United States of America
In the Matter of
|ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS|
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted against Oliver Flanagan, Chartered Accountant, ("Respondent" or "Flanagan") pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice.1
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") 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 the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds2 that:
Oliver Flanagan, 34, is a resident of Ireland, and has been a Chartered Accountant since 1996. Flanagan worked for Ernst & Young ("E&Y") between July 1997 and April 1999 in their Luton, England and London, England offices. After a brief period working for a bank, Flanagan rejoined E&Y in April 2000 and worked in E&Y's San Francisco, California office until early 2002. During this period, Flanagan was a member of the audit team for NextCard, Inc. ("NextCard"). Beginning in early 2002, Flanagan worked for Ernst & Young Chartered Accountants, in Dublin, Ireland. Flanagan resigned from Ernst & Young Chartered Accountants in 2003.
1. The "Audit Partner" became the audit partner responsible for E&Y'S NextCard audits in October 2000 and was at all relevant times after that date the E&Y partner in charge of the audit team for NextCard.
2. The "Other Audit Manager" was another E&Y employee who worked on the NextCard audit team beginning in mid-2001.
1. NextCard was an internet-based credit card issuer located in San Francisco, California and incorporated in Delaware. During the relevant period, NextCard's stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was listed on the NASDAQ National Market.
2. NextCard wholly owned NextBank, N.A., a chartered bank that funded the credit card loans. NextBank was subject to regulation by the Office of the Comptroller of the Currency.
3. NextCard retained E&Y to audit its financial statements for the year ended December 31, 2000 (the "2000 audit"). The Audit Partner was assigned to head the engagement. Flanagan was assigned to the audit as senior manager. Acting at the Audit Partner's direction, E&Y accountants conducted an audit of NextCard's financial statements in December 2000 and January 2001. The fact gathering phase of this work, known as "field work," was memorialized in documents called "working papers." On or about March 14, 2001, the Audit Partner and Flanagan reviewed some or all of the working papers and the Audit Partner approved E&Y's issuance of an auditor's report containing an unqualified opinion on NextCard's financial statements. E&Y's report was dated January 23, 2001, the date that E&Y's field work was concluded. The Other Audit Manager joined the NextCard audit team as a manager in approximately June 2001 during additional E&Y work.
4. In the summer of 2001, the Office of the Comptroller of the Currency asked E&Y for a portion of its audit working papers regarding E&Y's audit of NextCard. The Audit Partner was notified of this request.
5. On October 31, 2001, NextCard announced in a press release that the Office of the Comptroller of the Currency had asked the company to make certain changes regarding NextBank's accounting practices, including changes regarding the classification of losses on credit cards. The company also announced that it intended to sell NextBank because it was unable to raise sufficient capital to meet bank regulatory requirements after, among other issues, the Office of the Comptroller of the Currency called for NextBank to reclassify certain losses.
6. Following the company's press release on October 31, 2001, the trading price of its common stock declined by approximately 84 percent.
7. In the first few days of November 2001, the Audit Partner became concerned that E&Y's audit work would be examined by regulatory agencies or others. The Audit Partner instructed Flanagan to gather together the working papers for the NextCard 2000 audit (both hard copy files and those electronically archived) and have them ready for revisions during a Saturday meeting.
8. Also at this time, the Audit Partner began to investigate how to manipulate E&Y's computer system so that he could alter electronically archived working papers without being discovered. The Audit Partner asked the Other Audit Manager to find out how to de-archive an audit in order to revise and re-archive the working papers. On or about November 2, 2001, the Other Audit Manager obtained information on this subject from another E&Y employee and forwarded that information to the Audit Partner and Flanagan.
9. On a Saturday in November 2001, the Audit Partner and Flanagan met in E&Y's San Francisco office and altered portions of E&Y's electronic working papers for the NextCard 2000 audit. These alterations consisted of both additions and deletions to the working papers. Specifically, the Audit Partner altered the Summary Review Memorandum ("SRM") as well as memoranda regarding the audit of NextCard's allowance for loan and lease losses and securitizations of receivables. The Audit Partner marked up printed versions of the documents and gave them to Flanagan for Flanagan to input using Flanagan's laptop computer. In order to ensure that the revised documents appeared to have been created as part of the original working papers, the Audit Partner instructed Flanagan to reset the date on his computer so that any documents bearing computer-generated dates would reflect a date in early 2001. Some documents went through more than one edit, as Flanagan input the Audit Partner's changes and then printed out the revised version for the Audit Partner's further review.
10. Later in November 2001, the Audit Partner asked Flanagan and the Other Audit Manager to assist him in making additional alterations to the working papers for the NextCard 2000 audit. The Audit Partner, Flanagan and the Other Audit Manager met and made additional alterations to these working papers, using the Other Audit Manager's laptop computer. Flanagan showed the Other Audit Manager how to change the date setting on his computer to make it appear as though the altered workpapers were created earlier in the year at the time the original audit work had been performed. The Audit Partner marked up printed versions of the memoranda he was revising and then the Other Audit Manager input the changes. At the Audit Partner's direction, the Other Audit Manager deleted charts, portions of tables, and discussion sections that indicated problems with NextCard's charge-off numbers and trends. The Audit Partner also added information and altered the tone of certain sections. One of the documents altered during this meeting was a memorandum entitled "Analysis for Loan Losses." Flanagan remained involved in the process by proofreading the Other Audit Manager's work to ensure that all of the Audit Partner's changes were made.
11. The Audit Partner's purpose in altering E&Y's working papers was to make it appear that there was a more satisfactory basis for E&Y's audit conclusions.
12. In or about November 2001, after altering the working papers, the Audit Partner instructed Flanagan to scour his hard drive and delete documents or emails inconsistent with the altered versions of the working papers. Flanagan complied and deleted documents.
13. As a result of the conduct described above, Flanagan engaged in unethical and improper professional conduct by engaging in intentional or knowing conduct, including reckless conduct, that resulted in a violation of applicable professional standards. He violated professional auditing standards governing the creation and retention of working papers as well as those establishing the standards for ethical conduct by auditors. Statements on Auditing Standards are cited in the "AU" section of the AICPA's Professional Standards. AU Section 339 addresses the preparation and maintenance of working papers. AU 339.01 states that the information contained in working papers constitutes the principal record of the work that the auditor has done and the conclusions he has reached concerning significant matters. AU 339.08 requires the auditor to "adopt reasonable procedures for safe custody of his working papers and retain them for a period sufficient to satisfy any pertinent legal requirements of records retention." The AICPA Code of Professional Conduct, specifically ET Sections 51-54 and 56, provides additional professional standards for auditors. These sections require a high level of professional ethics and integrity from public accountants. Flanagan's intentional alteration and destruction of portions of the working papers for the NextCard 2000 audit violated these professional standards.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Flanagan's Offer.
Accordingly, it is hereby ORDERED, effective immediately, that:
A. Flanagan is denied the privilege of appearing or practicing before the Commission.
B. After three (3) years from the date of this order, Respondent 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:
1. 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 Respondent'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
2. an independent accountant. Such an application must satisfy the Commission that:
(a). Respondent, 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). Respondent, 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 Respondent 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.
D. The Commission will consider an application by Respondent to resume appearing or practicing before the Commission as an accountant provided that his accountant status is current and he has resolved any disciplinary issues with the applicable board of accountancy. However, if the resolution of any disciplinary action by a board of accountancy 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 Respondent'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)(ii) provides, in relevant part, that:
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 . . . to be lacking in character or integrity or to have engaged in unethical or improper professional conduct.
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.
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