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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. 46033 / June 5, 2002

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1566 / June 5, 2002

ADMINISTRATIVE PROCEEDING
File No. 3-10674


In the Matter of

JAMES E. SLAYTON, CPA,

Respondent.


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ORDER MAKING FINDINGS AND IMPOSING CEASE-AND-DESIST ORDER, AND IMPOSING SANCTIONS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE

I.

On January 7, 2002, the Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice against James E. Slayton ("Slayton").1

Following the institution of those proceedings, Slayton submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, Slayton consents to the entry of this Order Making Findings and Imposing Cease-and-Desist Order, and Imposing Sanctions Pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order") without admitting or denying the findings set forth in this Order, except as to the jurisdiction of the Commission over him and over the subject matter of these proceedings, which are admitted.

The Commission has determined that it is appropriate to accept Slayton's Offer and accordingly is issuing this Order.

II.

On the basis of this Order and the Offer, the Commission finds2 the following:

  1. James E. Slayton, age 55, is a resident of Las Vegas, Nevada. Slayton became licensed as a CPA in 1983, and is licensed to practice as a CPA in Ohio.

  2. California Software Corporation ("California Software") is a Nevada corporation headquartered in Irvine, California. Its common stock has been registered with the Commission pursuant to Section 12(g) of the Exchange Act since 1999 and is quoted on the OTC Bulletin Board. California Software has filed periodic reports with the Commission since August 1999.

  3. From late 1998 through early 2000, California Software engaged Slayton as its independent auditor. Slayton audited and issued reports on the financial statements of California Software and its predecessor company, California Software Products, Inc. ("CSPI"), for the years ended December 31, 1997, 1998 and 1999. Slayton was the sole certified public accountant on those audits and supervised the work of one non-accountant employee in connection with those audits.

  4. With respect to the audit reports referenced in paragraph C. above, Slayton issued false reports which claimed that California Software's financial statements presented fairly, in all material respects, the financial position of the company in conformity with generally accepted accounting principles ("GAAP"), when, in fact, those financial statements were materially false. Slayton also represented in those audit reports that his audits of California Software's financial statements were conducted in accordance with generally accepted auditing standards ("GAAS"), when they were not.

  5. In the course of those audits, Slayton failed to comply with GAAS, as follows:

    1. Slayton failed to obtain written representation letters from management of California Software;

    2. Slayton failed to prepare audit programs or conduct audit risk assessments sufficient to determine the nature, timing and extent of substantive tests needed for the audits;

    3. Slayton failed to obtain sufficient competent evidential matter upon which to base an opinion, specifically as it relates to the confirmation process and testing of California Software's and CSPI's accounts receivable and revenue;

    4. Slayton failed to properly supervise the person he used to assist in the audit. Slayton assigned this employee, who was not an accountant and did not have audit experience, responsibility for auditing accounts receivable without adequately reviewing the work performed;

    5. Slayton failed to understand California Software's revenue recognition policies sufficiently to identify that they did not comply with GAAP; and

    6. Slayton issued an unqualified audit report certifying that California Software's and CSPI's financial statements presented the condition of the company fairly in conformity with GAAP when in fact, they did not.

  6. Over the course of his engagements with California Software, Slayton examined the books and records of California Software and CSPI. While examining those records, Slayton failed to determine that California Software and CSPI recognized revenue using a method that did not comply with GAAP.

  7. California Software and CSPI recognized revenue upon shipment of software to potential customers prior to receiving persuasive evidence of an arrangement from the potential customers to purchase the software. In numerous instances, California Software recognized as revenue, and recorded as accounts receivable, shipments of software to potential customers who had never agreed to purchase the software.

  8. GAAP requires that revenue from the sale of software be recognized consistent with Statement of Position ("SOP") 97-2 which requires, in general, that four criteria must be met prior to recognizing revenue for the sale of software: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the vendor's fee is fixed or determinable, and (iv) collectibility on the sale is probable.

  9. However, California Software and CSPI recognized revenue before persuasive evidence of an arrangement to purchase the software existed and prior to a determination that collectibility on the sale was probable.

  10. California Software filed a registration statement on Form 10-SB on March 1, 1999, and an annual report on Form 10-KSB for the year ended December 31, 1999, which included financial statements audited by Slayton that materially overstated the company's revenue, net income, assets and shareholders equity.

  11. Slayton knew or was reckless in not knowing that the revenue recognition method utilized by California Software and CSPI did not comply with GAAP.

  12. Slayton audited the financial statements of CSPI for 1997 and 1998, and the financial statements of California Software as of January 12, 1999, which financial statements were included in California Software's Form 10-SB. Slayton also audited the financial statements of California Software for the year ended December 31, 1999, which financial statements were included in the company's Form 10-KSB for 1999. Slayton expressed an opinion in his audit reports that those financial statements presented fairly, in all material respects, the financial position of the company, in conformity with GAAP. Because of the revenue recognition method utilized by California Software and CSPI, those financial statements included in the Forms 10-SB and 10-KSB were not prepared in accordance with GAAP.

  13. California Software's financial statements for the year ended December 31, 1999, which were audited by Slayton, reflected gross revenue of $12,009,337, net income of $2,829,996, total assets of $6,070,652, and shareholders equity of $2,881,459. As a result of an audit performed by a new auditing firm engaged by California Software, those financial statements were restated to reflect revenue of $2,571,164, a net loss of $419,737, total assets of $954,301 and shareholders equity of $296,498.

  14. Based on the conduct set forth above, the Commission finds that Respondent Slayton has willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and has willfully aided and abetted and caused California Software's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder and has engaged in improper professional conduct.

  15. Slayton recklessly engaged in improper professional conduct and willfully violated, or willfully aided and abetted the violation of, provisions of the Federal securities laws and rules, for purposes of Rule 102(e)(1)(ii) and (iii) respectively, of the Commission's Rules of Practice.

III.

In view of the foregoing, it is appropriate to impose the sanction agreed to in the Offer.

Accordingly, IT IS HEREBY ORDERED that:

  1. Slayton cease and desist from committing or causing any violation and any future violation of Sections 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from causing any violation and any future violation of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder; and

  2. effective immediately, Slayton is denied the privilege of appearing or practicing before the Commission as an accountant.

By the Commission.

Jonathan G. Katz
Secretary

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1 Paragraph 1 of 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.
2 The findings herein are made pursuant to the Offer of Settlement of Slayton and are not binding on any other person or entity in this or any other proceeding.


http://www.sec.gov/litigation/admin/34-46033.htm


Modified: 06/05/2002