United States of America
In the Matter of
RICHARD FIEDELMAN, CPA,
|ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS|
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted against Richard Fiedelman, CPA, ("Respondent" or "Fiedelman") pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice.1
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "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 to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds2 that:
1. Richard Fiedelman, CPA, age 60, was a certified public accountant licensed in the State of California3 at the time of the events described below and is a recently retired partner of Deloitte & Touche LLP ("Deloitte"). During the period from 1997 through March 1999, he was the advisory partner for The North Face, Inc. Fiedelman was also in charge of Deloitte's Northern California consumer retail group.
2. In late December 1997, The North Face4 entered into a barter transaction in which it sold $5.15 million of product for $3.51 million in cash and $1.64 million in trade credits. The 1997 Deloitte audit partner concluded that The North Face could recognize income from the cash portion of the transaction, but not the trade credit portion. However, The North Face recognized its full normal profit margin on both the cash and trade credit portions. The 1997 audit partner proposed an adjustment to reverse the income from the trade credit portion. The North Face declined to make the adjustment and the 1997 audit partner passed on the proposed adjustment, concluding that the amount was immaterial. Fiedelman knew, or was reckless in not knowing, of the 1997 audit conclusion regarding the barter transaction.
3. In April of 1998, the 1997 audit partner was reassigned. A new audit partner was selected in May of 1998. Fiedelman was the advisory partner throughout the relevant time period and also functioned as the audit partner until the new audit partner took over that responsibility after Deloitte's review of The North Face's financial statements for the quarter-ended March 31, 1998.
4. After the 1997 audit partner had been reassigned, but prior to completion of Deloitte's review of The North Face's financial statements for the quarter ended March 31, 1998, Fiedelman learned that, in January 1998, The North Face had entered into a second barter transaction with the same company. The January barter transaction was for $2.65 million, all of which was paid in trade credits. The North Face once again recognized its full profit margin on the sale, despite Deloitte's conclusion during the 1997 audit that this was improper. The income recognized from this transaction was material to The North Face's March 31, 1998 financial statements. Despite the foregoing, Fiedelman did not question The North Face's recognition of income on the 1998 barter transaction in its financial statements included in its March 31, 1998 Form 10-Q.
5. In the Fall of 1998, the newly appointed audit partner began planning the 1998 audit. As part of his preparation, he reviewed the 1997 audit working papers and saw the 1997 audit conclusion and proposed adjustment as documented in a summary memorandum and a proposed adjustments schedule. The new audit partner raised the issue with Fiedelman. Fiedelman told him that he believed the conclusion in the 1997 working papers was wrong and that he believed the 1997 audit team had concluded it was not improper for The North Face to recognize income on the trade credit portion of the barter transaction. Fiedelman then began the process of documenting this revised conclusion in the 1997 working papers. The audit staff, acting upon their understanding of Fiedelman's directions, and after performing additional audit research, prepared a new summary memorandum and adjustments schedule reflecting the revised conclusion about profit recognition, and replaced the original 1997 working papers with these newly-created working papers. This was done without any documentation or indication that the original working papers were being modified. In the end, the 1997 working papers, as revised, did not indicate that the 1997 audit team had originally reached a different conclusion concerning the company's accounting for the 1997 barter transaction. Although Fiedelman did not give explicit instructions to the audit staff regarding documenting the revised conclusion, Fiedelman knew, or was reckless in not knowing, that the audit staff had modified, rather than supplemented, the 1997 audit working papers.
6. The new audit partner accepted the revised conclusion and continued the 1998 audit under the assumption that income from the trade credit portion of the 1998 barter transaction could properly be recognized. In early 1999, during the concurring review process, the concurring partner, who had been the concurring partner for the 1997 audit, questioned the revised conclusion. Based on his questions prior to the issuance of its 1998 audit report, Deloitte sought more information from The North Face. Deloitte's request ultimately resulted in the restatement of various North Face financial statements, including the March 31, 1998 quarterly financial statements.
7. Based on the foregoing, the Commission finds that Fiedelman engaged in intentional or reckless conduct that resulted in violations of generally accepted accounting principles ("GAAP") and generally accepted auditing standards ("GAAS"). The North Face's recognition of profit margin on the second barter transaction violated GAAP and, as a result The North Face's March 31, 1998 financial statements were materially misstated. The GAAS violations include the general GAAS standard concerning due professional care, AU Sections 150 and 230, the standard of field work relating to sufficient competent evidential matter, AU Sections 150 and 326, and the standard of field work relating to working papers, AU Section 338.5
8. The information contained in the working papers constitutes the principal record of the work that the auditor has done and the conclusions that he has reached concerning significant matters. AU Section 338.01. The auditor's working papers provide the principal support for the auditor's report, including his representation regarding the observance of the standards of field work, which is implicit in the reference in his report to generally accepted auditing standards. AU Section 338.02. It therefore follows that any addition, deletion, or modification to the working papers after they had been finalized in connection with the completion of the audit may be made only with appropriate supplemental documentation, including an explanation of the justification for the addition, deletion or modification.
9. The modifications to the 1997 working papers were not properly documented because there was no indication in the 1997 working papers that the original conclusion had been changed after the completion of the audit. More specifically, the original memorandum and adjustments schedule were not preserved in the working papers and the new memorandum and adjustments schedule did not indicate when they were prepared and did not clearly indicate that they superseded original working papers. Fiedelman was the partner in charge of the process of documenting the changed 1997 audit conclusion and was responsible for ensuring that the process was carried out in accordance with GAAS. Fiedelman failed to exercise due professional care in discharging this responsibility.
10. Fiedelman also failed to exercise due professional care in connection with the review of The North Face's March 31, 1998 quarterly financial statements. The North Face recorded the 1998 barter transaction directly contrary to the conclusion reached by Deloitte in its 1997 year-end audit, and yet Fiedelman failed to take steps to reconcile the 1997 conclusion with the company's treatment of the 1998 transaction.
11. Based on the foregoing, the Commission finds that Fiedelman engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice.
In view of the foregoing, the Commission deems it appropriate to impose the sanction agreed to in Respondent Fiedelman's Offer.
Accordingly, IT IS HEREBY ORDERED, effective immediately, that:
A. Fiedelman 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") 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.
C. 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 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 Rule 102(e)(1)(ii) provides, in relevant part, that the Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it to any person who is found to have engaged in improper professional conduct.
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 As of May 31, 2003, Fiedelman had retired and elected not to pay the public accountancy license renewal fee, thereby terminating his right to practice public accountancy for nonpayment of the renewal fee. Under California rules, his failure to renew his license for a period of 5 years will result in his license being cancelled.
4 The North Face had a December 31 fiscal year-end.
5 Former AU Section 338 was amended in January 2002, by Statement on Auditing Standards No. 96, Audit Documentation, which is codified as AU Section 339. For the purposes of this Offer and the Order, there is no material difference between AU Sections 338 and 339.
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