persons in the collection field concerning general methods of assessing the collectability of receivables, Tetsworth did not take adequate steps to document or reach an understanding of the methods and assumptions actually used by the specialist. For purposes of evaluating the collectability of the receivables, Tetsworth interpreted the specialist's 50 percent collectability estimate to apply to the combined principal and accrued interest amount in excess of $22 million. However, the specialist had based his estimate on the amount of principal alone. Tetsworth's interpretation supported a conclusion that approximately $7 million could be recovered from the receivables after deducting estimated costs of collection. In fact, the specialist believed the recoverable amount to be substantially less. Moreover, Tetsworth knew that the loans had been past due for at least five years and that the originating financial institutions, the FDIC, and prior owners of the receivables had failed to collect payments from the debtors. Given all these circumstances, Tetsworth departed from GAAS by relying on the specialist's opinion without obtaining other audit evidence to substantiate the collectability of the receivables.
4.Failure to Qualify or Disclaim Opinion
If the auditor's scope is restricted, either by the client or by the circumstances, such as by the inability to obtain sufficient evidential matter, the auditor may be required to qualify or disclaim an opinion in his report. AU 508.40. An unqualified audit report may be issued only when the audit was performed in accordance with GAAS. AU 508.07. The issuance of an audit report containing an unqualified opinion and a representation that the audit was conducted in accordance with GAAS when such was not the case constitutes improper professional conduct.
During the course of his audit of Interstate's April 27, 1992 financial statements, Tetsworth
(1) failed to obtain sufficient evidence to corroborate the written representations regarding predecessor's cost, (2) discovered that a material portion of the receivables had no supporting loan files, and (3) inappropriately used the findings of a purported specialist.
As part of Tetsworth's audit of Interstate's December 31, 1992 financial statements, Tetsworth tested the calculation of the interest accrued between the two audit dates. Other than accruing interest income, Interstate's assets did not change between April 27, 1992 and December 31, 1992. However, Tetsworth's December 31, 1992 audit had the same deficiencies as his prior audit, and thus also departed from GAAS. Tetsworth nonetheless caused T&T to issue an unqualified audit report on Interstate's materially overstated April 27, 1992 and December 31, 1992 financial statements, which were included in HTI's Form 8-K filed with the Commission on May 6, 1993. 4
Accordingly, for the reasons set forth above, the Commission finds that Tetsworth engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice.
ORDER IMPOSING REMEDIAL SANCTIONS
Based on the foregoing, the Commission deems it appropriate and in the public interest to accept Tetsworth's Offer of Settlement and, accordingly,
IT IS HEREBY ORDERED, effective immediately, that:
A. Tetsworth is denied the privilege of appearing or practicing before the Commission as an independent accountant.
B. Two years from the date of this Order, Tetsworth may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as an independent accountant upon submission of an application containing a showing satisfactory to the Commission that:
(1) Tetsworth, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") as long as he practices before the Commission as an independent accountant;
(2) Tetsworth or the firm has received an unqualified report relating to his or the firm's most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and
(3) Tetsworth will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant.
C. The Commission's review of any request or application by Tetsworth to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Tetsworth's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.By the Commission.
|1||Rule 102(e)(1) of the Commission's Rules of Practice, 17 C.F.R. § 201.102(e), provides in pertinent part: The Commission may censure a person or 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 and opportunity for hearing in the matter . . . (ii) . . . to have engaged in . . . improper professional conduct.|
|2||The findings herein are made pursuant to Tetsworth's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
|3||At the time of the Interstate audit, GAAS related to using the work of a specialist was set forth in Statement on Auditing Standards No. 11 ("SAS 11") which was subsequently superseded by SAS 73 for audits of periods ending on or after December 15, 1994. In this case, Tetsworth's conduct departed from GAAS as set forth under both SAS 11 and SAS 73.|
|4||On August 18, 1993, HTI filed a Form 8 amending its Form 8-K previously filed on May 6, 1993. This filing contained revised financial statements for Interstate, stating that Interstate's total assets were $22,212 and $22,167 as of April 27, 1992 and December 31, 1992, respectively. These statements were accompanied by a reissued audit report prepared by T&T related to those financial statements.|
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