UNITED STATES of AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 39314 / November 7, 1997 Accounting and Auditing Enforcement Release No. 983 / November 7, 1997 Administrative Proceeding File No. 3-9485 : In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO RULE 102(e) OF THE : COMMISSION'S RULES OF PRACTICE KENNETH O'NEAL, CPA, : AND FINDINGS AND ORDER OF THE DONALD WHITE, CPA, and : COMMISSION GEORGE CHRISTOPHER BLEIER, : CPA, : : Respondents : : I. The Securities and Exchange Commission deems it appropriate and in the public interest that proceedings be, and they hereby are, instituted pursuant to Rule 102(e) of the Commission's Rules of Practice,<(1)> to determine whether Kenneth O'Neal willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and engaged in improper professional conduct in connection with O'Neal & White's audits of the financial statements of Members Service Corporation ("MSC") for the <(1)> Rule 102(e)(1) provides, in relevant part: The Commission may censure a person or 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 (i) not to possess the requisite qualifications to represent others; or (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. ======END OF PAGE 1====== fiscal years ended December 31, 1991 and December 31, 1992; and to determine whether, in connection with the same audits, Donald White and George Christopher Bleier engaged in improper professional conduct. Accordingly, IT IS HEREBY ORDERED that said proceedings be, and they hereby are, instituted. II. Respondents O'Neal, White, and Bleier have submitted Offers of Settlement to the Commission in which, 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 any of the findings of the Order (except as to the jurisdiction of the Commission with respect to the matters set forth herein, which is admitted), and solely for purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, Respondents O'Neal, White, and Bleier consent to the issuance of an Order denying them the privilege of appearing or practicing before the Commission as accountants as set forth in Part IV of this Order. III. The Commission makes the following findings:<(2)> A. RESPONDENTS 1. Kenneth O'Neal was licensed by the State of Texas as a certified public accountant during the relevant period. O'Neal practiced before the Commission within the meaning of Rule 102(f) of the Commission's Rules of Practice by participating as the engagement partner of O'Neal & White's audits of MSC's consolidated financial statements filed with the Commission for fiscal years ended December 31, 1991 and December 31, 1992. O'Neal pleaded guilty to securities fraud in a criminal prosecution and has consented to an injunction in a civil action related to the audits. 2. Donald White is licensed by the State of Texas as a certified public accountant. White practiced before the Commission within the meaning of Rule 102(f) of the Commission's Rules of Practice by participating as a concurring partner in O'Neal & White's audits of MSC's consolidated financial statements filed with the Commission for fiscal years ended December 31, 1991 and December 31, 1992. 3. George Christopher Bleier is licensed by the State of Texas as a certified public accountant. Bleier practiced before the Commission within the meaning of Rule 102(f) of the Commission's Rules of Practice by participating as the audit manager in O'Neal & White's audits of MSC's financial statements filed with the Commission for fiscal years ended December 31, 1991 and December 31, 1992. <(2)> The findings herein are solely for the purpose of these proceedings and are not binding on any other person in this or any other proceeding. B. OTHER ENTITIES 1. O'Neal & White, P.C. was licensed by the State of Texas as a certified public accounting firm during the relevant period. The firm practiced before the Commission within the meaning of Rule 102(f) of the Commission's Rules of Practice by certifying MSC's financial statements filed with the Commission for fiscal years ended December 31, 1991 and 1992. 2. MSC is a Colorado corporation with principal offices in Winter Park, Florida. At all times relevant hereto, the common stock of MSC was registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") and the Boston Stock Exchange. MSC was engaged in the business of acquiring and operating private companies. C. MSC'S FALSE FINANCIAL STATEMENTS 1. 1991 In April 1992, as part of its annual report on Form 10-K, MSC filed consolidated financial statements for the fiscal year ended December 31, 1991 that were materially false and misleading. Specifically, MSC reported assets valued at $3.6 million, an overstatement of $3 million (or 83%), and understated its liabilities by at least $200,000. In November 1989, MSC acquired a limited partnership interest in 100 oil and gas properties in exchange for MSC stock that MSC valued at more than $3.3 million. MSC formed Ohio & Southwestern Energy Co. ("OSEC") to hold the limited partnership interests. By year-end 1991 the oil and gas properties were nearly worthless. Moreover, MSC lost all of its ownership interest in OSEC through litigation in August 1991. The 1991 balance sheet nonetheless valued MSC's ownership interest at more than $2.1 million. MSC also included among its assets in the 1991 Form 10-K a false $625,000 stock subscription receivable from the sale of stock. In April 1991, MSC sold one million shares of MSC stock to Lawrence Investment Corp. In fact, the subscription agreement provided that Lawrence Investment would pay $225,000 for the stock, not $625,000. Further, any claim that MSC may have had with respect to the receivable was extinguished in December 1991 when MSC dismissed, with prejudice, a lawsuit it had filed seeking return of the shares. Finally, the 1991 consolidated balance sheet improperly failed to account for a contingent liability with respect to a pending lawsuit. In October 1991, MSC was sued for $900,000 in damages in a landlord-tenant dispute. MSC failed to establish a contingent liability with respect to the lawsuit. MSC was negotiating a settlement and was prepared to pay $200,000 by year-end 1991, and eventually paid $235,000 to settle the lawsuit in 1992. 