UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 38762 / June 24, 1997 Accounting and Auditing Enforcement Release No. 926 / June 24, 1997 Administrative Proceeding File No. 3-9337 In the Matter of KENNETH F. RICHEY, CPA ORDER INSTITUTING PROCEEDINGS AND OPINION AND ORDER PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute public administrative proceedings against Kenneth F. Richey ("Richey"), a certified public accountant, pursuant to Rule 102(e)(1)(ii) <(1)> of the Commission's Rules of Practice [17 C.F.R. 201.102(e)(1)(ii)]. In anticipation of the institution of these proceedings, Richey has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying any of the findings herein except that he admits the Commission's jurisdiction over him and the subject matter of these proceedings, Richey has consented to the issuance of this Order Instituting Proceedings and Opinion and Order Pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order"). Accordingly, IT IS ORDERED that proceedings pursuant to Rule 102(e) of <(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 ... (ii) ... to have engaged in improper professional conduct. the Commission's Rules of Practice be, and hereby are, instituted. II. On the basis of this Opinion and Order, and the Offer, the Commission makes the following findings <(2)>: BACKGROUND A. Random Access, Inc. ("Random"), a Colorado corporation, was at all relevant times in the business of designing, selling, installing, supporting and servicing microcomputers throughout twelve states. In September 1995, Random shareholders accepted a buyout offer from Entex, Inc. ("Entex"), a privately-held New Jersey corporation. Random made its first public stock offering in 1989. Under a Form S-2 registration statement declared effective on August 11, 1993, Random made a second public offering. At all relevant times, Random shares were listed on Nasdaq. B. Richey, age 41, is a certified public accountant and partner in the Denver accounting firm of Williams, Richey & Co. ("WRC"). WRC was Random's independent auditor from 1986 until 1993. Richey was the concurring partner on WRC's audit of Random's 1992 financial statements, on which WRC issued an unqualified opinion. Richey also provided additional services to Random in connection with a special review and a public offering that included the 1992 financial statements. FACTS C. Random's Co-op Claim Scheme From 1991 through early 1993, Random generated a portion of its income by filing inaccurate claims against certain cooperative advertising accounts ("co-op accounts") administered by computer hardware and software manufacturers with which Random did business. The purpose of the co-op accounts was to reimburse computer resellers, such as Random, for costs the resellers incurred in promoting the manufacturers' products. To obtain payments from these co-op accounts, Random was required to submit to the manufacturers a claim form, invoices reflecting its expenses, and other proof that promotional expenses had been incurred. If a particular manufacturer determined that Random's promotional expenses qualified for reimbursement under its co-op program guidelines, Random would be sent a check for the amount it had claimed. <(2)> The findings herein are solely for the purposes of this proceeding and are not binding on any other person or entity named as a respondent or defendant in this or any other proceeding. ======END OF PAGE 2====== In 1991, Random's employees began a practice of using the co-op accounts to generate additional income by filing claims against the accounts for expenses which Random could not document. To support these claims, Random's employees created false invoices and falsified the company's books and records. The co-op claim scheme caused Random's income from continuing operations to be misstated in financial statements contained in its annual report on Form 10-K for the fiscal year ended August 31, 1992, which misstatement was repeated in a Form S-2 registration statement declared effective in August 1993 which incorporated the 1992 financial statements. This misstatement of as much as $66,467 gave rise to a contingent liability which required footnote disclosure in the respective financial statements referred to above. D. Richey's Retention In April 1993, after the scheme had been discovered by Random's then- controller, Random asked WRC to perform a special review of Random's cooperative advertising program. Richey was the lead WRC partner involved in the special review. At the beginning of the special review, Random's controller informed Richey of his belief that Random's prior financial statements may have been materially misstated and that Random's officers may have known of the scheme. This conflicted with Random management's assertions to Richey that the scheme was immaterial in amount and that they had no knowledge of it until the controller discovered it. Despite this red flag, on June 28, 1993, prior to the commencement of the special review, Richey accepted Random management's position that the false claims were immaterial and caused WRC to sign a consent to reissue the firm's unqualified audit report on Random's 1992 financial statements for inclusion in Random's 1993 registration statement. To facilitate the special review, Random in July 1993 provided Richey with schedules which company management stated reflected all claims it had made against the co-op accounts during fiscal 1993. Random's management also represented to Richey that no fraudulent co-op claims had been made in fiscal 1992. In July, Richey and another WRC employee working under Richey's direction began their review of Random's co-op claims. This review soon revealed both that the schedules provided by Random were inaccurate and incomplete, and that, contrary to the assertions of Random's management, the company had in fact submitted fraudulent co-op claims during fiscal 1992. Despite these findings, while the special review was still incomplete, Richey on August 2, 1993 signed a second consent to reissue WRC's unqualified audit report on Random's 1992 financial statements for inclusion in the first amendment to the registration statement. Further, on August 13, 1993, Richey, on behalf of WRC, issued a comfort letter to Random's underwriter. WRC did not issue its preliminary and final reports, respectively, with respect to the special review until October and November 1993. Moreover, in performing the special review and procedures related ======END OF PAGE 3====== to the consents and comfort letter, Richey failed to conduct an independent investigation into whether Random's management had knowledge of the co-op claim scheme before it was brought to light by the company's controller. <(3)> Richey's issuance of the consents