==========================================START OF PAGE 1====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 38316 / February 20, 1997 Accounting and Auditing Enforcement Release No. 888 / February 20, 1997 Administrative Proceeding File No. 3-9135 : In the Matter of : : PHILIP GREIFELD, CPA : ORDER MAKING : FINDINGS AND : IMPOSING SANCTIONS : I. The Securities and Exchange Commission (the "Commission") has previously instituted public administrative proceedings pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice against Philip Greifeld, CPA ("Greifeld" or "the Respondent").-[1]- The Respondent has submitted an Offer of Settlement which the Commission has determined to accept. II. ---------FOOTNOTES---------- -[1]- The Order Instituting Proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice in this matter was issued on September 30, 1996. See Securities Exchange Act of 1934 Release No. 37765; Accounting and Auditing Enforcement Release No. 836. Rule 102(e)(1) provides in relevant part that 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." ==========================================START OF PAGE 2====== Solely for the purposes of this proceeding and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, and without admitting or denying the facts, findings, or conclusions herein, Greifeld consents to entry of the findings, and the imposition of the sanctions set forth below. III. FINDINGS The Commission makes the following findings:-[2]- A. The Respondent Greifeld, age 35, was licensed to practice public accounting by the State of New York in 1988. His registration lapsed in 1990, and was reinstated in 1996 retroactive to 1990. He is currently employed as the Vice President of Finance at a non- public company. B. Background Greifeld served as the independent accountant for A.S. Goldmen & Co., Inc. ("Goldmen") for the audit years ending December 31, 1989-1991 and for Middlegate Securities, Ltd. ("Middlegate") for the audit years ending December 31, 1989-92. Both Goldmen and Middlegate are broker-dealers registered with the Commission and file annual reports on Form X-17A-5. The Commission requires that annual reports on Form X-17A-5 include financial statements audited by an independent public accountant and an audit report issued by the accountant stating his opinion as to whether the audit was made in accordance with generally accepted auditing standards ("GAAS"). 17 C.F.R. 240.17a-5(d) and (i). The Commission further requires that the accountant conducting the audit "shall in fact be independent," 17 C.F.R. 240.17a-5(e)(1)(i), and that the audit "include all procedures necessary under the circumstances to enable the independent public accountant to express" his opinion. 17 C.F.R. 240.17a-5(g)(1). Compliance with the requirements of Rule 17a-5 "is a keystone of the surveillance of registered broker-dealers with which [the Commission is] charged in the interest of affording protection to investors . . ." In re W.E. Leonard & Co., Inc., 39 S.E.C. 726, 727 (1960). Greifeld became the independent accountant for the two ---------FOOTNOTES---------- -[2]- The findings herein are made pursuant to the Offer of Settlement submitted by Greifeld and are not binding on any other person or entity. ==========================================START OF PAGE 3====== broker-dealers as a result of a request by Monte S. Colbert, an accountant and former co-worker.-[3]- In 1989, Colbert asked Greifeld to be identified as the independent public accountant for Goldmen and Middlegate. Colbert told Greifeld that he wanted Greifeld to be the accountant designated on the audit reports because Colbert was not yet certified and because his employer discouraged moonlighting. Greifeld and Colbert entered into an arrangement whereby Colbert conducted the field work for the audits of the broker- dealer firms and prepared workpapers. Once a year, Colbert brought his workpapers to Greifeld's home, where Greifeld spent several hours reviewing the workpapers. Greifeld thereafter signed the audit reports, stating his opinion that the financial statements presented fairly the financial condition of the broker-dealers, and representing that the audits were conducted in accordance with GAAS. Greifeld never met with any of the principals of Goldmen or Middlegate in connection with becoming their independent accountant. Nor did he meet with any of the principals in connection with his audit work. Greifeld did not receive any compensation from either Goldmen or Middlegate. Goldmen and Middlegate each paid Colbert several thousand dollars each year and Colbert, in turn, paid Greifeld the nominal sum of $150 per audit for his services. On September 1, 1990, Greifeld's registration to practice accounting lapsed. At the time that Greifeld signed the 1991 and 1992 Middlegate audit reports and the 1991 Goldmen audit report, he had not taken action to ensure that his registration was current for the years in question. Near the end of 1991, Colbert approached Goldmen about becoming a broker at the firm. Goldmen agreed to sponsor Colbert for the licensing examination given by the National Association of Securities Dealers, Inc. ("NASD"). Colbert was hired by Goldmen to become a salesperson on January 13, 1992, and he passed the NASD's Series 7 examination on February 5, 1992. At the time of these events, Colbert was engaged on Goldmen's 1991 audit. Greifeld never inquired whether Colbert knew of any facts and circumstances that might have impaired Colbert's independence ---------FOOTNOTES---------- -[3]- Colbert consented to issuance of an order permanently denying him the privilege of appearing or practicing before the Commission pursuant to Rule 102(e)(1)(ii), 17 C.F.R. 201.102(e)(1)(ii). In the Matter of Monte S. Colbert, CPA, Exchange Act Rel. No. 37761, AAER No. 835, Admin. Proc. File. No. 3-9131 (Sept. 30, 1996). ==========================================START OF PAGE 4====== as an auditor. Nor did Greifeld inquire whether Colbert had any relationship with Goldmen apart from his work