SECURITIES EXCHANGE ACT OF 1934
Release No. 47804 / May 6, 2003
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1774 / May 6, 2003
File No. 3-10762
In the Matter of
MICHAEL R. DROGIN, CPA,
|ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS|
Michael R. Drogin, CPA ("Drogin") has submitted an Offer of Settlement for the purpose of disposing of the issues raised by this proceeding, which was instituted pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice on April 22, 2002.1 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 the Commission's jurisdiction over him and the subject matter of these proceedings, Drogin consents to the entry of this Order Making Findings and Imposing Remedial Sanctions ("Order"). The Commission has determined that it is appropriate to accept the Offer of Settlement from Drogin, and accordingly is issuing this Order.
On the basis of this Order and Drogin's Offer, the Commission finds2 that:
Drogin resides in Jericho, New York and is licensed as a Certified Public Accountant in New York. Drogin has been a partner in the accounting firm Liebman, Goldberg & Drogin, LLP since January 1998. Drogin, as lead engagement partner, audited the financial statements of Teltran International Group, Ltd. for the years 1997, 1998 and 1999.
B. Other Entities and Person
Liebman Goldberg & Drogin, LLP ("LGD") is an accounting firm based in Garden City, New York.
Teltran International Group, Ltd. ("Teltran"), a Manhattan based telecommunications company, provided Internet telephony, 1-900 services and traditional carrier services during the relevant time. Teltran was removed from the OTC Bulletin Board in July 2000.
Byron Lerner ("Lerner") was Chairman, President and Chief Executive Officer of Teltran during the relevant time.
Drogin failed to conduct his audit of Teltran's 1999 financial statements in accordance with generally accepted auditing standards ("GAAS") and issued an audit report which incorrectly stated that Teltran's financial statements were prepared in conformity with generally accepted accounting principles ("GAAP"). Teltran's financial statements and Drogin's audit report were included in Teltran's 1999 Form 10-K filed with the Commission on April 12, 2000.
On May 7, 1999, Teltran publicly announced that it intended to acquire ChannelNet ("CNET"). At the time of the announcement, Lerner expected the acquisition to close on June 1, 1999. However, due to negotiations concerning certain terms of the deal, the parties did not execute a written contract until July 15, 1999, and did not close the transaction until August 16, 1999.
For accounting purposes, Teltran recorded the CNET acquisition as of June 1, 1999. However, under Accounting Principles Board Opinion No. 16 "Business Combinations" ("APB 16"), Teltran could not record the CNET acquisition on June 1, 1999. APB 16 only permits a company to book an acquisition earlier than the closing date if the buyer had "effective control" of the target company by the earlier date. Teltran did not have effective control of CNET on June 1, 1999, and did not obtain control until the closing on August 16, 1999.
By using the earlier effective date, Teltran improperly reported over $2 million in revenues generated by CNET before the acquisition ever took place. Specifically, on August 19, 1999, Teltran filed its Form 10-QSB for the quarter ended June 30, 1999. In this Form 10-QSB, Teltran reported revenues of $456,720 and $540,179 for the three-month and six-month periods ended June 30, 1999, respectively. If Teltran had used the correct date for the CNET acquisition, revenue for these periods would have been $99,881 and $183,340, or 78% and 64% lower, respectively.
On November 8, 1999, Teltran filed its Form 10-Q for the quarter ended September 30, 1999. In this Form 10-Q, Teltran reported revenues of $2,267,570 and $2,807,749 for the three-month and nine-month periods ended September 30, 1999, respectively. If Teltran had used the correct date for the CNET acquisition, revenues for these periods would have been $366,277 and $549,617, or 83% and 80% lower, respectively.
On April 12, 2000, Teltran filed its Form 10-K for the year ended December 31, 1999. In this Form 10-K, Teltran reported revenues of $2,453,189 for the year ended December 31, 1999. If Teltran had used the correct date for the CNET acquisition, revenues for the year would have been $1,041,815, or 58% lower.
On March 10, 2000, LGD issued an audit report that Teltran included in its December 31, 1999 Form 10-K. This audit report contained an unqualified opinion on Teltran's December 31, 1999 financial statements. In this audit report, LGD represented that: (1) Teltran's financial statements were in conformity with GAAP; and (2) LGD conducted its audit of Teltran's financial statements in accordance with GAAS.
