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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 44858 / September 27, 2001

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1456 / September 27, 2001

ADMINISTRATIVE PROCEEDING
No. 3-10589


In the Matter of

Charles K. Springer, CPA
Robert S. Haugen, CPA
Haugen, Springer & Co., PC

Respondents.


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ORDER INSTITUTING PROCEEDINGS
PURSUANT TO SECTION 21C OF THE
SECURITIES EXCHANGE ACT OF 1934
AND RULE 102(e) OF THE COMMISSION'S
RULES OF PRACTICE, MAKING FINDINGS,
AND IMPOSING REMEDIAL SANCTIONS
AND A CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission ("Commission") deems it appropriate to institute public cease-and-desist proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and proceedings pursuant to Rule 102(e)(1)(ii) and (iii)1 of the Commission's Rules of Practice against Charles K. Springer ("Springer") and to institute proceedings pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice against Robert S. Haugen ("Haugen"), and Haugen, Springer & Co., PC (collectively, the "Respondents" or "Auditors").

II.

In anticipation of the institution of these administrative proceedings, Respondents have together submitted an Offer of Settlement ("Offer") to the Commission, 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 the findings herein, except that Respondents admit the jurisdiction of the Commission over them and over the matters set forth herein, Respondents have consented to the issuance of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"). Accordingly, it is ordered that proceedings pursuant to Exchange Act Section 21C and Rule 102(e) of the Commission's Rules of Practice be, and hereby are, instituted.

III.

On the basis of this Order and the Offer submitted by Respondents, the Commission finds that:

A. Haugen, Springer & Co., PC, is a Colorado accounting firm located in Englewood, Colorado, with Haugen and Springer being the only shareholders of the company. Haugen, Springer & Co., PC audited the financial statements of Vari-L Company, Inc. ("Vari-L") from approximately 1991 until the firm resigned in July 2000.

B. Charles K. Springer, CPA, age 42, a resident of Highlands Ranch, Colorado, is vice president and a shareholder of Haugen, Springer & Co., PC where he has been employed since approximately 1990. Springer has been a licensed certified public accountant in Colorado since 1984. Springer was the partner in charge of all Haugen, Springer & Co., PC's audits of Vari-L from 1996 through 1999 and conducted most of the audit work himself.

C. Robert S. Haugen, CPA, age 60, a resident of Englewood, Colorado, is president and a shareholder of Haugen, Springer & Co., PC where he has been employed since 1990. Haugen has been a licensed Certified Public Accountant in Colorado since 1975. Haugen was the reviewing partner of all Haugen, Springer & Co., PC's audits of Vari-L.

D. Vari-L, a Colorado company located in Denver, Colorado, designs, manufactures and markets a wide range of radio frequency and microwave signal source processing components used in commercial and military/aerospace applications such as base stations, cellular phones, satellite communications systems, missile guidance, radar and navigational systems. Vari-L's common stock is registered with the Commission under Section 12(g) of the Exchange Act and was quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") until it was delisted on September 7, 2000. The company filed reports on Forms 10-KSB and 10-QSB through its December 31, 1999 Form 10-KSB and currently reports on Forms 10-K and 10-Q.

E. Vari-L engaged in a financial reporting fraud to show consistently increasing revenue and earnings from at least 1996 through the first quarter of 2000. As a result of the fraud, Vari-L filed periodic reports with the Commission that overstated revenue, earnings, and most assets. Vari-L's fraudulent accounting practices included (i) improperly recognizing revenue before products were shipped to customers by either treating them as bill and hold sales or simply holding its books open at quarterly and year-end periods; (ii) recognizing false revenue; (iii) improperly capitalizing internal labor and related overhead costs as property, equipment and intangible assets; (iv) overstating inventory by disregarding physical inventory counts, estimating inventory amounts in lieu of a physical count, failing to value inventory based on actual manufacturing costs, and failing to provide adequate inventory reserves; and (v) improperly deferring period costs. These accounting misstatements allowed Vari-L to report pretax income instead of a pretax loss each period from 1996 through the first quarter of 2000.

F. In a September 12, 2000 press release Vari-L conceded that its accounting was improper leading to a required $30-$35 million write down of its reported December 31, 1999 balance sheet. In February 2001, Vari-L filed with the Commission restated financial statements for the annual period ended December 31, 1999, and for quarterly periods ended March 31, 1999, June 30, 1999, September 30, 1999, and March 31, 2000. Vari-L's March 31, 2000 balance sheet was overstated by $39 million or 132% as a result of the company overstating reported pretax income for the quarter and in prior financial statements. Vari-L's accounting misstatements resulted in Vari-L reporting cumulative pretax income of $17.1 million from 1996 through the quarter ended March 31, 2000 instead of a $14.4 million cumulative pretax loss for the same period.

