UNITED STATES OF AMERICA
In the Matter of
David T. Thomson, CPA, and David T. Thomson PC
Order Instituting Public Order Instituting Public Pursuant to Rule 102(E) of the Commission's Rules of Practice, Making Findings and Imposing Remedial Sanctions
The Securities and Exchange Commission (the "Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted against David T. Thomson, CPA ("Thomson") and David T. Thomson PC ("Thomson PC"), pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice [17 C.F.R.§ 201.102(e)].
In anticipation of the institution of these proceedings, Thomson and Thomson PC (collectively, the "Respondents") have submitted an Offer of Settlement ("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 that they admit to the jurisdiction of the Commission over them, and the subject matter of these proceedings, Respondents consent 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 Respondents' Offer, the Commission finds that:
1. David T. Thomson, CPA, age 53, is a certified public accountant who was duly licensed by the State of Utah at all relevant times, and is the sole owner of David T. Thomson PC. Thomson headed the audit of Powerball International, Inc. ("Powerball") for the fiscal year ended December 31, 2002.
2. David T. Thomson PC is a Utah professional corporation located in Murray, Utah. Thomson PC was Powerball's independent auditor for the fiscal years 1999 through 2002.
B. RELATED ENTITY AND PERSON
1. Powerball was at all relevant times a Utah corporation located in Salt Lake City, Utah. Powerball is a development stage company that manufactures alternative energy products. Powerball's common stock is registered with the Commission under Section 12(g) of the Securities Exchange Act of 1934 and trades on NASD's OTC Bulletin Board.
2. William W. Freise ("Freise"), age 49, is a Utah resident. Freise was Powerball's President and Chief Operating Officer from December 2001 to April 2003. Freise was elected to Powerball's Board of Directors in December 2002. Freise was terminated by Powerball in April 2003.
Thomson PC, Powerball's auditor, led by Thomson, performed the annual audit of Powerball's financial statements for the fiscal year ended December 31, 2002. During the audit, company management gave Thomson faxed copies of Powerball's bank statements that had been altered by Freise. Freise had altered these bank statements to conceal his non-payment of $40,000 that represented the exercise price for shares that he had received pursuant to warrants. In addition, Freise altered the company's bank statements to hide his improper use of $7,200 of company funds for personal expenses. As a result of Freise's actions, the altered bank statements overstated cash by $47,200.
Cash represented over two-thirds of Powerball's assets as of December 31, 2002. Despite this fact, Thomson relied on faxed copies of the company's bank statements and failed to confirm the true cash balances with Powerball's bank. During the course of the audit, Freise's alteration of Powerball's bank statements thus went undetected and the overstated cash balance was incorporated into the company's financial statements and its Form 10-KSB filed with the Commission. Thomson PC issued an audit report dated April 2, 2003 containing an unqualified opinion on the company's financial statements. By overstating its cash balance by $47,200, Powerball overstated its cash balance by 85.7% and its assets by 47.5% and, as a result, filed a materially false Form 10-KSB with the Commission on April 9, 2003. On May 22, 2003, the Company filed a Form 8-K stating, among other things, that it would need to restate its financial statements for fiscal year 2002.
Rule 102(e) authorizes the Commission to "deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found ... (ii) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct ...." The rule defines improper professional conduct to mean "[i]ntentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional standards." A single instance of highly unreasonable conduct and repeated instances of unreasonable conduct also meet the definition of improper professional conduct. By failing to obtain bank confirmations, or otherwise obtain sufficient competent evidential matter to verify Powerball's cash balances, which represented over two-thirds of the company's assets, Thomson engaged in improper professional conduct. See Potts v. SEC, 151 F.3d 810, 811 (8th Cir. 1998) (upholding the Commission's Rule 102(e) sanction based on finding that auditor engaged in reckless professional conduct because, among other things, he failed to obtain documentary evidence, and relied on unsupported management representations despite contradictory documentary evidence).
Departures From Generally Accepted Auditing Standards
The Commission's rules require that auditors of public company financial statements adhere to Generally Accepted Auditing Standards ("GAAS"). Under GAAS, an auditor must exercise due professional care while conducting an audit and preparing the audit report. (See Codification of Statements on Auditing Standards ("AU") §§ 150.02, 230.01). Under AU § 230.04, "due professional care concerns what the independent auditor does and how well he does it." AU § 326.01 requires an auditor to obtain sufficient competent evidential matter to afford a reasonable basis for an audit report. Similarly, auditors are required to maintain an attitude of professional skepticism (AU § 230.07) and cannot simply rely on management representations (AU § 333.02).
Respondents' audit of Powerball's financial statements for the fiscal year ended December 31, 2002 failed to comply with GAAS because by failing to obtain confirmations of cash balances from Powerball's bank, or otherwise obtain sufficient competent evidential matter to verify Powerball's cash balances, and instead relying on faxed copies of bank statements, Respondents failed to exercise due professional care in violation of AU §§ 150.02, 230.01 and 230.04; failed to maintain an attitude of professional skepticism in violation of AU § 230.07; and failed to obtain sufficient competent evidential matter in violation of AU § 326.01. Obtaining bank confirmations is a fundamental audit requirement. This requirement was heightened by the fact that Powerball's cash balances represented over two-thirds of the company's assets. Thus, Thomson's failure to confirm Powerball's cash balances was highly unreasonable, and accordingly, constitutes "improper professional conduct."
Based on the foregoing, the Commission finds that Thomson and Thomson PC each engaged in improper professional conduct within the meaning of 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 the Respondents' Offer.
Accordingly, it is hereby ORDERED, effective immediately, that:
A. Thomson and Thomson PC are denied the privilege of appearing or practicing before the Commission as accountants.
B. After two (2) years from the date of this Order, Thomson and Thomson PC may request that the Commission consider their 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 Respondents' work in their practice before the Commission will be reviewed either by the independent audit committee of the public company for which they work or in some other acceptable manner, as long as they practice before the Commission in this capacity; and/or
2. an independent accountant. Such an application must satisfy the Commission that:
(a) Thomson PC, or the public accounting firm with which Thomson is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective;
(b) Thomson, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in Thomson's or firm's quality control system that would indicate that the respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, 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 of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions;
(c) Respondents have resolved all disciplinary issues with the Board, and have complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and
(d) The Respondents acknowledge their responsibility, as long as Respondents appear or practice before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards.
C. The Commission will consider an application by Respondents to resume appearing or practicing before the Commission provided that Thomson's 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 dependant 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 Thomson's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.
By the Commission.
Jonathan G. Katz
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