E. Drogin Failed to Obtain Sufficient Competent Evidence
In conducting an audit, an auditor must obtain sufficient competent evidential matter through inspection, observation, inquiries and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. American Institute of Certified Public Accountants Codification of Statements on Auditing Standards ("AU") § 326.01.
As set forth above, under APB 16, a company may not book an acquisition earlier than the closing date unless the acquiring company had "effective control" of the target company by the earlier date. In addition, if an earlier date is used, the acquiring company must adjust its purchase price to reflect control on the earlier date.
Drogin did not obtain sufficient competent evidential matter upon which to base his audit opinion and thus did not exercise due professional care because he did not: object to Teltran's recording the CNET acquisition as of June 1, 1999 for accounting purposes; audit the issue of effective control; document any audit procedures relating to that issue in his workpapers; or conduct any research regarding the specific requirements of APB 16 until after LGD issued its audit report on Teltran's 1999 financial statements.
F. Drogin Failed to Maintain an Attitude of Professional Skepticism
Auditors are required to exercise professional skepticism when performing audit procedures. AU § 230.07. At the time of the Teltran audit, the contract for the CNET acquisition was signed on July 15, 1999 and Teltran closed the transaction on August 16, 1999. These dates should have raised red flags as to the propriety of consolidating CNET as of June 1, 1999.
There were other red flags that should have prevented LGD from issuing an audit report containing an unqualified opinion on Teltran's financial statements for the year ended December 31, 1999, including: no purchase price adjustments were made to reflect a June 1, 1999 acquisition date; Teltran's second quarter, third quarter, and year end revenues would be increased by a material amount if the June 1, 1999 date was used; and a related agreement for the purchase of Atlantic Communications never closed.3
Drogin did not maintain an attitude of professional skepticism and thus did not exercise due professional care because he did not conduct sufficient audit procedures to test whether Teltran actually had effective control of CNET as of June 1, 1999, and instead relied upon representations from Lerner that Teltran had effective control of CNET as of June 1, 1999.
G. Drogin Failed to Render an Accurate Audit Report on Behalf of LGD
The auditor's report must express an opinion on the financial statements taken as a whole and must contain a clear indication of the character of the auditor's work. AU § 508.04. The auditor can determine that he is able to express an unqualified opinion only if he has conducted his audit in accordance with GAAS. AU § 508.07.
Drogin did not render an accurate audit report and thus did not exercise due professional care because Teltran's financial statements were not in conformity with GAAP, and because Drogin failed to perform sufficient procedures to audit Teltran's effective control of CNET as of June 1, 1999, in accordance with GAAS.
H. Drogin Failed to Exercise Due Professional Care
Auditors must exercise due professional care in performing the audit and preparing the audit report. AU § 230.01. Due professional care concerns what the auditor does and how well he does it. AU § 230.04.
Drogin did not exercise due professional care because he failed to: obtain sufficient competent evidential matter to support the assertions in the financial statements; maintain an attitude of professional skepticism; and render an accurate audit report on behalf of LGD.
Based on the foregoing, the Commission finds that Drogin engaged in improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Drogin's Offer.
Accordingly, IT IS HEREBY ORDERED, effective immediately, that:
- Drogin is denied the privilege of appearing or practicing before the Commission as an accountant.
- After two years from the date of this order, Drogin may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as:
- a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Drogin's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or
- an independent accountant. Such an application must satisfy the Commission that:
(a) Drogin, or the firm with which he is associated, is a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") or an organization providing equivalent oversight and quality control functions ("equivalent organization");
(b) Drogin, 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 or equivalent organization; and
(c) As long as Drogin appears or practices before the Commission as an independent accountant he will remain either a member of, or associated with a member firm of, the SEC Practice Section or equivalent organization, and will comply with all applicable SEC Practice Section or equivalent organization requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education.
- The Commission will consider an application by Drogin to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependent on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Drogin'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) of the Commission's Rules of Practice provides in pertinent part that:
|2||The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
|3||Atlantic Communications was another telecommunications company that was supposed to be sold to Teltran along with CNET. The contract for the purchase of Atlantic Communications was not signed until August 16, 1999, the date the CNET deal closed. The Atlantic Communications acquisition, however, never closed. Nonetheless, approximately 10% of the revenues reported by Teltran in its December 31, 1999 Form 10-K actually related to Atlantic Communications.|