UNITED STATES SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 48543 / September 25, 2003
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1872 / September 25, 2003
File No. 3-11270
COMMISSION ISSUES ORDERS ALLEGING THAT AUDITORS VIOLATED RULES OF PRACTICE BY ALTERING AND DELETING AUDIT WORKING PAPERS
The Commission announced today that it has instituted administrative proceedings against Thomas C. Trauger, a former audit partner with Ernst & Young, LLC ("E&Y"), and Michael Mullen, an E&Y audit manager.
The Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order") alleges that Trauger, assisted by Mullen and a third senior manager, altered E&Y's working papers for the fiscal year 2000 audit of E&Y client NextCard, Inc. The alterations and deletions were made months after the audit had been completed and the working papers had been signed and archived. NextCard was a publicly-traded, San Francisco-based issuer of credit cards over the Internet. The Order alleges that Trauger directed Mullen to make changes to the NextCard working papers and delete information from them. He also instructed another senior manager to destroy documents inconsistent with the changes he was directing, and the senior manager complied in part. The alterations and deletions made it appear as though E&Y had thoroughly considered all of the appropriate issues and available facts relating to NextCard's allowance for loan losses ("allowance") and NextCard's securitization of receivables. The Order further alleges that the alterations and deletions were in response to the October 2001 announcement by NextCard that the Office of the Comptroller of the Currency ("OCC") and Federal Deposit Insurance Corporation ("FDIC") were requiring NextCard's bank subsidiary, NextBank, to revise certain accounting treatments affecting the allowance and securitizations. After altering the working papers, Trauger, Mullen and the senior manager provided the altered documents to E&Y's legal department for production in response to a subpoena from the OCC and later subpoenas from the FDIC and SEC.
A hearing will be scheduled before an Administrative Law Judge to determine whether the allegations in the Order are true, to provide respondents an opportunity to dispute the allegations, and to determine what, if any, remedial action is necessary and appropriate against Trauger and Mullen pursuant to Rule 102(e) of the Commission's Rules of Practice.
The Commission directed that an Administrative Law Judge should issue an initial decision in this matter within 300 days from the date of service of the Order.