UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 38249 / February 6, 1997 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 877 / February 6, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9238 ___________________________________ : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS PURSUANT TO DANIEL C. LANGFORD, CPA, : RULE 102(e) OF THE DANIEL C. LANGFORD, JR., CPA : COMMISSION'S RULES OF STEPHANUS A. de KOCK, CPA, and : PRACTICE, MAKING FINDINGS PETER P. IRBY, CPA : AND IMPOSING REMEDIAL : SANCTIONS Respondents. : __________________________________ : I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings pursuant to Rule 102(e)(1)(ii)-[1]- of the Commission's Rules of Practice be, and they hereby are, instituted against Daniel C. Langford ("Langford"), Daniel C. Langford, Jr. ("Langford Jr."), Stephanus A. de Kock ("de Kock") and Peter P. Irby ("Irby"). ---------FOOTNOTES---------- -[1]- Rule 102(e)(1) provides in relevant part: 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 of and opportunity for hearing in the matter . . . (ii) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct. ==========================================START OF PAGE 2====== II. In anticipation of the institution of these administrative proceedings, Langford, Langford Jr., de Kock and Irby have each 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 to which the Commission is a party, Langford, Langford Jr., de Kock and Irby, without admitting or denying the findings set forth herein, except as to the Commission's jurisdiction over them, which is admitted, each consent to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings and Imposing Remedial Sanctions. III. Based on this Order and the Offers of Langford, Langford Jr., de Kock and Irby, the Commission finds-[2]- the following: 1. Langford is a certified public accountant licensed by the State of Georgia. He is the founding and managing partner of Langford de Kock & Company, which is a firm of certified public accountants located in Atlanta, Georgia. 2. Langford Jr. is a certified public accountant licensed by the State of Georgia. He is a manager with Langford de Kock & Company. 3. De Kock is a certified public accountant licensed by the State of Georgia. He is a partner with Langford de Kock & Company. 4. Irby is a certified public accountant licensed by the State of Georgia. Irby was formerly a manager with Langford de Kock & Company. 5. Langford de Kock & Company was engaged to conduct the 1991 and 1992 audits of Paragon Mortgage Corporation's ("Paragon") financial statements. These financial statements were included in Paragon's 1991 and 1992 annual reports filed with the Commission on Form 10-K. Langford de Kock & Co. was also engaged to perform work relating to, among other things, the ---------FOOTNOTES---------- -[2]- The findings herein are made pursuant to the Offers of Langford, Langford Jr., de Kock and Irby and are not binding on any other person or entity named as a respondent in this or any other proceeding. ==========================================START OF PAGE 3====== issuance of two registration statements on Form S-1, a quarterly report on Form 10-Q and a current report on Form 8-K filed by Paragon with the Commission during 1992 and 1993. 6. Langford practiced before the Commission within the meaning of Rule 102(f) of the Commission's Rules of Practice in connection with the 1991 and 1992 audits of Paragon's financial statements and work performed on other Paragon documents filed with the Commission. During this time, Langford was the engagement partner for his firm's audits of Paragon. Langford was responsible for ensuring that Langford de Kock & Co.'s audits were performed in accordance with generally accepted auditing standards ("GAAS") and that Paragon's financial statements were presented in accordance with generally accepted accounting principles ("GAAP"). As the audit engagement partner, Langford had the ultimate responsibility for the supervision and review of the 1991 and 1992 audits, as well as the work performed on the Form S-1 registration statements and the Form 8-K filed by Paragon in 1992 and 1993. 7. Langford Jr. practiced before the Commission within the meaning of Rule 102(f) of the Commission's Rules of Practice in connection with the 1991 and 1992 audits of Paragon's financial statements and work performed on other Paragon documents filed with the Commission. During this time, Langford Jr. was an audit manager for his firm's audits of Paragon. Langford Jr. was responsible for ensuring that Langford de Kock & Co.'s audits were performed in accordance with GAAS and that Paragon's financial statements were presented in accordance with GAAP. As an audit manager, Langford Jr. was directly responsible for planning, coordinating, performing, and supervising the 1991 and 1992 audits, as well as the work performed on the Form S-1 registration statements and the Form 8-K filed by Paragon in 1992 and 1993. 