SECURITIES EXCHANGE ACT OF 1934
Rel. No. 48372 / August 20, 2003

ACCOUNTING AND AUDITING ENFORCEMENT
Rel. No. 1846 / August 20, 2003

Admin. Proc. File No. 3-9862

In the Matter of

CARROLL A. WALLACE, CPA
c/o George B. Curtis
GIBSON DUNN & CRUTCHER, LLP
1801 California Street, Suite 4100
Denver, Colorado 80202-2641

ORDER IMPOSING REMEDIAL SANCTIONS

On the basis of the Commission's opinion issued this day, it is

ORDERED that Carroll A. Wallace be temporarily denied the privilege of appearing or practicing before the Commission as an accountant for one year, effective at the opening of business on September 2, 2003.

By the Commission.

Jonathan G. Katz
Secretary

 

1 17 C.F.R. § 201.102(e).
2 The Division of Enforcement sought a permanent bar against Wallace with a proviso that no request for reinstatement could be considered by the Commission before the expiration of three years. The law judge denied this requested sanction, and the Division did not appeal that denial.
3 BDCs are investment companies regulated pursuant to Sections 54-65 of the Investment Company Act of 1940, 17 U.S.C. §§ 80a-54 to -65.
4 Calandrella is a respondent in a pending related proceeding, The Rockies Fund, Inc., Admin. Proc. File No. 3-9615.
5 Amendment to Rule 102(e) of the Commission's Rules of Practice, Securities Exchange Act Rel. No. 40567 (Oct. 18, 1998), 68 SEC Docket 707, 709 (hereinafter "Adopting Release"); Russell Ponce, Exchange Act Rel. No. 43235, (Aug. 31, 2000), 73 SEC Docket 442, 467 n.57, appeal pending, No. 00-71398 (9th Cir.); Albert Glenn Yesner, CPA, Exchange Act Rel. No. 42030 (Oct. 19, 1999), 70 SEC Docket 2743, 2746-47; Robert D. Potts, CPA, 53 S.E.C. 187, 203-04 (1997); Marvin E. Basson, Exchange Act Rel. No. 35840 (June 13, 1995), 59 SEC Docket 1650.
6 Adopting Release, 68 SEC Docket at 710.
7 Adopting Release, 68 SEC Docket at 710, (citing SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992) (quoting Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 n.12 (1976)).
8 Id.
9 For this reason, the cases cited by Wallace in support of his claim that recklessness for the purposes of determining a violation of Rule 102(e) should be defined as approximating actual intent to aid in the fraud perpetrated by the audited company are inapposite. In re Software Toolworks, 50 F.3d 615, 627 (9th Cir. 1994); Decker v. Massey-Ferguson, Ltd, 681 F.2d 111, 121 (2d Cir. 1982); and SEC v. Price Waterhouse, 797 F. Supp. 1217, 1240 (S.D.N.Y. 1992) are all cases involving actions against accountants or others for violations of the antifraud provisions of the federal securities laws.
10 A "chartered accountant" is a professional designation in the United Kingdom, Australia, Canada, and New Zealand equivalent to a certified public accountant.
11 The record has no information regarding Mah's background, credentials, or experience and very little about her assigned duties.
12 None of the responding persons volunteered the classifica-tion of the Premier shares they held.
13 During 1995, the Fund discovered that the Premier restricted shares had been misclassified and disclosed the error. The Fund did not restate its financial reports for 1994. The failure to restate is not at issue in this case.
14 It is undisputed that this Board meeting was not in-person, but the record does not specify how it was conducted.
15 The Valuation Policy differed from the valuation procedures set forth in the Fund's 1983 prospectus ("the Prospectus"). The Prospectus provided that the securities in the Fund's portfolio would be valued at either market value or in good faith at fair value. The Prospectus defined "fair value" as the amount the Fund could expect to realize from the current sale of the securities. The Prospectus described four methods for the valuation of its security portfolios and ranked them in order of preference. The most favored method, the "public market method," used the bid price for those securities traded on a stock exchange. The Board was to value restricted shares at a discount from the market price for unrestricted shares of the same issuer and class. The Prospectus noted that it would be "highly probable" that the securities of many of the portfolio companies would not have a public market. In that event, their valuation was to be based on the "private market method." This method valued the stock on the basis of actual or proposed third-party transactions. The third method, the "appraisal method," used when there were no third-party transactions in the securities, valued shares by an appraisal which was to take into consideration events that occurred since the purchase of the stock. Finally, if no other method was feasible, the Prospectus directed the Board to value the shares at their cost to the Fund.
16 The record provides no explanation for the calling of a second valuation meeting.
17 See AICPA, Codification of Statements on Auditing Standards, §§ 312.20(a), .20(c), .21 (hereinafter "AICPA, AU"). Hammer testified that a critical audit area requires a greater amount of subjective judgment by management and, as a result, poses a greater risk of misstatement in the financial statements. As used in Generally Accepted Auditing Standards terms, a critical audit area presents a higher inherent audit risk. AICPA, AU § 312.20(a). The existence of this inherent risk obliges an auditor to reduce the chance that any misstatement that might occur would go undetected. AICPA, AU § 312.21. Simply stated, Wallace had a professional obligation to take special care with critical audit areas.
18 The audit gauge establishes the level above which an audit variance will, in most cases, be deemed material to the Fund's financial reports.
19 In fact, they made no such determination with respect to any of the Fund's investments, but there was no charge with respect to this failure.
20 Wallace points to "the extensive detail in the work papers demonstrating the fact that the auditors did indeed document their review" of the Fund's valuation process, citing notations in the work papers that the auditors reviewed several specific documents. Wallace claims that these notations demonstrate the scope of the auditors' review of the Board's valuation of its securities, "most particularly those of Premier."

