UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION Securities Act of 1933 Release No. 7401 / March 12, 1997 Securities Exchange Act of 1934 Release No. 38388 / March 12, 1997 Accounting and Auditing Enforcement Release No. 895 / March 12, 1997 Administrative Proceeding File No. 3-9271 ----------------------------------- : In the Matter of : ORDER INSTITUTING : PROCEEDINGS, AND MERLE S. FINKEL, CPA : OPINION AND ORDER : PURSUANT TO RULE 102(e) Respondent. : OF THE COMMISSION'S : RULES OF PRACTICE : ------------------------------------ I. The Securities and Exchange Commission deems it appropriate and in the public interest that administrative proceedings be instituted pursuant to Rule 102(e)(1)(ii) and (iii)-[1]- of the Commission's Rules of Practice [17 C.F.R.  201.102(e)(1)] against Merle S. Finkel ("Finkel"). II. In anticipation of the institution of these proceedings, Finkel has submitted an Offer of Settlement ("Offer") to the ---------FOOTNOTES---------- -[1]- Rule 102(e)(1) provides in pertinent 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) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder." ==========================================START OF PAGE 2====== Commission, which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R.  201.1 et seq., and without admitting or denying the facts, findings, or conclusions herein, except as to jurisdiction of the Commission over him and over the subject matters of this proceeding, which he admits, Finkel consents to the entry of this Order Instituting Proceedings and Opinion and Order pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order"), [17 C.F.R.  201.102(e)], and the entry of the findings and imposition of the sanction set forth below. III. On the basis of this Order and Finkel's Offer, the Commission makes the following findings:-[2]- A. Summary On at least 13 occasions Finkel issued materially false or inaccurate audit reports on the financial statements of three publicly traded companies: (i) Systems of Excellence, Inc.; (ii) Twenty First Century Health, Inc.; and (iii) Combined Companies International Corp. In each case, Finkel's audit reports falsely state that he conducted audits of the financial statements of these companies in accordance with Generally Accepted Auditing Standards ("GAAS") and falsely represent that the financial statements were fairly presented in conformity with Generally Accepted Accounting Principles ("GAAP"). In fact, Finkel did not perform the audits in accordance with GAAS. For two of the companies, Finkel also knew that the financial statements he certified were materially false and misleading. Finally, Finkel knew that his false audit reports would be included by his clients in periodic reports and an amended registration statement on Form 10, and incorporated by reference in 18 registration statements on Form S-8, all of which were filed with the Commission. B. Respondent and Issuers Involved 1. Respondent Merle S. Finkel is a certified public accountant licensed by the State of Pennsylvania since about 1959. He has practiced ---------FOOTNOTES---------- -[2]- The findings herein are made pursuant to the Offer of Settlement submitted by Finkel and are not binding on any other person or entity named as a respondent in this or any other proceeding. ==========================================START OF PAGE 3====== before the Commission within the meaning of Rule 102(f) of the Commission's Rules of Practice in connection with the preparation of financial statements and other documents filed with the Commission. Finkel has practiced under the name M.S. Finkel & Co. On March 12, 1997, Finkel plead guilty to a one-count criminal information charging him with conspiracy to commit securities fraud and bank fraud in the action entitled United States v. Merle S. Finkel, Cr-S-97-45-PMP (D.C. Nev.) 2. Issuers Involved Systems of Excellence, Inc. ("SOE"), which was incorporated in Florida in 1989, maintained its offices in Coral Gables, Florida and McLean, Virginia. It purportedly is engaged in manufacturing and distributing video teleconferencing equipment. SOE's stock is registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act"). Before the Commission suspended trading in SOE's stock on October 7, 1996 (which suspension has since expired), its stock was quoted on the NASDAQ Bulletin Board. On November 7, 1996, the Commission filed a Complaint and Applications for a Temporary Restraining Order, Preliminary Injunction and other emergency relief in the United States District Court against, among others, SOE, alleging that SOE had violated the antifraud, registration, and periodic filing provisions of the federal securities laws. See SEC v. Charles O. Huttoe et al., Civil Action No. 96-02543 (GK)(D.D.C.). Twenty First Century Health, Inc. ("TFCH"), located in Las Vegas, Nevada, was incorporated in Utah in 1981 as Big Valley Energy, Inc. It purportedly completed an intrastate offering of its securities in Utah. Thereafter it changed its name to Biotronic Energy Engineering, Inc., then to The Sonoran Group, then to Zorro International, Inc., then to Health & Wealth, Inc., and finally became Twenty First Century Health in 1995. It presently holds itself out as a new products development company in the field of health-related hygienic, home diagnostic, nutritional supplement and medical technology products. TFCH's stock is not registered with the Commission pursuant to the Exchange Act, and accordingly the company does not make periodic filings with the Commission. Before the Commission suspended trading in TFCH's stock on February 10, 1997 and again on February 27, 1997 (the latter suspension being in effect until 11:59 p.m. EST, March 12, 1997), its stock was quoted on the NASDAQ Bulletin Board. Combined Companies International Corp. ("CCIC"), is located in Las Vegas, Nevada. Through its predecessor it was incorporated in Nevada in 1971, and remained largely inactive