8. De Kock practiced before the Commission within the meaning of Rule 102(f) of the Commission's Rules of Practice in connection with the 1991 and 1992 audits of Paragon's financial statements. During this time, de Kock was the concurring review partner for his firm's audits of Paragon. De Kock was responsible for ensuring that Langford de Kock & Co.'s audits were performed in accordance with GAAS and that Paragon's financial statements were presented in accordance with GAAP. As the concurring review partner, de Kock's duties included reviewing the audited financial statements to ensure that the quality of the work performed during the audits was consistent with the standards of the accounting profession, serving as an objective reviewer of material accounting, auditing and financial reporting issues, and consulting with the audit team as requested. ==========================================START OF PAGE 4====== 9. Irby practiced before the Commission within the meaning of Rule 102(f) of the Commission's Rules of Practice in connection with the 1992 audit of Paragon's financial statements. Irby was an audit manager assigned to the 1992 audit of Paragon. Irby was responsible for ensuring that Langford de Kock & Co.'s audit was performed in accordance with GAAS and that Paragon's financial statements were presented in accordance with GAAP. Irby was directly responsible for planning, coordinating, performing, and supervising the audit of the area of purchase mortgage servicing rights ("PMSRs") and the related sale of loans. 10. Paragon was a mortgage banking firm headquartered in Smyrna, Georgia. It was incorporated in Illinois on May 27, 1988, commenced operations in September 1988, conducted its initial public offering on August 8, 1989, and was dissolved on October 1, 1994. Paragon's operations included originating residential real estate loans and selling the resulting mortgage secured notes in the secondary mortgage market, brokering mortgage loans and servicing mortgage loans. Paragon's common stock, which was a penny stock, was registered pursuant to Section 12(g) of the Exchange Act. 11. During the years ended September 30, 1991 and 1992, certain senior officers of Paragon diverted over $110,000 from the company to repay certain personal loan obligations. 12. Paragon's 1991 and 1992 financial statements failed to disclose a purported agreement by Paragon to repay a $347,000 personal loan for certain corporate officers, or the fact that $70,719 of payments were made by Paragon on behalf of those officers during 1991. Paragon's 1992 financial statements failed to disclose that Paragon made $5,362 of payments on another personal loan for the same corporate officers. These disclosures were required to be made in the notes to the 1991 and 1992 financial statements in accordance with GAAP. 13. During their 1991 audit, Langford and Langford Jr. had actual knowledge of the existence of and payments made towards the $347,000 personal loan. Langford de Kock & Co. inquired as to the reason for an approximate $25,000 increase in a Paragon account titled "Salaries, Commissions and Benefits-Contract Labor". Langford de Kock & Co. was told by the accounting manager of Paragon that the $25,000 represented payments made by Paragon to a bank on behalf of certain officers and would be included in the officers' taxable income. Langford and Langford Jr. failed to perform adequate additional audit procedures relating to these payments nor did they insist that this transaction be disclosed in the notes to Paragon's financial statements. ==========================================START OF PAGE 5====== 14. Langford and Langford Jr. violated the due professional care standards of GAAS in the performance of their audit and the preparation of their audit opinion, and did not exercise adequate professional skepticism. In this regard, Langford and Langford Jr. failed to determine whether the repayment of the loan was for legitimate business purposes of Paragon, and they failed to obtain evidence that the repayments were valid transactions officially authorized and documented by Paragon's board of directors. Langford de Kock & Co.'s workpapers reveal that the loan repayments were to be "non-recurring," suggesting that they were not part of a compensation arrangement covered by FASB No. 57. While Langford and Langford Jr. obtained a general representation letter from Paragon stating that all related party transactions had been properly disclosed in the financial statements, they failed to make additional specific inquiries to determine whether Paragon was repaying other personal loans of corporate officers. In addition, Langford and Langford Jr. violated the reporting standards of GAAS, when they certified that Paragon's 1991 and 1992 financial statements complied with GAAP notwithstanding Paragon's failure to disclose the economic substance of these transactions in the notes to the financial statements. 15. Langford de Kock & Co. issued an unqualified audit opinion on Paragon's 1991 financial statements. This audit opinion was included in Paragon's 1991 10-K, which was filed in January 1992. The opinion was reissued in Paragon's 1992 10-K and in two registration statements on Form S-1 filed by Paragon with the Commission during 1992 and 1993. 