UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39377 / December 1, 1997 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 992 / December 1, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9493 In the Matter of : ORDER INSTITUTING PUBLIC : CEASE-AND-DESIST PROCEEDINGS Robert Gossett and : PURSUANT TO SECTION 21C OF Ronald Langos, : THE SECURITIES EXCHANGE ACT : OF 1934, MAKING FINDINGS AND Respondents : ORDERING RESPONDENTS TO CEASE AND DESIST I. The Securities and Exchange Commission (Commission) deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (Exchange Act) against Robert Gossett (Gossett) and Ronald Langos (Langos). In anticipation of these proceedings, Gossett and Langos have submitted Offers of Settlement (Offers) 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 contained in the Commission's Order, except the Commission's jurisdiction, which is admitted, Gossett and Langos consent to the entry of this Order Instituting Public Cease-and-Desist Proceedings, Making Findings and Ordering Respondents to Cease and Desist. II. Accordingly, IT IS HEREBY ORDERED THAT proceedings pursuant to Section 21C of the Exchange Act be, and hereby are, instituted. ======END OF PAGE 1====== ======END OF PAGE 2====== III. On the basis of this Order and the Offers of Settlement submitted by Gossett and Langos, the Commission finds<(1)> that: Respondents A. Gossett was the President and Chief Operating Officer and a Director of Corrpro Companies, Inc. (Corrpro) from September 1992 to June 1995. Prior to his employment with Corrpro, Gossett served as the controller for various divisions and subsidiaries of another public company. B. Langos was Corrpro's Vice-President of Finance, Chief Financial Officer, and Treasurer from September 1992 to June 1995. Issuer C. Corrpro is an Ohio corporation headquartered in Medina, Ohio. Its stock is registered pursuant to Section 12(b) of the Exchange Act, and is listed on the New York Stock Exchange. Corrpro and its subsidiaries provide corrosion control engineering and monitoring services, systems and equipment to the infrastructure, environmental and energy markets. Summary D. During the period April 1, 1994 to March 31, 1995 (Fiscal 1995), Langos, Gossett, and others recorded, authorized or approved erroneous entries on the books of Corrpro, and failed to record entries which should have been recorded, as described in Paragraphs III.F. through III.N. below. As a result of these errors, operating expenses were not recorded or were improperly capitalized, depreciable assets were not depreciated or amortized, impaired assets were not written off, and revenues were recognized before they were earned. Corrpro's improper accounting practices resulted in its assets and revenues being overstated and its expenses and liabilities being understated, and caused its pre-tax income for Fiscal 1995 to be overstated by $7.2 million, or approximately 138%, before the company closed its books. E. Corrpro's Forms 10-Q for the second and third quarters of Fiscal 1995 contained financial statements which overstated its income by $622,075 and $2,116,442, respectively. The excess income represented 18% and 52% of pre-tax income for those two quarters. Langos, Gossett, and others prepared or reviewed the Forms 10-Q and the financial statements contained in them, and caused Corrpro to file the forms with the Commission. Langos, Gossett, and others also failed to implement or maintain proper and <(1)> The findings contained herein are made pursuant to the offers submitted by Langos and Gossett and are not binding on any other person or entity named as a respondent in this or any other proceeding. ======END OF PAGE 3====== adequate accounting procedures and internal controls for Corrpro, as described in Paragraph III.O. below. Improper Accounting Entries F. Corrpro understated its subcontract expenses by $1.4 million as a result of its failure to reverse certain temporary entries which were made to its Miscellaneous Payables Account. This failure caused a $1.4 million debit balance to erroneously accrue in the Miscellaneous Payables Account. Rather than reverse the temporary entries and recognize $1.4 million in additional subcontract expenses when they uncovered the error, Langos, Gossett, and others transferred a portion of the debit balance into various asset accounts and offset $601,000 of the balance against a credit balance that allegedly existed in Corrpro's Intercompany Account.<(2)> The understatement of subcontract expenses was in violation of Generally Accepted Accounting Principles (GAAP). In addition, it was improper for Corrpro to transfer a portion of the debit balance into asset accounts and offset the $601,000 against a credit balance in the Intercompany Account because there was no relationship between the cause of the debit balance that existed in the Miscellaneous Payables Account, the asset accounts which were created, and the Intercompany Account. G. At the end of Fiscal 1995, Corrpro's Intercompany Account had a $1.3 million debit balance instead of an expected zero balance. Approximately $700,000 of this amount resulted from Corrpro's failure to record certain intercompany transfers of inventory. The remainder resulted from the $601,000 debit entry to the Intercompany Account described in Paragraph III.F. above. The debit balance in the Intercompany Account caused operating expenses to be understated by $700,000 and also left a balance in an account which should have been eliminated in consolidation, as required by GAAP. H. Corrpro failed to record or recognize other expenditures which should have been expensed. For example, it failed to record $36,000 of petty cash expenditures and $91,776 of expenditures paid for from funds advanced to workmen. In addition, Corrpro failed to recognize $219,000 in legal expenses because it made a reversing entry when the original entry had not been made. I. On or about April 26, 1995, Corrpro improperly reclassified $150,000 of "Corporate