G. Haugen, Springer & Co., PC issued unqualified audit reports on Vari-L's 1996 through 1999 financial statements dated February 5, 1997, February 24, 1998, January 29, 1999, and March 14, 2000. Haugen, Springer & Co., PC's unqualified reports stated that, "We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion."

H. Contrary to their representations, the Auditors failed to conduct the 1996 through 1999 audits of Vari-L's financial statements in compliance with GAAS. They failed to obtain sufficient competent evidential matter, act with due professional care, and exercise professional skepticism.

I. The Auditors failed to obtain sufficient competent evidential matter in the area of revenue recognition. They relied on management's representation that customers requested the sales be made on a bill and hold basis. They ignored information in the audit workpapers that suggested management's representations were false. In addition, the Auditors failed to perform sufficient audit procedures to determine if the other criteria for bill and hold sales were met.

J. The Auditors did not obtain sufficient competent evidential matter to opine on Vari-L's capitalized costs. The Auditors knew that Vari-L had no contemporaneous and detailed time records evidencing the labor that was capitalized, yet they did not confirm sufficiently the amount of time employees worked on specific projects or determine whether specific projects were capitalizable. Moreover, the Auditors failed to test sufficiently the overhead burden rate used by Vari-L to calculate capitalized costs.

K. The Auditors failed to obtain sufficient competent evidential matter in the area of inventory. The Auditors knew, or were reckless in not knowing, that Vari-L made unsubstantiated inventory adjustments and allowed Vari-L to estimate significant portions of inventory each year based on management's representation that there was not sufficient time to count and value inventory. The Auditors did not sufficiently test Vari-L's overhead burden rates used in valuing work-in-process inventory. Moreover, in 1997 and 1998 the audit test work of Vari-L's inventory reserves was insufficient and in 1999 the Auditors did not test inventory reserves.

L. Additionally, the Auditors did not perform sufficient audit procedures testing Vari-L's failure to expense over $2.5 million of period costs from 1996 through the quarter ended March 31, 2000.

M. The Auditors demonstrated a lack of due professional care and professional skepticism in several areas. In the revenue area, the audit workpapers contained two documents that suggested that Vari-L held its books open at the end of fiscal years 1998 and 1999. In addition, the Auditors exercised insufficient professional skepticism when in fiscal years 1996 through 1998 they allowed Vari-L to recognize certain cancellation charges as revenue (without a reserve) based on management's assurances that the receivable would be collected and again in 1999 when they allowed a reserve less than what likely could be collected.

N. The Auditors failed to exercise due professional care and maintain professional skepticism in the long-term asset area. They failed adequately to consider the risk that Vari-L's financial statements were misstated due to the significant amount of labor and related overhead Vari-L capitalized based on estimates. Moreover, the Auditors ignored Vari-L's failure to depreciate more than $5 million of capitalized costs.

O. The Auditors also failed to exercise due professional care and maintain professional skepticism in the area of inventory. The audit workpapers contained year-end inventory schedules documenting that Vari-L made unsubstantiated inventory adjustments and estimated material inventory quantities. The audit workpapers also contained all the information necessary to conclude that Vari-L's finished goods inventory was significantly overstated.

P. Finally, the Auditors violated the four standards of reporting during their 1996 through 1999 audits of Vari-L's financial statements. First, the Auditors' reports on Vari-L's 1996 through 1999 financial statements stated that the financial statements were in conformity with GAAP when they were materially misstated. Second, the Auditors' report on Vari-L's 1999 financial statements failed to discuss Vari-L's change in its revenue recognition policy from recognizing revenue on bill and hold sales from 1996 through 1998 to disallowing it in 1999. Third, the Auditors' reports on Vari-L's 1996 through 1998 financial statements did not discuss Vari-L's failure to disclose its revenue recognition policy. Finally, the Auditors' improperly issued unqualified audit reports on Vari-L's 1996 through 1999 financial statements.

Q. Based on the foregoing, the Auditors engaged in improper professional conduct by recklessly violating applicable professional standards.