until September 1993 when it merged with a medical supply disposal company. CCIC has at various times described itself as engaged in manufacturing and distributing medical and infection ==========================================START OF PAGE 4====== control products, recycling tires and manufacturing and distributing video games. CCIC's stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act, and its stock is quoted on the NASDAQ Bulletin Board. C. Finkel's Issuance of False Audit Reports and his Role in the Issuance of Materially False and Misleading Periodic Reports and Registration Statements Finkel was engaged as the independent auditor for SOE, TFCH and CCIC at the direction of a Las Vegas stock promoter who controls TFCH and CCIC (the "Promoter"). At the Promoter's instance or direction, Finkel rendered unqualified audit reports on SOE's, TFCH's and CCIC's financial statements without performing audits in accordance with GAAS for these companies. With respect to the two companies controlled by the Promoter, Finkel knew that the financial statements on which he opined were materially false. 1. Finkel's Role in the SOE Fraud From at least March 1995 through September 24, 1996, SOE engaged in a massive unregistered distribution of its shares. The stock it distributed purportedly was issued to consultants in exchange for services rendered to SOE, and purportedly had been registered pursuant to Registration Statements on Form S-8. In fact no such services were provided and no Registration Statements were filed with the Commission. In the course of its audit of SOE's financial statements for the fiscal year ended February 29, 1996, SOE's then independent auditor, Weinberg, Pershes & Co. ("WPC"), discovered that the purported registration statements had not been filed. In addition, WPC was unable to obtain evidence that services had been rendered in exchange for the stock that had been issued, and obtained other information that suggested irregularities in the issuance of the stock by SOE and in other matters. As a result of those discoveries, on September 18, 1996, WPC informed SOE that it would be necessary to expand the scope of the audit to, among other things, "perform [an] extensive amount of testing on the common stock issued by the Company ....". On September 20, 1996, WPC issued a letter to SOE pursuant to Section 10A of the Exchange Act alerting it that illegal acts by the Company may have occurred in contravention of state and federal law. On or before September 19, 1996, Charles O. Huttoe ("Huttoe"), then the Chairman of SOE, sought the Promoter's assistance in resolving the issues raised by SOE's auditors. Huttoe, at the Promoter's direction, decided that SOE would file its then delinquent annual report on Form 10-KSB for the period ==========================================START OF PAGE 5====== ended February 29, 1996 (Form 10-KSB") and a quarterly report on Form 10-Q for the period ended May 31, 1996, and thereafter file registration statements that would cover the shares previously distributed by SOE. The Promoter arranged for Finkel to issue an audit report on SOE's financial statements, which was to be included in SOE's Form 10-KSB. On September 21, 1996, Finkel was retained as SOE's independent auditor. Finkel was present at SOE's offices in McLean, Virginia during the weekend of September 21 and 22, and on September 23, and issued an unqualified audit report on SOE's financial statements for the fiscal years ended February 28, 1995 and February 29, 1996. The audit report was dated September 21, 1996. ==========================================START OF PAGE 6====== Finkel's audit report, issued under the name M.S. Finkel & Co., stated: We conducted my [sic] audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits [sic] to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Finkel's audit report stated that, on the basis of the audit "[i]n our opinion, the financial statements ... present fairly, in all material respects, the financial position of Systems of Excellence, Inc. at February 29, 1996 and February 28, 1995, and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles." Finkel's audit report was materially false or inaccurate. Finkel did not perform an audit in accordance with GAAS. Finkel performed no substantive audit procedures and relied solely on documents and statements prepared or provided to him by Huttoe or SOE's internal accountant. He failed to make inquiries of WPC or to review workpapers generated by WPC, as required by GAAS. Furthermore, despite the fact that more than 80% of SOE's reported expenses were for "consulting," Finkel made minimal effort to obtain any evidential matter or determine whether the purported consultants who had received SOE stock had even provided any services to SOE. As a result, Finkel failed to discover that SOE stock was improperly distributed to persons who had performed no services for the company that would qualify the stock for S-8 registration. SOE's Form 10-KSB, incorporating Finkel's audit report, was filed with the Commission on September 23, 1996. Finkel knew that his audit report would be included in SOE's Form 10-KSB. Finkel also consented to the incorporation of his audit report in 16 registration statements on Form S-8 that SOE filed with the Commission on September 24, 1996, to cover the shares previously distributed by SOE. 2. Finkel's Issuance of False Audit Reports for TFCH Between July 22, 1993, and October 4, 1996, at the Promoter's request, Finkel issued audit reports on at least eight sets of financial statements of TFCH. Each of those audit reports falsely stated that Finkel had conducted an audit in ==========================================START OF PAGE 7====== accordance with GAAS, and that the financial statements were fairly presented in conformity with GAAP. Finkel did not perform audits in accordance with GAAS of the financial statements before certifying them. To the contrary, Finkel knowingly falsified certain of these financial statements by recording material and nonexistent assets at the Promoter's request. Those fictitious assets -- capitalized research and development costs and capitalized organizational costs -- were the largest assets on TFCH's balance sheet during the period from June 30, 1993 through June 30, 1995, and were included in six of the eight financial statements "audited" by Finkel. Those nonexistent assets resulted in financial statements that overstated TFCH's assets by an amount ranging from 110% to 321% during the period from June 30, 1993 through June 30, 1995. Finkel knew or was reckless in not knowing that the false audit reports certifying TFCH's false and misleading financial statements would be disseminated to brokers who would sell TFCH stock to the investing public. 