Charge Expenses" and $150,000 of "Unemployment Tax Expenses" as "Prepaid Expenses - Other" in the amount of $300,000. It was improper to reclassify the expenses as an asset because those expenses did not benefit future periods. J. At the end of Fiscal 1995, Corrpro recorded a receivable from one of its subcontractors in the amount of $523,000. Corrpro sought to recover the $523,000 from the subcontractor as amounts spent on reworking a project that the subcontractor was to complete. Of the $523,000, $249,816 <(2)> No credit balance existed in the Intercompany Account. ======END OF PAGE 4====== represented a part of the debit balance in the Miscellaneous Payables Account. It was improper for Corrpro to record this receivable because it was a gain contingency, and GAAP does not permit the recognition of gain contingencies. Also, it was improper for Corrpro to reclassify a part of the debit balance in the Miscellaneous Payables Account as part of the receivable. There was no relationship between the receivable and the cause of the debit balance in the Miscellaneous Payables Account. K. Corrpro improperly capitalized other operating expenses. For example, Corrpro capitalized a $50,000 payment to settle a lawsuit because Corrpro was seeking to recover the payment from a third party. However, the entry violated GAAP's prohibition against recognizing gain contingencies. Also, in connection with a secondary offering conducted during May 1994, Corrpro capitalized $150,000 of expenditures which were not directly attributable to the offering, and therefore violated GAAP. In addition, Corrpro improperly capitalized certain expenditures twice. Corrpro capitalized on two separate occasions the same $50,000 expenditure incurred in connection with a computer installation. Corrpro also capitalized $175,000 of overhead expenses as part of ending inventory whereas the overhead expenses had already been absorbed into inventory during physical inventory. L. During Fiscal 1995, Corrpro failed to write off $250,000 in receivables which had remained uncollectible for over two years and $18,678 of deposits which were unrecoverable. In addition, Corrpro failed to amortize $60,000 of capitalized expenditures relating to the preparation of annual reports and also failed to amortize $219,201 of prepaid insurance as a result of its failure to increase its rate for amortizing prepaid insurance to reflect increases in premiums during February and March 1995. Also during the year, Corrpro improperly reduced its rate for amortizing its patents and thereby understated patent expense by $50,000. M. During the fourth quarter of Fiscal 1995, Corrpro overstated its income from its long-term contracts by approximately $1.3 million. Corrpro made this overstatement by overestimating the costs incurred on those contracts, which are used in the computation of income from the contracts. In addition, at the end of the year, Corrpro improperly reversed into income a $267,300 contingency reserve which had not yet expired. N. For the second and third quarters of Fiscal 1995, ended September 30, 1994 and December 31, 1994, respectively, Langos, Gossett, and others caused Corrpro to file inaccurate and misleading Forms 10-Q with the Commission. The filings contained financial statements which overstated Corrpro's pre-tax income for the second and third quarters by $622,075 and $2,116,442, respectively. The excess income represented 18% and 52% of the pre-tax income for the second and third quarters, respectively. Langos, Gossett, and others prepared or reviewed the Forms 10-Q and the consolidated financial statements contained in them. O. Langos, Gossett, and others failed to implement and maintain proper and adequate internal accounting controls for Corrpro during Fiscal 1995. The lack of adequate internal accounting controls contributed to ======END OF PAGE 5====== Corrpro's failure to reconcile or analyze its general ledger accounts to ensure that transactions were properly recorded and account balances properly stated. Corrpro also failed to timely complete a policies and procedures manual which would have ensured that accounting policies and procedures were applied consistently. In addition, Corrpro's accounting department lacked adequate and competent personnel. Corrpro also lacked a standardized procedure for accumulating costs incurred on its long-term contracts, and relied on improper estimates which were not documented. Violations P. Langos and Gossett, together with others, caused Corrpro's violation of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder because they caused Corrpro to file inaccurate and materially misleading Forms 10-Q for the second and third quarters of Fiscal 1995, as described in Paragraph III.N. above. Q. Langos and Gossett, together with others, caused Corrpro's violation of Section 13(b)(2)(A) of the Exchange Act because they recorded, authorized or approved the improper entries described in Paragraphs III.F. through III.N. above. In addition, Langos and Gossett, together with others, caused Corrpro's violation of Section 13(b)(2)(B) of the Exchange Act because they failed to implement or maintain a system of internal accounting controls sufficient to provide reasonable assurances that there was a valid basis for the entries Corrpro recorded. R. Langos and Gossett committed violations of Rule 13b2-1 under the Exchange Act by recording, authorizing or approving certain of the entries described in Paragraphs III.F. through III.N. which did not have justifiable bases. IV. In view of the foregoing, it is in the public interest to impose the sanctions specified in the offers of settlement. Accordingly, IT IS ORDERED THAT Ronald Langos and Robert Gossett cease and desist from causing any violation, and any future violation, of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, and from committing or causing any violation, and any future violation, of Rule 13b2-1 of the Exchange Act. By the Commission. Jonathan G. Katz Secretary