16. On January 12, 1993, Paragon filed its 1992 10-K. Langford de Kock & Co. audited Paragon's September 30, 1992 annual financial statements, which were included in the 1992 10- K. For 1992, Paragon reported $1,134,707 of income before income taxes and extraordinary item. However, Paragon overstated this income by $785,410 in violation of GAAP by (1) improperly recognizing $814,949 of gains from the sale of loans related to PMSRs, and (2) failing to recognize $24,961 of self-insured medical expenses. Had Paragon accounted for the sales of loans and medical expenses in accordance with GAAP, it would have only reported $349,297 of income before income taxes and extraordinary item during 1992. 17. Langford, Langford Jr., de Kock and Irby each knew that Paragon was recognizing the gains from the sale of loans related to PMSRs in violation of GAAP and that Paragon's 1992 financial statements did not comply with GAAP. Langford, Langford Jr., de Kock and Irby should have refused to permit the recognition of income from the sale of these loans. Instead, they agreed to permit Paragon prematurely to recognize income in violation of GAAP. In addition, Langford and Langford Jr. failed to establish an audit step to test for unknown or unrecorded medical ==========================================START OF PAGE 6====== liabilities and failed to make inquiries to determine if any such liabilities existed at year-end. Langford and Langford Jr.'s failure to perform these procedures allowed Paragon to understate medical liabilities related to Paragon's self-insured employee medical plan. 18. Langford, Langford Jr., de Kock and Irby violated the due professional care standards of GAAS in the performance of their audits and the preparation of their audit opinion, and failed to exercise adequate professional skepticism. In addition, Langford, Langford Jr., de Kock and Irby violated the reporting standards of GAAS when they certified that Paragon's 1992 financial statements complied with GAAP. In this regard, they permitted Paragon improperly to report $814,949 of income from the sale of loans during 1992. In addition, Langford and Langford Jr. failed to recognize $24,961 of self-insured medical expenses incurred by Paragon during 1992. 19. Despite these deficiencies, Langford de Kock & Co., with the concurrence of Langford, Langford Jr., de Kock and Irby, issued an unqualified audit opinion on Paragon's 1992 financial statements which falsely stated that the audit had been conducted in accordance with GAAS and that Paragon's financial statements were presented in accordance with GAAP. The 1992 unqualified audit opinion of Langford, Langford Jr., de Kock and Irby was included in Paragon's 1992 10-K and was reissued in a registration statement on Form S-1 filed by Paragon with the Commission during 1993. 20. On February 22, 1993, Paragon filed its 10-Q for the quarter ended December 31, 1992 (the "1992 10-Q"). Paragon reported income before income taxes and extraordinary item of $26,932 for the quarter ended December 31, 1992. The 1992 10-Q was false and misleading because the December 31, 1992 financial statements prematurely reported a $260,305 gain from the sale of mortgage loan servicing rights in violation of GAAP. Had Paragon complied with GAAP and deferred recognition of this transaction until the quarter ended March 31, 1993, it would have reported a loss before income taxes and extraordinary item of $233,373 at December 31, 1992. 21. During late 1992 and early 1993, Langford and Langford Jr. informed senior Paragon officers that the company should not report the $260,305 gain from the sale of the mortgage loan servicing rights until the quarter ended March 31, 1993. 22. On February 26, 1993, Paragon filed a registration statement on Form S-1 ("the 1993 S-1"), which became effective on March 26, 1993. The 1993 S-1 included Paragon's misstated financial statements for the quarter ended December 31, 1992. ==========================================START OF PAGE 7====== 23. Langford and Langford Jr. each knew that the 1993 S-1 included the false December 31, 1992 financial statements which prematurely reported a gain from the sale of mortgage loan servicing rights. Yet, they took no action to adjust their 1992 audit report, which had been reissued in the 1993 S-1, to disclose that the December 31, 1992 interim financial statements failed to comply with GAAP. Langford and Langford Jr. were required by GAAS to make such a disclosure. 24. On May 18, 1993, Langford de Kock & Co. was dismissed as Paragon's independent accountants and replaced by another firm ("the successor auditor"). On May 25, 1993, Paragon filed a Form 8-K (the "8-K") to report the change in accountants. The 8-K stated that Paragon and Langford de Kock & Co. had no disagreements during any interim period subsequent to September 30, 1992. On June 8, 1993, Paragon filed an amendment to the 8-K which consisted of the response letter of Langford de Kock & Co. regarding the disclosures made by Paragon in the 8-K. The Langford de Kock & Co. letter, which was prepared by Langford and Langford Jr., confirmed that there had been no disagreements between Paragon and Langford de Kock & Co. 25. The 8-K and amendment thereto were false and misleading because Langford de Kock & Co., specifically Langford and Langford Jr., had disagreed with Paragon's recognition of income from the sale of mortgage loan servicing rights at December 31, 1992. Paragon and Langford de Kock & Co. should have disclosed the disagreement in the 8-K and amendment thereto pursuant to Item 4(a) of Form 8-K and Items 304(a)(1)(iv) and 304(a)(3) of Regulation S-K, and Section 603.06 of the Codification of Financial Reporting Policies. Langford and Langford Jr. engaged in improper professional conduct when they provided Paragon a letter for the 8-K which falsely stated that there had been no disagreements between Langford de Kock & Co. and Paragon. 