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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. 46290 / August 1, 2002

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1603 / August 1, 2002

ADMINISTRATIVE PROCEEDING
File No. 3-10856


In the Matter of

David Friend, CPA

Respondent.


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ORDER INSTITUTING PUBLIC ADMINISTRATIVE 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, IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission ("Commission") deems it appropriate to institute public administrative proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e)(1)1 of the Commission's Rules of Practice against David Friend, CPA ("Friend" or Respondent").

II.

In anticipation of the institution of these administrative proceedings, Respondent has submitted an Offer of Settlement ("Offer"), 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 the Respondent admits the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Public Administrative 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 Section 21C of the Exchange Act and Rule 102(e) of the Commission's Rules of Practice be, and hereby are, instituted.

III.

FINDINGS

On the basis of this Order and Respondent's Offer, the Commission finds2 that:

A. Settling Respondent

1. David Friend, age 36, is a certified public accountant licensed to practice in Florida. Friend was the controller for Paragon Construction International, Inc. ("Paragon"), a wholly owned subsidiary of Golden Bear Golf, Inc. ("Golden Bear"), from the date of Golden Bear's August 1, 1996 initial public offering of stock until he left Paragon on March 27, 1998. During that time he was responsible for the maintenance of Paragon's general ledger and preparation of Paragon's financial statements in conformity with generally accepted accounting principles ("GAAP"). Paragon's financial statements were a material component of Golden Bear's consolidated financial statements.

B. Summary

2. From at least the second quarter of 1997 through the first quarter of 1998, Paragon engaged in a scheme to artificially inflate and accelerate its revenue and gross margin recognition by misrepresenting the true status of its construction contracts.3 Paragon overstated contract profitability or ignored expected losses by (i) accelerating revenue and income recognition by overstating the progress it made on its construction projects, (ii) understating estimated construction costs, (iii) overstating estimated construction revenues and (iv) recording revenue and gross margin in connection with non-existent project agreements.

3. Paragon continued these practices until April 1998 when Golden Bear dismissed Paragon management. On May 5, 1998, Golden Bear announced an internal review of Paragon's operations and said it might need to record losses in connection with some Paragon construction projects. On July 28, 1998, Golden Bear announced that it would restate its results for the periods ended December 31, 1997 and March 31, 1998.

4. On October 19, 1998, Golden Bear restated its financial statements for the year-ended December 31, 1997 and quarter-ended March 31, 1998 (the "Restatements"). Relevant financial statement captions from the original financial statements and the Restatements are set out below (all amounts in $000):

  Year Ended 12/31/97   3-mo. ended 3/31/98
  Original   Restated   Changes   Original   Restated   Changes
Construction revenues 39,755   21,894   (17,861)   16,016   8,345   (7,671)
Construction costs 32,107   34,266   2,159   13,626   12,074   (1,552)
Net operating profit/(loss) (3,198)   (15,500)   (12,302)   (547)   (5,244)   (4,697)
Income tax benefit/(provision) 1,372   (288)   (1,660)   308   (49)   (357)
Gain/(loss) from discontinued ops.4 0   (8,429)   (8,429)   0   (1,649)   (1,649)
Net profit/(loss) (2,931)   (24,699)   (21,768)   (778)   (7,259)   (6,481)

5. As a result of Paragon's improper financial accounting and reporting practices, Golden Bear's financial statements for the periods ended June 30, 1997, September 30, 1997, December 31, 1997, and March 31, 1998 were not stated in conformity with GAAP or the requirements of federal securities laws and regulations and materially misrepresented the financial condition and results of operations of Golden Bear.

C. Facts

6. Paragon senior management, aided by Friend, started in 1997 to implement a scheme to inflate and accelerate revenue and gross margin by reporting Paragon's construction contracts as more profitable than they were and by reporting Paragon as having more work than it did. Paragon's scheme included (i) accelerating revenue and gross margin recognition by overstating progress on construction contracts, (ii) understating estimated construction costs, (iii) overstating estimated construction revenues, and (iv) recording revenue and gross margin in connection with non-existent contracts. Paragon then sought to conceal the scheme by recording fictitious estimates and otherwise misrepresenting the status of its contracts.