2. 1992 ======END OF PAGE 3====== In April 1993, as part of its annual report on Form 10-K, MSC filed consolidated financial statements for the fiscal year ended December 31, 1992 that were materially false and misleading. The consolidated balance sheet falsely reported MSC's assets as $4.9 million, an overstatement of $3.3 million (or 67%). First, MSC overvalued a subsidiary, Cedar Bluff Development Corporation, which it had acquired in March 1992 in a 100% stock transaction. MSC's 1992 balance sheet recorded Cedar Bluff as an investment worth $722,000, an amount that O'Neal and Bleier calculated as the discounted market value of the MSC stock issued as consideration in the purchase. In fact, Cedar Bluff had no recognizable value. MSC should have used the "pooling of interests" method to record the acquisition, which would have reduced MSC's assets by approximately $722,000. Moreover, in an effort to substantiate the $722,000 valuation, MSC falsely claimed in its Form 10-K that it had a joint venture partner who would purchase all gas produced from the Cedar Bluff properties at a price of $3.84 per thousand cubic feet through the year 1995. Second, MSC improperly valued 536,062 shares of the common stock of Logos International at $1.75 per share, or $950,000, when in fact the stock was virtually worthless. MSC acquired the stock in 1992 in exchange for 2,000,000 shares of Associated Trades, a company that MSC had valued at $0 at year-end 1991. Finally, MSC's supposed agreement with ZFAX Technology, a manufacturer of cellular fax machines, resulted in an overstatement of more than $800,000. In March 1992, MSC signed an agreement to acquire the exclusive rights to the fax machines. The agreement called for MSC to issue 100,000 shares of stock to ZFAX under Regulation S and 200,000 restricted shares to a ZFAX subsidiary. By year-end 1992, MSC had defaulted on its obligation to deliver the stock to ZFAX. MSC reported its rights to the fax technology as an asset and valued it at more than $800,000 even though the default had diminished or extinguished the value of the asset. D. O'NEAL & WHITE's DEFICIENT AUDITS O'Neal & White was a member of the American Institute of Certified Public Accountants SEC Practice Section, which requires the review of a second partner or concurring partner in an audit of a public company's financial statements. O'Neal served as the engagement partner, White as the concurring partner, and Bleier as the audit manager for each MSC audit. O'Neal & White rendered audit reports containing unqualified opinions that it had audited MSC's financial statements for 1991 and 1992 in accordance with generally accepted auditing standards ("GAAS"), and that those financial statements presented fairly the financial position of MSC in conformity with generally accepted accounting principles ("GAAP"). O'Neal & White's audits of the 1991 and 1992 financial statements were not conducted in accordance with GAAS and those financial statements did not fairly present the financial position of MSC in conformity with GAAP. 1. Failure to Comply with GAAS ======END OF PAGE 4====== a. Lack Of Independence An auditor must maintain an "independence in mental attitude" in all matters relating to an assignment. American Institute of Certified Public Accountants, Codification of Statement on Auditing Standards ("AU") Section 220.01; see Rule 210.2-01(b) of Regulation S-X. An auditor is not independent if during his professional engagement he, his firm, or a member of the firm has any material financial interest in the audit client, or any connection as a promoter, underwriter, voting trustee, director, officer, or employee of the audit client. AU Section 220.03. O'Neal & White was not independent of MSC. First, the firm maintained MSC's books. Bleier prepared MSC's trial balance and made the necessary adjustments to convert MSC's cash basis accounting to the accrual system required for financial statements filed with the Commission. Second, O'Neal was a principal of Logos, a company in which MSC had a significant investment. O'Neal became president and a director of Logos in March 1992. While O'Neal held these positions, O'Neal & White was engaged to audit MSC's 1991 and 1992 financial statements, which contained valuations of MSC's investments in Logos. Third, Bleier owned 50 shares of MSC stock during 1991, while he was engaged in the audit of MSC's financial statements. He purchased the shares prior to November 1991 and sold them in April 1992. b. Failure to Gather Sufficient Competent Evidential Matter O'Neal and Bleier failed to gather sufficient competent evidential matter relating to substantially all of the assets reflected on MSC's 1991 and 1992 balance sheets. O'Neal and Bleier failed to confirm accounts receivable, in contravention of AU Section 330.34. If the firm had exercised due professional care, as required by AU Section 322.02, it would have learned that MSC had no ownership interest in OSEC, had probably forfeited its interest in the ZFAX technology, had no valid receivable from Lawrence Investment, and had no basis to value MSC's investments in Cedar Bluff and Logos at their recorded values. The failure to exercise due professional care is evident from the audit work papers, which fail to reflect that O'Neal or Bleier performed any substantive audit work with respect to most of MSC's reported assets. If O'Neal and Bleier had merely performed basic auditing procedures they would have learned, as discussed below, that a material amount of the assets recorded on MSC's balance sheets did not exist. i. Lawrence Investment As discussed