3. Finkel's Issuance of False Audit Reports for CCIC Since February 7, 1994, Finkel has issued four audit reports containing unqualified opinions on the financial statements of CCIC and its predecessor. Each of those audit reports falsely stated that Finkel had conducted an audit in accordance with GAAS and that the financial statements were fairly presented in conformity with GAAP. Finkel did not perform any of his audits in accordance with GAAS. Since 1993, the largest asset CCIC has included on its balance sheet -- valued at about $2.0 million -- has been variously characterized as "cash," a "note receivable" and, most recently, a "certificate of deposit." That asset does not exist. In the course of his "audits," Finkel obtained letters that he knew to be false that purported to confirm the existence of that asset. That fictitious asset plus accrued "interest" resulted in CCIC's total assets being overstated by 615% as of December 31, 1995. Finkel knew that his audit reports, falsely stating that he had conducted audits in accordance with GAAS and that CCIC's financial statements were presented in conformity with GAAP, would be filed with the Commission as part of CCIC's annual report and amended annual report on Form 10-K for its fiscal year ended December 31, 1994, annual report on Form 10-K for its fiscal year ended December 31, 1995, and its amended registration statement on Form 10 filed in March 1994. Finkel also consented to the incorporation of his false audit reports in two registration statements on Form S-8 that CCIC filed with the Commission in April and June 1995. ==========================================START OF PAGE 8====== D. Finkel Engaged in Improper Professional Conduct For Purposes of Rule 102(e)(1)(ii) of the Commission's Rules of Practice As described above, Finkel routinely issued audit reports falsely stating that he conducted audits of the financial statements of SOE, TFCH and CCIC in accordance with GAAS and falsely representing that the financial statements were fairly presented in conformity with GAAP. Finkel also issued unqualified audit reports on financial statements that he knew were materially false and misleading, and permitted the false audit reports to be included in periodic reports and registration statements filed with the Commission. E. Finkel Willfully Violated the Antifraud Provisions, and Willfully Aided and Abetted Violations of the Periodic Filing Provisions, of the Federal Securities Laws for Purposes of Rule 102(e)(1)(iii) of the Commission's Rules of Practice Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraud in connection with the purchase or sale of securities. Section 17(a) of the Securities Act of 1933 prohibits fraud in the offer and sale of securities. Violations of these provisions occur when a person employs any device, scheme or artifice to defraud, makes an untrue statement of a material fact or omits to state a material fact, or engages in any act, practice or course of business which operates as a fraud. Finkel willfully violated these provisions by issuing false audit reports that he knew were included in periodic reports and registration statements: (1) that stated that he had conducted audits in accordance with GAAS, when he knew that he had not; and (2) that represented that the financial statements were fairly presented in conformity with GAAP, when he knew that they were not, and in fact were materially false. See SEC v. Baker, Lit Rel. 12861 (May 23, 1991)(auditor who signed audit report despite failing to comply with several major GAAS provisions violated the antifraud provisions); SEC v. Greenspan, Lit. Rel. 12862 (May 23, 1991)(same). Section 13(a) of the Exchange Act, and Rule 13a-1 thereunder, requires issuers with securities registered with the Commission pursuant to Section 12 of the Exchange Act to file with the Commission periodic reports that are complete and accurate.-[3]- By issuing false audit reports that: (1) he ---------FOOTNOTES---------- -[3]- Rule 12b-20 requires that reports filed pursuant to Section 13(a) contain, in addition to all (continued...) ==========================================START OF PAGE 9====== knew would be included in SOE's and CCIC's annual reports on Form 10-KSB and Form 10-K, respectively; and (2) he knew would substantially assist in the filing of false financial statements contained in SOE's and CCIC's annual reports on Form 10-K, Finkel willfully aided and abetted violations of Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder. ---------FOOTNOTES---------- -[3]-(...continued) expressly required disclosures, such other information as is necessary to ensure that the statements made in the reports are not materially misleading. ==========================================START OF PAGE 10====== IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept Finkel's Offer, and, ACCORDINGLY IT IS HEREBY ORDERED, effective immediately, that Merle S. Finkel be, and hereby is, denied the privilege of appearing or practicing before the Commission as an accountant. By the Commission. Jonathan G. Katz Secretary