Accelerating Revenue and Income Recognition by Overstating Progress on Construction Projects

7. Paragon recognized revenue and profit on its contracts pursuant to the percentage-of-completion method of contract accounting, under which GAAP permits the proportionate recognition of total revenue, cost and gross margin based on the percentage of work estimated complete under a contract. Through the first quarter of 1997, Paragon estimated the progress towards completion on its construction projects' for financial statement purposes under the "cost method". Under the cost method, Paragon determined percentage-of-completion estimates solely with reference to cost incurred to date as a percentage of the project's estimated total cost.5 In connection with the second quarter of 1997, Paragon changed the method it used to determine percentage of completion estimates from the cost method to what Paragon called the "earned value method."

8. Under the earned value method, Paragon still recognized proportionate amounts of total revenue, cost and gross margin based on the percentage of work estimated complete under a contract, but changed its method of determining the percentage-of-completion of contracts by solely referring to Paragon's physical progress in building a project, as subjectively estimated by Paragon.6 Under the earned value method, Paragon relied not on objective criteria to estimate its progress on contracts, like costs incurred, but instead relied on management's subjective estimates.

9. Starting in the second quarter of 1997, Paragon artificially inflated its revenue and gross margin by overstating the progress it made on numerous construction projects. Friend knew that Paragon overstated its percentage of completion estimates and that it had a material effect on Golden Bear's financial statements.

10. When Paragon made the change, its auditor told the Company that it did not expect a material difference in Paragon's results under the two methods, and, that if Paragon's results under the earned value method were materially higher than under the cost method for the same period, the auditor would require an adjustment so that Paragon's recognized revenues and gross margin would be in-line with its results under the cost method.

11. Paragon senior management and Friend knew when Paragon proposed the change, however, that Paragon's implementation of the earned value method would have the effect of accelerating and overstating Paragon's reported revenue and gross margin when compared to the cost method; Friend referred to the increase in its reported results under the earned value method as Paragon's "revenue pick-up."

12. In order to evaluate the effect of the change, Golden Bear's auditor required that Paragon provide detailed, project-by-project schedules showing Paragon's calculated gross margins under both methods for each reporting period from the second quarter of 1997 through the first quarter of 1998. These schedules demonstrated that for each period after Paragon made the change, it recorded materially higher revenue and gross margin under the earned value method than it would have reported under the cost method for the same period, precisely the outcome the Company's auditor cautioned against.

13. The auditor told Golden Bear in the third quarter of 1997 that it expected the difference between the two methods to close to an immaterial amount by year-end. It did not; at year-end Paragon's gross margin under the earned value method remained materially higher than under the cost method. To conceal the gap, Paragon recorded approximately $4 million in fictitious project cost accruals, i.e., Paragon booked costs that it had not incurred. These fictitious accruals narrowed the difference in Paragon's results under the two methods. Friend knew or was reckless in not knowing that these year-end accruals were fictitious and that they were recorded to conceal the difference between Paragon's year-end results under the earned value method as compared to what its results would have been under the cost method.

Understating Estimated Construction Costs and Failing to Record Project Losses

14. At year-end 1997, Paragon intentionally understated the costs it expected to incur in connection with numerous of its construction contracts. GAAP requires that losses be recognized in full for the period in which they become reasonably estimable but in numerous instances Paragon ignored its own cost estimates and failed to record losses and reduced estimated gross margins. Paragon management failed to recognize and disclose $12 million in estimated losses at year-end 1997. Friend knew that Paragon understated its costs and that it had a material effect on Golden Bear's financial statements.

15. Paragon also failed to recognize for the third quarter of 1997 $350,000 in known losses in connection with four Paragon projects that were substantially completed. 7 Paragon did not, in the third quarter of 1997, have a reasonable expectation of payment in connection with these amounts, but deferred recognizing them as losses until year-end 1997. Friend knew that Paragon had no reasonable expectation of payment in connection with the amounts and that GAAP required that the losses be recorded in the third quarter of 1997.

Overstating Estimated Construction Revenues

16. At year-end 1997 Paragon also improperly overstated the amount of revenue it expected to realize from some construction contracts. This artificially inflated Paragon's revenue, gross margin and construction backlog. Friend knew at year-end that Paragon overstated its revenue and income in this manner and that it had a material effect on Golden Bear's financial statements.

Recording Revenue And Profits In Connection With Non-Existent Project Agreements

17. Paragon also started a scheme in 1997 to record revenue and gross margin in connection with non-existent project agreements. In some cases Paragon recognized revenue in connection with potential projects that Paragon had identified while looking for new work, even though Paragon had no agreements in connection with these projects.8 In other cases, Paragon recognized revenue in connection with projects where the project's owners were either entertaining bids from Paragon and other contractors or were negotiating with Paragon regarding a project yet to be awarded. Paragon recorded material amounts of revenue and gross margin in connection with non-existent project agreements. Friend knew that Paragon improperly recorded revenue in connection with certain projects for which Paragon had no agreements and that it had a material effect on Golden Bear's financial statements.