on the audits. As a result, he failed to discover Colbert's employment by Goldmen. C. Greifeld Engaged in Improper Professional Conduct Greifeld "engaged in unethical or improper professional conduct," within the meaning of Rule 102(e)(ii) of the Commission's Rules of Practice, in connection with the 1991 audit of Goldmen and the 1991 and 1992 audits of Middlegate. First, his participation in the audits of both clients was not sufficient for him to assure that proper audit procedures required by GAAS were employed. Specifically, Greifeld failed to comply with several of the tenets of GAAS, including all of the standards of field work and the requirement that he exercise due care in the performance of the audit. Second, he failed to comply with Rule 17a-5 and GAAS when he did not perform reasonable procedures to ensure that Colbert was independent during the 1991 audit of Goldmen. Third, he was not at the time he signed the audit reports registered as an accountant as required by Rule 17a-5(f).-[4]- 1. Greifeld Failed to Participate Meaningfully in the Audits and to Assure that Proper Audit Procedures Were Employed As the designated independent accountant for Goldmen and Middlegate, Greifeld had the ultimate responsibility for assuring that their audits were conducted in accordance with GAAS. This includes the responsibility for planning, supervising, and reviewing the audit work, and for ensuring that appropriate auditing standards were applied. Greifeld's role in the audits, under his arrangement with Colbert, was not sufficient to fulfill these obligations. GAAS requires that certain standards of field work be maintained. The three basic standards are: 1) the audit work is to be adequately planned and assistants, if any, are to be properly supervised; 2) a sufficient understanding of the internal control structure is to be obtained to plan the audit ---------FOOTNOTES---------- -[4]- The Order Instituting Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice did not allege that the Goldmen and Middlegate financial statements on which Greifeld stated an opinion were materially misstated. The absence of a material misstatement, however, does not excuse Greifeld's failure to conduct the audits in accordance with GAAS. The purpose of the audit is to provide reasonable assurance that the financial statements are free of material misstatement, and unless the audit is conducted in accordance with GAAS as represented, the utility of the auditor's opinion is compromised. ==========================================START OF PAGE 5====== and to determine the nature, timing, and extent of tests to be performed; and 3) sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. Codification of Statement on Auditing Standards, ("AU") Section 150. In addition, GAAS requires that an auditor exercise due professional care in the performance of an audit. AU  150, 230. The standard of due case imposes "a responsibility . . . to observe the standards of field work and reporting." AU  230.02. a. General Deficiencies The field work performed on the audits, as documented in the workpapers prepared by Colbert and reviewed by Greifeld, was not sufficient to support Greifeld's expression of an opinion on the financial statements of Goldmen and Middlegate. The workpapers contain no documentation of Greifeld's planning, supervision and review of the audits. See AU  150, 311, 319. The workpapers in addition contain virtually no evidence of the application of auditing procedures as required by GAAS. The workpapers do not contain documentation that sufficient competent evidential matter was obtained concerning: 1) the completeness of the balances for liabilities; 2) the completeness and proper presentation of revenues; 3) the completeness and proper presentation of material expenses, including payroll, commissions, and occupancy costs; 4) the existence, or financial statements effects of, significant agreements or contracts; and 5) the existence, or financial statements effects of, contingencies. In addition to these general deficiencies, Greifeld's conduct resulted in the following two specific failures in the audits: b. Failure to Evaluate Internal Controls Commission Rule 17a-5(g) specifically requires that the audit of a broker-dealer include an evaluation of the firm's internal accounting control. The understanding of the internal control structure must be sufficient to provide reasonable assurance that any material inadequacies existing at the date of the examination are disclosed. As noted above, GAAS also requires that an auditor obtain a sufficient understanding of the internal control structure, and that the auditor document his understanding. AU 150, 319. The workpapers prepared by Colbert and reviewed by Greifeld do not reflect the auditors' understanding or evaluation of the systems of internal controls of Goldmen or Middlegate. Without such documentation, Greifeld could not assess the risk that the firms' internal control structures were sufficient to prevent or detect misstatements in the recording of transactions or to ==========================================START OF PAGE 6====== permit identification of material misstatements in the financial statements. c. Failure to Audit the Value of Marketable Securities Greifeld failed to require that Colbert obtain sufficient competent evidence concerning the value and presentation of marketable securities on Goldmen's 1991 financial statements. First, as evidence of the value of Goldmen's marketable securities, Colbert obtained only a statement from the firm's clearing broker, and did not attempt to obtain assurance that the clearing broker's statement was supported by either independent market price reports or by a report from the clearing broker's auditor. Greifeld should have recognized that the evidence obtained by Colbert was inadequate and required Colbert to obtain additional evidence. Second, Generally Accepted Accounting Principles ("GAAP") normally require the recording of securities transactions and balances as of the