SECURITIES EXCHANGE ACT OF 1934
Release No. 41785 / August 24, 1999
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1155 / August 24, 1999
File No. 3-9984
|In the Matter of
CARL F. RUZICKA, CPA
|ORDER INSTITUTING PROCEEDINGS
AND OPINION AND ORDER PURSUANT
TO RULE 102(e) OF THE COMMISSION'S
RULES OF PRACTICE
The Securities and Exchange Commission (Commission) deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant Rule 102(e) of the Commission's Rules of Practice against Carl F. Ruzicka (Ruzicka). Accordingly, it is ordered that proceedings pursuant to Rule 102(e) be, and they hereby are, instituted.1
In anticipation of the institution of these administrative proceedings, Ruzicka has submitted an Offer of Settlement, 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 herein, except as to jurisdiction, which is admitted, Ruzicka consents to the entry of this Order Instituting Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice (Order) and to the entry of the findings and imposition of remedial sanctions as set forth below.
On the basis of this Order and the Offer of Settlement submitted by the Respondent, the Commission makes the following findings:
A. RESPONDENT AND OTHER ENTITIES
Ruzicka, age 49, is a resident of Highland Park, Illinois. At all relevant times, he has been a certified public accountant licensed with the state of Illinois, and is the president of Ruzicka & Associates (R&A), a five-employee accounting firm located in Northfield, Illinois. Ruzicka solely performed the audits of the financial statements of Chicago Partnership Board (CPB) from 1992 through 1996.
2. Other Entity
CPB, a sub-chapter S corporation located in Chicago, Illinois, was a broker-dealer employing approximately 90 individuals, and was registered with the Commission from February 1988 until December 1997, when it ceased operations. CPB was engaged in the business of matching buyers and sellers of public limited partnership interests through a modified auction process. CPB was a member of the National Association of Securities Dealers.
Ruzicka performed an audit of CPB's financial statements for the year ended December 31, 1996, and of certain supplementary reports, including CPB's Computation of Net Capital under Rule 15c3-1 and CPB's Computation for Determination of Reserve Requirements for Broker-Dealers under Rule 15c3-3, as of December 31, 1996. Ruzicka, through R&A, issued a report on the financial statements and on the aforementioned supplementary reports containing an unqualified opinion thereon. CPB's 1996 financial statements and supplementary reports, accompanied by R&A's audit report, were filed with the Commission on Form X-17A-5.
Between May 1996 and December 1997, CPB's owner and president, James R. Frith, Jr. (Frith), diverted more than $3.5 million in customer funds, which were sent to CPB by investors for the purchase of limited partnership interests, and used those funds for a variety of personal and business purposes. To disguise the effect of the diversion, Frith purported to assume approximately $3.4 million in CPB's liabilities to sellers (which were non-assumable), and removed those liabilities from CPB's books and records.
As a result of the diversions of funds, CPB failed to maintain a sufficient sum in its "Special Reserve Bank Account for the Exclusive Benefit of Customers" and had a net capital deficiency. As of December 31, 1996, CPB's total customer liabilities, and resulting customer reserve requirement, were $15,334,288, and CPB maintained customer reserves of only $13,903,467. Thus, as of December 31, 1996, CPB had a net capital deficiency of $1,361,696. Under Section 15(c)(3) of the Securities Exchange Act of 1934, a broker-dealer with a net capital deficiency is prohibited from transacting business as a broker or dealer.
CPB's financial statements and supplementary reports for the year ended December 31, 1996, were materially inaccurate. The statement of financial condition understated customer liabilities by approximately $1.7 million. As a result, CPB reported that its customer reserve requirement under Rule 15c3-3 was $13,634,765, when in fact it was $15,334,288. CPB failed to disclose that its reserve was materially deficient. The financial statements also falsely indicated that CPB maintained net capital of $318,519 which exceeded the required net capital of $250,000. In actuality, CPB had a net capital deficiency of $1,361,696 and thus was transacting business as a broker-dealer in violation of the federal securities laws.
C. THE 1996 CPB AUDIT
Ruzicka engaged in improper professional conduct under Rule 102(e)(1)(ii) of the Commission's Rules of Practice by auditing the financial statements of CPB for the period ended December 31, 1996 in a reckless manner, and by issuing a report containing an unqualified opinion stating that his firm had conducted its audit in accordance with Generally Accepted Auditing Standards and that CPB's financial statements conformed with Generally Accepted Accounting Principles, when in fact they did not.
First, Ruzicka failed to obtain the requisite training to conduct broker-dealer audits. He had no experience in auditing broker-dealers, except for his experience with CPB, and did not obtain necessary training through any other means.
Second, Ruzicka did not adequately plan his audit of CPB's financial statements. He relied on an existing generic audit program and did not tailor it to address audit issues unique to broker-dealers. He failed to assess the audit risk for the CPB audit, despite several factors that pointed to a higher than normal level of audit risk.
Third, Ruzicka failed to exercise due professional care in conducting the audit of CPB's financial statements, and failed to obtain sufficient competent evidential matter to support his firm's opinion on CPB's financial statements. Given the higher than normal level of audit risk and the fact that Frith was a related party of CPB who had entered into unusual transactions with CPB, Ruzicka's audit was inadequate. For example, Ruzicka:
1. failed to conduct effective tests of disbursements from CPB's customer account;
2. failed to analyze any of the disbursements from CPB's customer account to Frith, despite the facts that each check issued to Frith from the customer account referenced an account number for a customer other than Frith and that Frith was a related party of CPB;
3. failed to investigate the reason for a $2.4 million overdraft in CPB's customer account at the end of 1996;
4. failed to confirm customer account balances either through positive or negative requests to customers; and
5. failed to investigate Frith's treatment of month-end net capital deficiencies at CPB of inputting cash at month-end and subsequently withdrawing the cash at the beginning of the next month, despite the fact that Ruzicka had knowledge of this practice.
Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Ruzicka and accordingly,
IT IS HEREBY ORDERED, effective immediately, that:
1. Ruzicka is denied the privilege of appearing or practicing before the Commission as an accountant.
2. After three years from the date of this Order, Ruzicka 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 Ruzicka 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:
(i) Ruzicka, 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;
(ii) Ruzicka 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
(iii) Ruzicka 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 Ruzicka to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Ruzicka's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.
By the Commission.
Jonathan G. Katz
|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 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.