above, MSC included in its 1991 balance sheet a $625,000 stock subscription receivable from Lawrence Investment, which represented approximately 20% of its shareholders' equity. If O'Neal and Bleier had sent a confirmation request to Lawrence Investment, they would have learned that the debt had been extinguished in December 1991 as part of a settlement. ======END OF PAGE 5====== ii. OSEC During the 1991 audit engagement, O'Neal and Bleier made no attempt to audit MSC's interest in OSEC, which MSC reported as representing approximately 69% of its stockholders' equity. O'Neal and Bleier never examined OSEC's oil and gas wells or its books and records. The 1991 Form 10-K placed a value of $2.1 million on OSEC's leases based on the potential value of the property if MSC were to drill additional wells. MSC did not drill any wells by year-end 1991, and in fact had not done so by the time the 1991 Form 10-K was filed in April 1992. If O'Neal and Bleier had performed even the minimally required audit procedures, they would have learned this fact. iii. Cedar Bluff The footnotes to MSC's 1992 financial statements disclose that MSC purchased Cedar Bluff through a 100% stock transaction in March 1992. O'Neal & White's planning memorandum and schedule for investments for the 1992 audit correctly stated that MSC's purchase of Cedar Bluff would be treated for accounting purposes as a pooling of interests. The accounting treatment for pooling would have required MSC to report the historical cost of Cedar Bluff's assets and operations as though MSC and Cedar Bluff were combined as a single entity from the beginning of MSC's reporting period. As stated above, Cedar Bluff had no significant assets reflected on its balance sheet. Under the pooling of interest method, Cedar Bluff would have had no significant value on MSC's balance sheet. On its 1992 balance sheet, however, MSC recorded its purchase of Cedar Bluff as a $722,000 "investment." O'Neal and Bleier calculated the carrying value of the investment based on the discounted market value of MSC stock issued in March 1992 without further determining the underlying value of the assets of Cedar Bluff as of year-end 1992. If O'Neal and Bleier had exercised due professional care, as required by professional standards AU 230.01, they would have learned that Cedar Bluff was substantially overvalued on MSC's balance sheet. iv. ZFAX In March 1992, MSC agreed to purchase the ZFAX cellular fax machine technology for MSC stock that it valued at approximately $806,000. MSC improperly recorded this amount on its balance sheet as an investment. At year end, MSC was in default on its obligations under the acquisition agreement because it had failed to deliver the partial consideration of 200,000 shares called for by the acquisition agreement. If O'Neal and Bleier had sought to confirm the transaction, as required by AU 332.04 and 332.05, they would have learned that MSC had defaulted on the agreement and ZFAX was retaining all the rights, title, and interest in the technology. c. Lack of Adequate Training and Proficiency According to AU Section 210, an "examination is to be performed by a person or persons having adequate technical training and proficiency as an ======END OF PAGE 6====== auditor." Bleier lacked adequate technical training and proficiency as an auditor, as demonstrated by his virtually complete failure to conduct a proper audit. White concurred with the decisions that the audit team reached, and with O'Neal & White's issuance of unqualified opinions as to MSC's financial statements. For each engagement, White wrote a concurring partner memorandum outlining the work he performed, including a review of the audit work papers and all memoranda concerning any differences or discrepancies. In each memorandum, White stated that in his opinion "all matters are properly documented." The audit files contained virtually no documentation in support of MSC's reported assets. In fact, O'Neal and Bleier created virtually no work papers relating to MSC's most significant assets. Although there was inadequate documentation in the audit workpapers, as discussed above, White concurred in the issuance of O'Neal & White's 1991 and 1992 reports. As demonstrated by his concurrences in the 1991 and 1992 audits of MSC, White lacked adequate proficiency as an auditor to recognize the audit deficiencies in the O'Neal & White audit engagement. E. CONCLUSION In view of the foregoing, O'Neal willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and engaged in improper professional conduct, and White and Bleier engaged in improper professional conduct. IV. ORDER IMPOSING SANCTIONS Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the offers of settlement submitted by the Respondents. Accordingly, IT IS HEREBY ORDERED, effective immediately, that: A. O'Neal, White, and Bleier be, and they hereby are, denied the privilege of appearing or practicing before the Commission as accountants pursuant to Rule 102(e) of the Commission's Rules of Practice; B. Three years from the date of this order, Bleier may apply to the Commission by submitting an application to the Office of the Chief Accountant requesting that he be permitted to resume appearing or practicing before the Commission as: 1. 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 Bleier 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; ======END OF PAGE 7====== 2. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: (a) Bleier, 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) Bleier 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 (c) Bleier 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. 3. The Commission's review of any request or application by Bleier to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Bleier's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. By the Commission Jonathan G. Katz Secretary ======END OF PAGE 8======