SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
ACCOUNTING AND AUDITING ENFORCEMENT
RULE 102(e) PROCEEDINGS INSTITUTED AGAINST FORMER COOPERS AUDITORS FOR IMPROPER PROFESSIONAL CONDUCT RELATING TO CAL MICRO AUDIT.
The Commission announced today that it has instituted public administrative proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice to determine whether two former Coopers & Lybrand, LLP ("Coopers") auditors, Michael J. Marrie and Brian L. Berry ("Respondents"), engaged in improper professional conduct. The Order Instituting Proceedings ("Order") alleges that Marrie and Berry, who acted as engagement partner and engagement manager, respectively, for Coopers' audit of the financial statements of California Micro Devices Corporation ("Cal Micro") for its fiscal year ended June 30, 1994, failed to comply with applicable professional standards during the course of the Cal Micro audit.
The Order alleges that Marrie and Berry recklessly failed to conduct the audit of Cal Micro's 1994 financial statements in compliance with generally accepted auditing standards ("GAAS") due to their improper professional conduct in three critical audit areas: accounts receivable, inventory, and property. The financial statements audited by Marrie and Berry, included in Cal Micro's annual report on Form 10-K for the fiscal year ended June 30, 1994, were materially false and misleading and failed to comply with generally accepted accounting principles ("GAAP") as a result of pervasive fraud by former Cal Micro officers and employees. Coopers issued an unqualified report with respect to these financial statements.
In auditing Cal Micro's receivables, inventory, and property, the Order alleges that Marrie and Berry violated GAAS by failing to exercise appropriate professional skepticism, obtain competent evidential matter, or properly supervise audit personnel. Despite singling out Cal Micro for "special attention," Marrie and Berry recklessly ignored unmistakable red flags that indicated potential accounting irregularities. With respect to revenue recognition, for example, the auditors failed even to examine a write-off of one third of the Company's accounts receivable balance, a red flag that should have alerted the auditors to the possibility of a material misstatement. Marrie and Berry also recklessly failed to follow applicable auditing standards in the areas of inventory obsolescence and property and equipment.
On February 6, 1995, Cal Micro restated its financial results for fiscal year 1994. The bulk of the adjustments to Cal Micro's financial statements - all highly material - occurred in the areas of accounts receivable, inventory, and property. Accounts receivable, as originally reported, had been overstated by 168%, or $10.6 million. Inventory had been overstated by 197%, or $10.2 million. Property had been overstated by 40%, or $3.0 million. From originally reported net income of approximately $5.1 million for the year ended June 30, 1994, restated net accounts receivable decreased net income by approximately $9.7 million. The restated allowance for additional inventory obsolescence decreased net income by approximately $9.3 million. Restated property and equipment decreased net income by approximately $2.7 million.
A hearing will be scheduled to determine if the staff's allegations are true and, if so, what remedial actions or sanctions are appropriate under the circumstances of this case.
For additional information, see Litigation Release Nos. 16127 (April 29, 1999), 15919 (September 30, 1998), 15846 (August 12, 1998),. 15690 (March 31, 1998), and 14776 (January 4, 1996); and see Accounting and Auditing Enforcement Release Nos. 1131 (April 29, 1999), 1083 (September 30, 1998), 1066 (August, 12, 1998), 1022 (March 31, 1998), and 750 (January 4, 1996).