26. In addition, Langford violated GAAS when he failed to disclose this disagreement to Paragon's successor auditor, after the successor auditor specifically asked him if there had been any disagreements between Paragon and Langford de Kock & Co. 27. Based on the foregoing, the Commission finds that Langford, Langford Jr., de Kock and Irby each engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice. IV. Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offers submitted by Langford, Langford Jr., de Kock and Irby and accordingly, IT IS HEREBY ORDERED, effective immediately, that: ==========================================START OF PAGE 8====== 1. Daniel C. Langford, Daniel C. Langford Jr., Stephanus A. de Kock, and Peter P. Irby are each denied the privilege of appearing or practicing before the Commission as accountants. 2. After four years from the date of this Order, Langford may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as: a. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which Langford undertakes that, in his practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission; b. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: (1) Langford, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section as long as he practices before the Commission as an independent accountant; (2) Langford 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 (3) Langford will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant. c. The Commission's review of any request or application by Langford to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to ==========================================START OF PAGE 9====== Langford's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. 3. After three years from the date of this Order, Langford Jr. may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as: a. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which Langford Jr. undertakes that, in his practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission; b. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: (1) Langford Jr., or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section as long as he practices before the Commission as an independent accountant; (2) Langford Jr. 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 (3) Langford Jr. will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant. c. The Commission's review of any request or application by Langford Jr. to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Langford Jr.'s character, integrity, professional ==========================================START OF PAGE 10====== conduct, or qualifications to appear or practice before the Commission. 4. After three years from the date of this Order, de Kock may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as: a. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which de Kock undertakes that, in his practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission; b. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: (1) de Kock, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section as long as he practices before the Commission as an independent accountant; (2) de Kock 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 (3) de Kock will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant. c. The Commission's review of any request or application by de Kock to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to de Kock's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. ==========================================START OF PAGE 11====== 5. After three years from the date of this Order, Irby may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as: a. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which Irby undertakes that, in his practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission; b. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: (1) Irby, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") as long as he practices before the Commission as an independent accountant; (2) Irby 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 (3) Irby will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant. c. The Commission's review of any request or application by Irby to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Irby's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. ==========================================START OF PAGE 12====== By the Commission. Jonathan G. Katz Secretary