trade date, not the settlement date, unless the difference is not material. See AICPA Audit and Accounting Guide - Audits of Brokers and Dealers in Securities. The evidence that Colbert obtained and Greifeld reviewed regarding the transactions and balances consisted of the statement of the clearing broker, which listed these items on a settlement date basis. The workpapers contain no evidence that Greifeld considered the possible effect on the financial statements of adjusting the balances and transactions to a trade date basis. Third, on Goldmen's 1991 financial statements, certain short securities positions are netted against the value of long securities positions. The presentation is not in accordance with GAAP. GAAP requires that the value of securities sold but not yet purchased, unless hedged, be shown as a liability, and not netted against the value of long securities positions. Id. Greifeld should have required that Goldmen's marketable securities be presented in accordance with GAAP on its 1991 financial statements. 2. Greifeld Failed to Perform Reasonable Procedures to Ensure that All Personnel Working on the Audit were Independent Rule 17a-5(e)(1)(i) requires that the independent accountant conducting the audit of a broker-dealer "shall in fact be ==========================================START OF PAGE 7====== independent."-[5]- GAAS also requires that an auditor, and persons working on the audit, be independent. See AU 150.02. The Commission has made clear that this requirement "is critical to the Commission's reporting process and to the securities markets which the Commission regulates." In re Iommazzo, Exchange Act Release No. 31726, AAER No. 437, 53 SEC 870, 875, Admin. Proc. File No. 3-7740 (Jan. 12, 1993). An auditor must establish quality control procedures designed to provide reasonable assurance that all persons working on the audit maintain the required independence. See AU 161.03; QC 10.07.a. These procedures must be designed to identify the facts and circumstances relating to any independence issues so that the conclusions reached by assistants relating to such issues can be reviewed. Colbert lacked independence once he became an employee of Goldmen during the 1991 audit. Regulation S-X, 2-01(b), 17 C.F.R. 210.2-01(b). In addition, Colbert's concurrent engagement as the auditor and a broker was incompatible with the practice of public accounting. Codification of Financial Reporting Releases 602.02.e.iii. Colbert's independence was impaired from the time he first considered, but did not reject, employment by Goldmen. See AICPA Ethics Ruling 77. Greifeld did not learn of Colbert's lack of independence because he failed to make any inquiry, much less establish procedures to ensure that Colbert maintained independence. Greifeld should have asked Colbert, and documented, whether Colbert had any relationship with Goldmen, other than as auditor. It was not sufficient for Greifeld simply to assume that Colbert was independent, or to assume that Colbert would reach appropriate conclusions concerning independence issues, because these are not procedures that provide the reasonable assurance required by GAAS. If Greifeld had fulfilled his responsibility to establish appropriate procedures, he would have discovered Colbert's independence problem. He then should have removed Colbert from the 1991 audit of Goldmen. Having failed to do so, he was precluded from expressing an opinion on the broker- dealer's 1991 financial statements, because "any procedures he might perform would not be in accordance with" GAAS as a result of the impairment of Colbert's independence. AU  504.09. ---------FOOTNOTES---------- -[5]- The rule adopts the standards for independence set forth in Sections 2-01(b) and (c) of Regulation S-X, 17 C.F.R. 210.2-01(b) and (c), which governs the form and contents of financial statements filed with the Commission. 17 C.F.R. 240.17a-5(f)(3). Regulation S-X, 2-01(b) specifically provides that the Commission will not consider a certified public accountant independent if during the period of engagement he is an employee of the audit client. ==========================================START OF PAGE 8====== 3. Greifeld Was Not at the Time He Signed the Audit Reports Registered as an Accountant Rule 17a-5(f), 17 C.F.R. 240.17a-5(f), states that in connection with reports filed by a broker-dealer, the Commission will not recognize as a certified public accountant any person who is not registered in good standing to practice accounting. Greifeld's registration to practice accounting in the state of New York lapsed in 1990. Greifeld took no action to renew his registration until 1996, when he renewed his registration retroactive to 1990. Thus, he was not registered in good standing to practice accounting at the time he signed the 1991 and 1992 audit reports at issue. IV. ORDER IMPOSING SANCTIONS Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer of Settlement submitted by the Respondent and accordingly, IT IS HEREBY ORDERED, effective immediately, that: 1. Greifeld is denied the privilege of appearing or practicing before the Commission as an accountant. 2. After two years from the date of this order, Greifeld 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 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 Greifeld 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. 3. After five years from the date of this Order, Greifeld 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 an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: (a). Greifeld, 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; ==========================================START OF PAGE 9====== (b). Greifeld 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). Greifeld 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. 4. The Commission's review of any request or application by Greifeld to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Greifeld's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. By the Commission. Jonathan G. Katz Secretary