R. Springer knew in 1998 that Vari-L had or may have improperly recognized $1.3 million of revenue in 1997 and knew, or was reckless in not knowing, that the false revenue materially misstated Vari-L's financial statements. Section 10A(b)(1) provides that if in the course of conducting an audit "the independent public accountant detects or otherwise becomes aware of information indicating that an illegal act (whether or not perceived to have a material effect on the financial statements of the issuer) has or may have occurred, the accountant shall, in accordance with [GAAS] . . . (A)(i) determine whether it is likely that an illegal act has occurred; and (ii) if so, determine and consider the possible effect of the illegal act on the financial statements of the issuer . . . ." Moreover, Section 10A(b)(1)(B) requires the independent accountant to "as soon as practicable, inform the appropriate level of the management of the issuer and assure that the audit committee of the issuer, . . . is adequately informed with respect to illegal acts that have been detected or have otherwise come to the attention of such accountant in the course of the audit." Springer violated Section 10A(b)(1) when he failed to inform Vari-L's audit committee that he had detected information indicating that Vari-L had or may have reported $1.3 million in false revenue.

S. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, prohibit persons from, directly or indirectly, in connection with the purchase or sale of securities by use of any means or instrumentality of interstate commerce or of the mails, employing any device, scheme or artifice to defraud; making any untrue statement of a material fact or omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon any person. Vari-L violated the antifraud provisions of the Exchange Act by filing Forms 10-KSB and quarterly reports during fiscal years 1996 through 1999 and through the quarter ended March 30, 2000 that contained false and misleading financial statements. Springer caused and willfully aided and abetted Vari-L's violations of Section 10(b) and Rule 10b-5 by contributing to the violations by issuing unqualified audit reports for fiscal years 1996 through 1999.

T. Section 13(a) of the Exchange Act requires issuers with securities registered pursuant to Section 12 of the Exchange Act to file reports with the Commission. Rule 13a-1 thereunder requires such reports to be filed annually in compliance with the Commission's Regulation S-X, that requires financial statements to be presented in conformity with GAAP. Rule 12b-20 further requires the inclusion of any material information necessary to make the required statements, in light of the circumstances under which they were made, not misleading. Vari-L violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 by filing false and misleading annual reports with the Commission starting with its 1996 Form 10-KSB continuing through its 1999 Form 10-KSB that misrepresented Vari-L's financial position, including overstating gross profit, net income, and total assets. Springer caused and willfully aided and abetted Vari-L's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 by contributing to the violations by issuing unqualified audit reports for fiscal years 1996 through 1999.

IV.

In view of the foregoing, the Commission deems it appropriate to accept the Offer submitted by Respondents. Accordingly, IT IS HEREBY ORDERED, effective immediately, that:

A. Springer, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violations and any future violations of Sections 10A and 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and from causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder.

B. Springer is denied the privilege of appearing or practicing before the Commission as an accountant. After ten years from the date of this order, Springer may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as:

1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Springer's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or

2. an independent accountant. Such an application must satisfy the Commission that:

a. Springer or the firm with which he is associated is a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section");

b. Springer 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

c. As long as Springer appears or practices before the Commission as an independent accountant, he will remain either a member of the SEC Practice Section or associated with a member firm of the SEC Practice Section, and will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education.

C. Haugen is denied the privilege of appearing or practicing before the Commission as an accountant. After three years from the date of this order, Haugen may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as:

1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Haugen's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or

2. an independent accountant. Such an application must satisfy the Commission that:

a. Haugen or the firm with which he is associated is a member of the SEC Practice Section;

a. Haugen 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

c. As long as Haugen appears or practices before the Commission as an independent accountant, he will remain either a member of the SEC Practice Section or associated with a member firm of the SEC Practice Section, and will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education.

D. Haugen, Springer & Co., PC is denied the privilege of appearing or practicing before the Commission as an accountant. After three years from the date of this Order, Haugen, Springer & Co., PC may request that the Commission consider its reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as:

1. A preparer or reviewer, or a firm responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Haugen, Springer & Co., PC's work in its practice before the Commission will be reviewed either by the independent audit committee of the public company for which it works or in some other acceptable manner, as long as it practices before the Commission in this capacity; and/or

2. an independent accounting firm. Such an application must satisfy the Commission that:

a. Haugen, Springer & Co., PC is a member of the SEC Practice Section;

a. Haugen, Springer & Co., PC has received an unqualified report relating to the firm's most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and

b. As long as Haugen, Springer & Co., PC appears or practices before the Commission as an independent accounting firm it will remain a member firm of the SEC Practice Section, and will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education.

E. The Commission's review of any request or application by any of the Respondents to resume appearing or practicing before the Commission may include consideration of, in

addition to the matters referenced above, any other matters relating to that Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.

By the Commission.

Jonathan G. Katz
Secretary


Footnote

1 Rule 102(e)(1) provides, in relevant part, that:

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 and opportunity for hearing in the matter: . . . (ii) [t]o be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) [t]o have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.


http://www.sec.gov/litigation/admin/34-44858.htm


Modified: 10/30/2001