UNITED STATES OF AMERICA
In the Matter of
KEVIN R. ANDERSEN, CPA,
|ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS, MAKING FINDINGS, AND IMPOSING SANCTIONS 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 to institute public administrative proceedings against Kevin R. Andersen, CPA, pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice. 1
In anticipation of the institution of these proceedings, Andersen 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 to which the Commission is a party, and without admitting or denying the facts, findings, or conclusions herein, except that he admits the Commission's jurisdiction over him and the subject matter of these proceedings, Andersen consents to the entry of this Order Instituting Proceedings, Making Findings, and Imposing Sanctions Pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order").
On the basis of this Order and respondent's Offer of Settlement, the Commission finds that:2
Andersen, age 48, is a certified public accountant licensed in the State of Utah. Andersen audited the financial statements of Itex Corporation for the fiscal years ended July 31, 1992-97, issuing audit reports containing unqualified opinions for each of those years . He also audited the financial statements of Associated Reciprocal Traders, at various relevant times a wholly or partially owned subsidiary of Itex and whose financial operations were wholly or partially included in Itex's financial statements. Itex filed an amended Form 10-K for the period ended July 31, 1997, which included restated financial statements for the fiscal years ended July 31, 1996 and 1997 and additional restated financial information stretching back to the fiscal year ended July 31, 1993, as part of its settlement with the Commission of charges arising out of the investigation leading to this proceeding.3
Itex was a Nevada corporation headquartered in Portland, Oregon. Itex's common stock was and is registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 and was quoted on NASDAQ Small Cap Stock Market until its delisting on December 21, 1998. Its common stock is currently quoted in the National Quotation Bureau's "Pink Sheets."
C. ITEX'S MATERIALLY MISLEADING FINANCIAL STATEMENTS
Itex receives fees for managing the Itex Retail Trade Exchange (the "Exchange"), whose members barter goods and services. In lieu of trading (or bartering) such goods and services directly, Exchange members use barter credits, known as Itex trade dollars, issued to them by the Exchange. During 1994-97, Itex also entered into numerous barter transactions as a principal. The material misstatements in Itex's financial statements for fiscal years 1994-97 arose from these barter transactions that were not accounted for in conformity with generally accepted accounting principles ("GAAP").
Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions" (APB 29), provides that non-cash transactions, which include barter transactions such as those on the Exchange, be recorded at the fair value of the assets given up or received, whichever is more clearly evident. Emerging Issues Task Force Consensus No. 93-11, "Accounting for Barter Transactions Involving Barter Credits," underscores that APB 29 applies to exchanges involving barter credits and requires valuation of barter transactions at the fair value of the non-cash asset and not on the basis of the barter credits exchanged.
Itex improperly reported various principal barter transactions on its books and in its public filings, valuing them at the equivalent of one U.S. dollar for one Itex trade dollar, which resulted in valuations far in excess of the fair market value of the goods or services involved. Itex reported substantial revenue from these overvalued barter transactions as a principal in its own name or through its Swiss-based subsidiary, Associated Reciprocal Traders. In fiscal years 1994 through 1997, approximately 56%, 56%, 43% and 60%, respectively, of Itex's reported revenues were derived from such barter transactions. The barter deals involved difficult-to-value assets, such as artwork, pre-paid advertising due bills, and certain securities in public companies.
Itex also failed to comply with other provisions of GAAP. The company prematurely recognized revenue on advertising time sold in barter transactions, notwithstanding the fact that the advertising time was indeterminate in value and the advertisements had not been broadcast, in contravention of APB 29 and Financial Accounting Standards Board Concepts Statement No. 5. Itex also recognized revenue in inventory swaps whose valuation was not in accord with APB 29, paragraph 21a, which provides that exchanges of inventory held for sale are to be valued at no more than the value of the asset given up. Itex recognized gain on the basis of the difference between the value of the asset given up and the "contracted amount" of the asset being received. Itex also improperly valued restricted common stock and certain preferred securities issued by various public companies. In the case of restricted common stock, the company inappropriately relied on quotations published by the National Quotations Bureau as a measure of fair value. See Accounting Series Release No. 113. The preferred stock was valued at "cost", but "cost" was measured in barter dollars and thus was not an accurate measure of fair value
D. ANDERSEN'S AUDITS OF ITEX'S FINANCIAL STATEMENTS
Statement on Auditing Standards No. 1. ("SAS No. 1"), as codified by AU Section 230, "Due Professional Care in the Performance of Work," required Andersen to exercise due professional care in performing the audits of Itex's financial statements and the preparation of the audit reports. Due care required Andersen to exercise professional skepticism in planning auditing procedures and in assessing audit evidence4 and to obtain sufficient competent evidential matter through inspection, observation, inquiries and confirmations to afford a reasonable basis for his opinions regarding Itex's financial statements. Andersen had a responsibility not only to plan and perform the Itex audits to provide reasonable assurances of detecting material errors or irregularities in the financial statements,5 but also to exercise sufficient professional skepticism to achieve reasonable assurance that material errors or irregularities would be detected. As set forth below, Andersen's lack of skepticism resulted in the audit failures.
