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U.S. Securities and Exchange Commission


Litigation Release No. 19652 / April 12, 2006

Accounting and Auditing Enforcement Release No. 2410 / April 12, 2006

SEC Sues UK Accounting Firm PKF and Former Partner Anthony Mead in Connection with the AremisSoft Corporation Audit

PKF to Pay $2 Million Penalty and Disgorge Audit Fees

Mead Barred from SEC Practice, Fined $50,000

Second Partner Stuart Barnsdall Censured and Barred Two Years

SEC v. PKF and Anthony Frederick John Mead, Civil Action No. 06 CV 2853 (S.D.N.Y)

In the Matter of PKF, Anthony Frederick John Mead, FCA, and Stuart John Barnsdall, ACA, Exchange Act Release No. 34-53633 / April 12, 2006

Accounting and Auditing Enforcement Release No. 2409 / April 12, 2006

The Securities and Exchange Commission today announced that it filed a civil action in the United States District Court for the Southern District of New York and a related administrative proceeding against PKF, a United Kingdom based accounting firm, and its former partner Anthony Frederick John Mead ("Mead"), as a result of the failed year 2000 audit of AremisSoft Corporation. AremisSoft, a public company traded on the Nasdaq market, went bankrupt in March 2002 after announcing it was unable to substantiate approximately $90 million of revenues it reported in 2000. Subject to Court approval and without admitting or denying the allegations in the Complaint, PKF consents to disgorge $309,048 in fees plus interest and to pay a $2 million penalty which may be distributed to harmed investors pursuant to the Sarbanes-Oxley Act of 2002. Mead consents to a $50,000 penalty. In 2005, PKF converted to PKF (UK) LLP, a limited liability partnership.

The Complaint charges that PKF became aware of information during the 2000 AremisSoft audit indicating that illegal acts had or may have occurred but did not bring that information to the attention of AremisSoft's management, board of directors, or audit committee and that Mead failed to design appropriate audit procedures to determine whether AremisSoft senior management had committed fraud, violations of Section 10A of the Securities Exchange Act of 1934 ("Exchange Act").

The Commission also instituted and simultaneously settled combined administrative and Rule 102(e) proceedings against PKF, Mead, and Stuart John Barnsdall ("Barnsdall"), concurring partner on the 2000 AremisSoft audit. PKF, Mead, and Barnsdall settled without admitting or denying the findings in the Commission's order. The Commission found PKF and Mead engaged in highly unreasonable conduct in connection with the audit of AremisSoft's 2000 financial statements that resulted in repeated violations of applicable professional standards in circumstances which each knew or should have known warranted heightened scrutiny. It found Barnsdall engaged in unreasonable conduct that resulted in violations of applicable professional standards. According to the Commission's order:

  • PKF issued an audit report, signed by Mead, containing an unqualified opinion stating that PKF had conducted its audit of AremisSoft's 2000 financial statements in accordance with generally accepted auditing standards ("GAAS"), and that those financial statements were consistent with generally accepted accounting principles ("GAAP"), when each knew or should have known that the financial statements did not comply with GAAP and that the audit had not been conducted in accordance with GAAS. In its 2000 Form 10-K AremisSoft reported $97.5 million of its $123.6 million total revenue came from two Cyprus-based subsidiaries when, in fact, the subsidiaries together had just $1.7 million in revenue for the year. AremisSoft also claimed $33.3 million in cash at December 31, 2000, but in fact, $9.98 million was in the bank account of one its co-CEOs and $10.7 million was not received by AremisSoft until mid-January 2001;

  • During the 2000 audit, a PKF staff accountant alerted Mead to shortcomings of the audits being performed on AremisSoft's two Cyprus based subsidiaries, particularly the lack of documented testing. When the PKF accountant advised the PKF Cyprus partner, Pavlos Meletiou, about his concerns, especially the limited audit testing, Meletiou suggested that the testing be carried out after the audit;

  • In his review of the audit workpapers for one of the AremisSoft Cyprus-based subsidiaries, Mead found numerous problems, including serious deficiencies in two significant audit areas: cash and accounts receivable. According to his notes, the workpapers included copies, not originals, of cash confirmations, and both cash and accounts receivable confirmations were apparently not received directly by PKF Cyprus. Moreover, inventory confirmations were provided by AremisSoft management rather than third parties. A second PKF partner found multiple problems in the audit file related to the other AremisSoft Cyprus based subsidiary including similar problems with cash and accounts receivable;

  • The accounts receivable confirmations in the PKF Cyprus audit workpapers reviewed by PKF and Mead evidence additional irregularities that should have warranted heightened scrutiny. None are originals; many have identical or similar handwriting; and, according to the dates printed on the top of each, eight of seventeen were returned on the same two dates. The accounts receivable confirmations also were addressed to customers of AremisSoft rather than to account managers, despite the company's claim that account managers, not its end users, were indebted to AremisSoft;

  • PKF and Mead relied on AremisSoft's system of internal controls to limit substantive testing of revenue reported by AremisSoft's two Cyprus-based subsidiaries, but neither obtained sufficient understanding of the internal controls for those subsidiaries; and

  • Barnsdall conducted his concurring partner review the day after Mead signed and transmitted PKF's audit report for inclusion in AremisSoft's year 2000 Form 10-K but backdated his sign-off to the date of the audit report.

The order finds that through these actions, PKF willfully violated Section 10A of the Exchange Act and was a cause of AremisSoft's violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 ("Securities Act") and Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13b2-1 thereunder; and that Mead willfully violated Section 10A(a) of the Exchange Act and was a cause of AremisSoft's violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13b2-1 thereunder. PKF and Mead each consented to the order that they cease and desist from committing and/or causing the violations charged as well as any future violations of these provisions.

As part of the settlement, PKF agreed to disgorge $309,048 in audit fees plus pre-judgment interest and consented to a censure and an undertaking not to accept any audit engagements for new Commission registrant clients for one year. Mead consented to a censure and permanent bar from appearing or practicing before the Commission as an accountant pursuant to Rule 102(e) of the Commission's Rules of Practice. Barnsdall consented to a censure and two year bar from appearing or practicing before the Commission as an accountant pursuant to Rule 102(e).

The Commission acknowledges the assistance provided in this matter by the United Kingdom Financial Services Authority.



Modified: 04/12/2006