and the comfort letter were premised, in part, on the assertion of Random's management that the scheme would in any event be immaterial to Random's 1992 financial statements because the company would be released from liability by the two manufacturers with which Random had filed most of the false claims. However, Richey performed no direct or independent verification procedures as to the releases. In fact, the two manufacturers did not resolve the issue with Random until October and November 1993, respectively. E. Departure from GAAP FASB No. 5, Accounting for Contingencies Under Generally Accepted Accounting Principles ("GAAP"), Random was required in its registration statement to disclose as a subsequent event to its fiscal 1992 financial statements the contingent liability related to the false claims it filed against the manufacturers. Absent such disclosure, the financial statements were not prepared in conformity with GAAP, contrary to WRC's representations in its audit report, comfort letter, and consents. Statement of Financial Accounting Standards No. 5, Accounting for Contingencies ("FASB 5"), states that an estimated loss from a "loss contingency" must be charged to income if it is "probable" that a liability has been incurred and the amount of loss can be reasonably estimated. If both conditions cannot be met, then the contingency should be disclosed when there is at least a "reasonable possibility" that a loss has been incurred. In such situations, "[t]he disclosure shall indicate the nature of the contingency and shall give an estimate of the possible loss or range of loss or state that such estimate cannot be made." As of the date of Random's public offering, Random's two largest suppliers had been notified that Random had overcharged them for co-op claims, but had not yet committed themselves to release Random from liability on the false claims. Therefore, Random was required to make footnote disclosure of the contingent liability in the 1992 financial statements in the registration statement. Such disclosure should have included a description of the contingency and a range of possible loss. <(3)> Richey was the only WRC partner involved in the subsequent events procedures relating to WRC's comfort letter and consents to reissue its audit report for the 1992 financial statements contained in Random's 1993 registration statement. ======END OF PAGE 4====== F. Departures from GAAS 1. Failure to Obtain Sufficient Competent Evidential Matter, Make Reasonable Investigation, and Use Due Care in the Performance of Work AU Section 326, Evidential Matter, states that "[s]ufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit." AU Section 711, Filings Under the Federal Securities Statutes, states in part that the auditor has the burden of proving that he has made an investigation of subsequent events occurring from the date of his audit report through the effective date of a registration statement sufficient to uncover events that may materially affect the financial statements included in the registration statement. AU Section 711 defines reasonable investigation and reasonable ground to believe as "that required of a prudent man in the management of his own property." Richey failed to obtain sufficient competent evidential matter and to conduct a reasonable subsequent events investigation prior to his issuance of WRC's comfort letter and consents. Richey issued those documents knowing that WRC had not completed its special review of the co-op issue, and that information had been brought to his attention concerning the potential misstatement of Random's 1992 financial statements. AU Section 230, Due Care in the Performance of Work, requires an auditor to use due professional care in performing audits and issuing reports. Richey also failed to meet this standard. 2. Failure to Evaluate Effect of Irregularities Irregularities are defined in AU  316, The Auditor's Responsibility to Detect and Report Errors and Irregularities, as follows: "The term irregularities refers to intentional misstatements or omissions of amounts or disclosures in financial statements. Irregularities include fraudulent financial reporting undertaken to render financial statements misleading, sometimes called management fraud, and misappropriation of assets, sometimes called defalcations." The fraudulent co-op claims fit this definition of an irregularity. Richey was on notice of Random management's possible involvement in the co-op scheme and thus of a possible irregularity. He nevertheless failed to perform adequate procedures to determine whether Random's management in fact had a role in it. ======END OF PAGE 5====== G. Conclusion GAAS (AU Section 711) has long recognized that the auditor has an important responsibility that extends beyond the date of the audit if the audited financial statements are going to be used to sell securities to the investing public. The diligent exercise of this responsibility is crucial to the proper functioning of the market, and must be approached in a serious and professional manner whenever the auditor is consenting to the inclusion of a previous audit report in a registration statement or offering comfort to underwriters or others in connection with the sale of securities. The auditor must resolve issues that call into question the validity of the previously-issued financial statements and audit report. Richey failed to properly consider information that came to his attention that should have caused him to seek additional evidence concerning the veracity of the financial statements and the ability of his firm to reissue its previous audit report and to give comfort to others. FINDINGS Based on the foregoing, the Commission finds that Richey engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice with respect to the comfort letter and consents issued in connection with Random's 1993 Form S-2 registration statement and amendment thereto. III. ORDER Based on the foregoing, the Commission finds it appropriate and in the public interest to accept the Offer of Richey and impose the sanctions consented to therein. Accordingly, IT IS HEREBY ORDERED, effective immediately, that: 1. Richey is suspended from appearing or practicing before the Commission as an accountant for a period of nine months; 2. Nine months from the date of this Order, Richey may resume appearing or practicing before the Commission as an independent accountant provided that: (a) Richey 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 appears or practices before the Commission as an independent accountant; (b) Richey complies with all applicable SEC Practice Section ======END OF PAGE 6====== 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. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 7======