1. Andersen Failed to Communicate with Itex's Predecessor Auditor
Itex first engaged Andersen to audit its financial statements for its fiscal year ended July 31, 1992. Itex's management told Andersen that, notwithstanding Itex's cooperation, the prior auditor had not finished the audit, and that there were fee disputes with the previous auditor and that Andersen should not expect to obtain any of the previous auditor's workpapers.
Statement on Auditing Standards ("SAS") No. 7, "Communications Between Predecessor and Successor Auditors" obligated Andersen to contact the prior auditor, which he did not do. Moreover, Andersen's failure to exercise professional skepticism through relying on management's representations constituted a violation of SAS No. 1. In the weeks leading up to Andersen's engagement, the prior auditor had raised questions concerning the valuation of certain transactions based on trade dollars, the company's application of APB 29 to non-monetary transactions, the lack of sufficient competent evidential matter to support the value of non-cash transactions, the degree of control exercised over the company's operations by the chairman and former president of the company, the validity of Itex's accounting for non-cash transactions, and the lack of accounting experience of the controller and chairman of the company. Andersen should not have relied on management's representations as a substitute for his obligations under SAS Nos. 1 and 7.
2. Andersen Failed to Exercise Professional Skepticism
As noted, Itex's barter transactions typically involved difficult to value assets such as hotel room nights, artwork, media inventory due bills, and restricted and preferred shares of certain public companies. For the most part, Andersen accepted at face value Itex's large barter transactions, many of which were material on a stand-alone basis. Although some of the transactions and assets (such as hotel room nights and artwork) were subjected to downward adjustments, these adjustments were not fully supported by competent evidential matter and in fact still left the assets with materially inflated values. Moreover, certain characteristics of the transactions exhibited red flags, which should have prompted Andersen to more carefully examine them. For example, certain significant transactions occurred at or near the end of fiscal periods, involved unusual purchases, sales, and repurchases of assets within a short period of time, and a series of transactions involving an offshore entity whose sole address was a post office box in Belize, Central America. Had Andersen conducted the reasonable inquiry into these transactions required by generally accepted auditing standards ("GAAS"), such an inquiry would have raised questions about the value of certain assets and whether certain transactions were reported properly in the financial statements.
For example, a large and material portion of Itex's barter-derived assets and revenues during the period of Andersen's audits involved the artwork of an artist named Sky Jones. In auditing these transactions, Andersen relied on appraisals that he understood were based on a barter situation, some of which even expressly assigned a barter value for each piece of artwork. Since Itex considered a barter credit to equal one US dollar, Andersen considered any distinction between cash and barter value to be irrelevant. He did not know whether the appraisers ever relied on any cash sales in valuing the Sky Jones artwork. The presumed equal status of cash and barter transactions precluded the skeptical inquiry required of Andersen and led to his failure to question certain red flags in the appraisals. Many of the appraisals, none of which referred to Sky Jones, gave the same value to numerous pieces of artwork. For example, fourteen Sky Jones paintings were carried on Itex's books at an arbitrary discount to an appraised barter value of $62,500 each. In another example, 29 Sky Jones sculptures were carried at an arbitrary discount to an appraised value of $110,000 each. Moreover, Andersen's failure to conduct the assessment required by GAAS prevented him from learning that these appraisals were based on information that should have caused him to reject them as unreliable.
As a result of the foregoing, Andersen failed to follow the requirements of generally accepted auditing standards in his audits of Itex's financial statements, which resulted in Itex's filing financial statements that failed to comply with GAAP.
Based on the foregoing, the Commission finds that Respondent Kevin R. Andersen engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice.
Accordingly, IT IS HEREBY ORDERED, effective immediately, that:
A. Respondent Kevin R. Andersen is denied the privilege of appearing or practicing before the Commission as an accountant.
B. After three (3) years from the date of this order, Respondent 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 Respondent'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) Respondent, 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) Respondent, 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 Respondent 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. The Commission's review of an application by Respondent to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.
By the Commission.
Jonathan G. Katz
|1|| Subsection (1) of Rule 102(e) 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.
|2||The findings herein are made pursuant to Andersen's Offer of Settlement and are not binding on any other person or entity in this or in any other proceeding.|
|3||SEC v. Itex, et al., CV 99-1361-BR (D. Ore.). All of the defendants in that proceeding have settled with the Commission. For further information, see LR-16305 (announcing complaint), LR-16430 (settlement with Joseph Morris), LR-16437 (settlement with Itex), LR-16536 (settlements with Graham Norris and Cynthia Pfaltzgraff), LR-16708 (settlement with Terry Neal), and LR-16841 (settlement with Michael T. Baer). All of these releases are available at the Commission's website at http://www.sec.gov/enforce/litig.htm.|
|4||See SAS No. 53, "Errors and Irregularities" paragraph 16 to 21, as superceded and amended by SAS No. 82, "Consideration of Fraud in Financial Statement Audit" and codified in AU Section 230.07 through 230.09 and AU Section 316.27.|
|5||SAS No. 53, paragraph 5, as superseded and amended by SAS No. 82 and codified in AU Section 316.01.|
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