UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 38250 / February 6, 1997 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 878 / February 6, 1997 AMINISTRATIVE PROCEEDING File No. 3-9239 ______________________________ : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS PURSUANT TO HARRY T. COUCH, CPA, : RULE 102(e) OF THE : COMMISSION'S RULES OF Respondent. : PRACTICE, MAKING FINDINGS : AND IMPOSING REMEDIAL : SANCTIONS _____________________________ : 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 Harry T. Couch ("Couch"). II. In anticipation of the institution of these administrative proceedings, Couch has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceedings ---------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====== brought by or on behalf of the Commission or to which the Commission is a party, Couch, without admitting or denying the findings set forth herein, except as to the Commission's jurisdiction over him, which is admitted, consents to the entry of this Order Instituting Public 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 Offer of Couch, the Commission finds-[2]- the following: 1. Couch is a certified public accountant licensed by the State of Georgia. He is the sole shareholder of Tim Couch, P.C. of Lawrenceville, Georgia. 2. Couch was engaged to conduct the 1990 audit of Paragon Mortgage Corporation's ("Paragon") financial statements. These financial statements were included in Paragon's 1990, 1991 and 1992 annual reports filed with the Commission on Form 10-K, and in three registration statements on Form S-1 filed by Paragon with the Commission during 1991, 1992 and 1993. 3. Couch issued an unqualified audit opinion on Paragon's 1990 financial statements. This audit opinion was included in Paragon's 1990 10-K and was reissued in Paragon's 1991 10-K and 1992 10-K and in the three registration statements filed by Paragon. 4. Couch practiced before the Commission within the meaning of Rule 102(f) of the Commission's Rules of Practice in connection with the 1990 audit of Paragon's financial statements and work performed on the three registration statements. Couch was responsible for ensuring that the reissuance of his 1990 audit opinion was performed in accordance with generally accepted auditing standards ("GAAS") and that Paragon's 1990 financial statements were presented in accordance with generally accepted accounting principles ("GAAP"). As the audit engagement partner, Couch had the ultimate responsibility for the supervision and review related to the reissuance of his 1990 audit opinion during 1992 and 1993. 5. 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 ---------FOOTNOTES---------- -[2]- The findings herein are made pursuant to the Offer of Couch and are not binding on any other person or entity named as a respondent in this or any other proceeding. ==========================================START OF PAGE 3====== 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. 6. Couch, who audited Paragon's September 30, 1990 annual financial statements, certified Paragon's net loss and stockholders' equity to be $402,057 and $1,272,438, respectively. Those figures were misstated by $258,750 because Couch did not require Paragon to report certain compensation expense related to the granting of stock options during 1990. Additionally, Couch did not require Paragon to disclose the terms of the stock options in the notes to the financial statements as required by GAAP. Had Paragon included the $258,750 of compensation expense in its financial statements in accordance with GAAP it would have reported a net loss of $660,807 and stockholders' equity of $1,013,688 for the year ended September 30, 1990. 7. In addition, during the year ended September 30, 1990, certain officers of Paragon diverted $50,111 from the company to repay certain personal loan obligations. 8. Paragon's 1990 financial statements failed to disclose a purported agreement that Paragon would repay a $347,000 personal loan for certain officers of the company, or the fact that $50,111 of payments were made by Paragon on behalf of those officers during 1990. These disclosures were required to be made in the notes to the 1990 financial statements in accordance with GAAP. 9. Couch knew during his 1990 audit that Paragon was repaying the $347,000 personal loan at a time when Paragon did not have a corporate loan from the relevant bank. Yet, he did not pursue or follow-up on this apparent irregularity, nor did he insist that this transaction be disclosed in the notes to Paragon's 1990 financial statements. 10. On September 16, 1991, Couch was dismissed as Paragon's auditor and replaced by another auditor ("the successor auditor"). 11. During December 1991, the successor auditor discussed with Couch the 1990 nonrecognition of the $258,750 of compensation expense related to the granting of the 1990 stock options. This time, Couch concluded that the $258,750 should be deferred at September 30, 1990 and amortized ratably over the next four years. This conclusion was wrong under GAAP. ==========================================START OF PAGE 4====== 12. On January 14, 1992, Paragon filed its 1991 10-K. The 1991 10-K included Paragon's September 30, 1990 financial statements accompanied by Couch's reissued, unqualified 1990 audit opinion. The reissuance of Couch's 1990 audit opinion violated the reporting standards of GAAS because the 1990 financial statements were still in violation of GAAP. As discussed above, they failed to report $258,750 of compensation expense and to disclose material information regarding the personal loans of certain Paragon officers. 13. On January 29, 1992, Paragon filed a registration statement on Form S-1 (the "1992 S-1") which became effective on April 27, 1992. The 1992 S-1 included Paragon's September 30, 1990 financial statements accompanied by Couch's reissued, unqualified 1990 audit opinion. The reissuance of Couch's 1990 audit opinion violated the reporting standards of GAAS because the 1990 financial statements were still in violation of GAAP. As discussed above, they failed to report $258,750 of compensation expense and to disclose material information regarding the personal loans of certain Paragon officers. 14. On January 12, 1993, Paragon filed its 1992 10-K. The 1992 10-K included Paragon's September 30, 1990 financial statements accompanied by Couch's reissued, unqualified 1990 audit opinion. The reissuance of Couch's 1990 audit opinion violated the reporting standards of GAAS because the 1990 financial statements were still in violation of GAAP. As discussed above, they failed to report $258,750 of compensation expense and to disclose material information regarding the personal loans of certain Paragon officers. 15. 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 September 30, 1990 financial statements accompanied by Couch's reissued, unqualified 1990 audit opinion. The reissuance of Couch's 1990 audit opinion violated the reporting standards of GAAS because the 1990 financial statements were still in violation of GAAP. As discussed above, they failed to report $258,750 of compensation expense and to disclose material information regarding the personal loans of certain Paragon officers. 16. As a result of the above, on four separate occasions in 1992 and 1993 Couch reissued his audit report on Paragon's 1990 financial statements which incorrectly stated that his audit had been conducted in accordance with GAAS and Paragon's financial statements were presented in accordance with GAAP. 17. Based on the foregoing, the Commission finds that Couch engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice. ==========================================START OF PAGE 5====== IV. Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Couch and accordingly, IT IS HEREBY ORDERED, effective immediately, that: 1. Harry T. Couch is denied the privilege of appearing or practicing before the Commission as an accountant. 2. After four years from the date of this Order, Couch 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 Couch 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) Couch, 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) Couch 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 ==========================================START OF PAGE 6====== (3) Couch 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 Couch to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Couch's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. By the Commission. Jonathan G. Katz Secretary