D. Violations

18. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit a person, in connection with the purchase or sale of a security, from making an untrue statement of a material fact or from omitting to state a material fact necessary to make statements made, in light of the circumstances under which they were made, not misleading. To violate Section 10(b) or Rule 10b-5, a defendant must act with scienter, Aaron v. SEC, 446 U.S. 680, 695, 701-02 (1980), which the Supreme Court has defined as "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). As a result of actions taken by Friend, described above, from the second quarter of 1997 though year-end 1997, Paragon violated the antifraud provisions by causing the filing with the Commission of quarterly and annual reports that were materially misstated and that misrepresented Golden Bear's financial condition and results of operations.9

19. Although Friend was aware that certain Paragon financial accounting and reporting practices were improper, he nevertheless helped in carrying out those practices. By his conduct described above, Friend willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

20. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers with securities registered under Section 12 of the Exchange Act to file quarterly and annual reports with the Commission and to keep this information current. The obligation to file such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979)

21. As discussed above, from the second quarter of 1997 through the first quarter of 1998 Paragon caused Golden Bear to file false and misleading quarterly and annual reports with the Commission that misrepresented the financial results of Golden Bear, overstating operating income and earnings. By his conduct described above, Friend caused, and willfully aided and abetted, Golden Bear's violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.

22. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make and keep books, records, and accounts that accurately and fairly reflect the transactions and dispositions of their assets. Section 13(b)(5) of the Exchange Act provides that no person shall knowingly falsify any such book, record, or account or circumvent internal controls. Rule 13b2-1 also prohibits the falsification of any book, record, or account subject to Section 13(b)(2)(A).

23. As a result of the actions taken by Friend as described above, from the second quarter of 1997 through year-end 1997, Golden Bear's books and records reflecting the transactions and dispositions of its assets were not merely inaccurate, they were intentionally falsified. Based on the conduct described above, Friend willfully violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and caused, and willfully aided and abetted, Golden Bear's violations of Section 13(b)(2)(A) of the Exchange Act.

E. Findings

24. Based on the foregoing, the Commission finds that Friend (a) willfully violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 promulgated thereunder; and (b) caused, and willfully aided and abetted, Golden Bear's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act, and Rules 13a-1 and 13a-13 promulgated thereunder.

IV.

In view of the foregoing, the Commission deems it appropriate to accept Friend's Offer and to impose the sanctions agreed to therein.

Accordingly, IT IS HEREBY ORDERED that

A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from violating, and from causing future violations of, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13a-1, and 13a-13 promulgated there under.

B. Respondent is suspended from appearing or practicing before the Commission as an accountant.

C. After two 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") or an organization providing equivalent oversight and quality control functions ("equivalent organization");

(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 or equivalent organization; and

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

D. The Commission will consider an application by Respondent to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. 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
Secretary

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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 there under.
2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
3 Golden Bear's fiscal year ended on December 31.
4 The Golf Centers division was treated as a discontinued operation on Golden Bear's restated financial statements.
5 For example, $500,000 in costs-to-date on a project with $1,000,000 in estimated total costs at the completion of the contract indicated that the work under the contract was 50% complete. Under the cost method Paragon would recognize 50% of the project's estimated total revenue, cost and gross margin.
6 For example, in connection with an earned value method percentage of completion estimate of 50%, as estimated by Paragon management on a project with $1,000,000 estimated total costs at the completion of the contract, Paragon would recognize for financial statement purposes 50% of the project's estimated total revenue, cost and gross margin, even if the actual costs incurred were substantially lower than $500,000.
7 GAAP requires recognizing estimated losses in full in the period in which they become reasonably estimable.
8 Paragon allocated costs incidental to pursing these business development leads to project file numbers assigned to each lead. Beginning in the third quarter of 1997, Paragon management directed Friend to report these leads as awarded projects and to record revenue in connection with them.
9 A fact is material if there is a substantial likelihood that a reasonable investor would consider the information to be important. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). Information regarding a Golden Bear's income is among the most important information for making an investment decision.


http://www.sec.gov/litigation/admin/34-46290.htm


Modified: 08/01/2002