    This argument is disingenuous. None of the documents specifically identified by Wallace relate to Premier. In fact, the omission from the work papers of any supporting documentation with respect to Premier in the face of specific mention of documentation with respect to several of the Fund's other holdings supports our finding that theauditors did not, in fact, review underlying documentation of the value of the Fund's shares of Premier.

21 The consent resolution is erroneously dated February 1,1995.
22 This was the same Valuation Policy attached to the 1994 valuation.
23 As noted below, the 1995 Form 10-K also stated that both restricted and unrestricted securities with quoted market prices were valued at the closing bid price.
24 Wallace contends on appeal that, in fact, the closing bid on the last trading day of 1995 was "most likely" $0.375.
25 Wallace drafted this footnote. There is no indication that the Fund's Board ever approved the valuation procedures in the footnote.
26 AICPA, AU § 311.01. The obligation to plan an audit adequately encompasses the obligation to prepare audit programs and obtain knowledge of the entity's business.
27 AICPA, AU § 311.11
28 Id.
29 Id.
30 AICPA, AU § 311.13.
31 AICPA, AU § 316.16 (audit of financial statements in accordance with GAAS should be planned and performed with an attitude of professional skepticism); AICPA, AU § 150.02 (auditor to exercise due professional care in conduct of audit and preparation of audit report).
32 AICPA, AU § 150.02, Standard of Field Work, ¶ 3 (auditor must obtain "[s]ufficient competent evidential matter . . . through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit").
33 AICPA, AU § 230.02.
34 AICPA, AU § 316.16.
35 AICPA, AU § 326.02.
36 AICPA, AU § 326.22.
37 Wallace argues that the misclassification of the securities made no difference in the financial statements because the securities were so thinly traded. Wallace is in error. See Financial Accounting Standards Board Concept Doc. No. 2 ¶ 128(c) (1980). Misclassification makes a portfolio appear more liquid by presenting shares as freely saleable when, in fact, they are not.
38 AICPA, AU § 311.11.
39 15 U.S.C. § 80a-2(a)(41).
40 Accounting for Investment Securities by Registered Investment Companies, Accounting Series Rel. No. 118 at 5 (Dec. 30, 1970) ("ASR-118"). The AICPA Audit and Accounting Guide: Audits of Investment Companies, (hereinafter "AAG") is the source for GAAP regarding investment companies. The AAG references ASR-118 and Restricted Securities, Accounting Series Rel. No. 113, at 3 (Oct. 21, 1969) ("ASR-113") as GAAP for valuation of securities for which market quotations are not readily available. AAG § 2.33.
41 ASR-113, at 3.
42 ASR-118 at 5.
43 Id.
44 ASR-118 at 3.
45 Wallace concedes as much by arguing that the difference between the price of restricted and unrestricted shares is insignificant when the shares are as thinly traded as those of Premier in 1994 and 1995.
46 The 1994 Procedures Memorandum states that, for restricted securities, Calandrella indicated that the Board "generally maintains investments at cost" until events such as strong operations, growing market share, or third party transactions indicate appreciated value. The Memorandum concludes that, from its review of the Board minutes and conversations with Calandrella, it appears that the Board "has adequate information to value the portfolio." Since this discussion in the Memorandum pertains to restricted securities, there is no reason to suppose that these purported conversations with Calandrella involved Premier shares, which were classified as unrestricted in 1994. In any event, the 1994 Procedures Memorandum does not specify the information that was deemed "adequate."
47 AICPA, AU § 326.23.
48 Wallace offers no authority for the novel proposition that quotations in the over-the-counter market are less public than those on stock exchanges. Moreover, the $0.625 valuation used for the 1995 financial statement was significantly higher than the only bid on the last day of trading for 1995, i.e. $0.25.
49 As noted above, the factors cited in the Procedures Memorandum would not appear to have been applied in the 1994 audit with respect to the Fund's holdings of Premier which were not then classified as restricted securities.
50 We accept a law judge's credibility finding unless substantial evidence suggests that we should not do so. See Laurie Jones Canady, Exchange Act Rel. No. 41250 (Apr. 5, 1999), 69 SEC Docket 1468, 1480-81, aff'd 230 F.3d 362 (D.C. Cir. 2000). Nothing in the record suggests that we not accept the law judge's finding here.
51 AICPA, AU § 316.17.
52 See Financial Accounting Standards Board Concept Doc. No. 2 ¶ 128(c) (1980).
53 ASR-113, at 3.
54 The financial statements identified all of the shares as restricted.
55 ASR-113, at 3.
56 Several trades of unrestricted shares occurred that day at $0.625 (13,000 shares), $0.65625 (13,000 shares), and $0.6875 (5,000 shares). The last trade before December 29 occurred on December 6, 1995, a sale of 20,000 shares at $0.625 by Hanifen Imhoff.
57 See Christiana Sec. Co., 45 S.E.C. 649, 662 n.43 (1974), aff'd 432 U.S. 46 (1977) (valuation of a restricted "control block" of DuPont stock presents "a most unusual circumstance").
58 We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.