The SEC recently issued a wakeup call to auditors: Report all abuses committed by clients or risk receiving a civil injunction.
This action arises from the case involving the SEC vs. Solucorp Industries Ltd. and its auditor, Glenn Ohlauser.
Here’s what happened: On December 13, 1999, the SEC filed a civil injunctive action claiming that senior officers and directors of Canadian company, Solucorp Industries Ltd., entered into a “deliberate and systematic scheme to defraud investors over a four-year period.”
The company is incorporated in Canada’s Yukon Territory but headquartered in West Nyack, N.Y. It began trading on the NASD OTCBB, which is the Bulletin Board, in 1996 after voluntarily delisting itself from the Vancouver Stock Exchange after an eight-month trading suspension.
It registered its securities with the SEC under Section 12(g) of the Exchange Act in February of 1998. The SEC then suspended trading in Solucorp’s securities less than three months later.
On October 31, 2000, the SEC amended the complaint to include Glenn R. Ohlhauser, a Chartered Accountant with the Canadian Accounting firm, MacKay & Partners. This is the first time the SEC has ever brought a civil injunction against an auditor who has violated Section 10A of the Securities Exchange Act of 1934, which requires auditors to disclose any illegal acts they discover upon conducting an audit.
MacKay & Partners is providing legal counsel for Ohlhauser, and in a sense, representing itself . “We don’t think he’s done anything wrong,” says Iain MacKay, Chairman of MacKay & Partners. “Being sued does not mean he is guilty.”
The SEC claims otherwise.
According to the SEC’s complaint, Ohlhauser evaluated the information gathered during MacKay’s review of Solucorp’s September 30, 1997 interim financials and his own audit of Solucorp’s December 31, 1997 financial statements. He then “reasonably concluded that Solucorp had backdated a licensing agreement between the company and Smart International Ltd. to September 15, 1997 for improper purposes relating to its accounting treatment of income from a license fee.”
Ohlhauser further concluded that Solucorp had improperly recognized $500,000 in revenues from this licensing agreement, which represented 40% of Solucorp’s total reported revenues for the quarter.
Throughout the audit, Ohlhauser informed Victor Herman, the former chief financial officer of Solucorp’s two principal operating subsidiaries and the preparer of Solucorp’s consolidated financial statements, of the misrepresentation, twice explaining that the September 30, 1997 financial statements were “materially misstated as a result.”
Ohlhauser suggested that Solucorp restate its financial statements. Instead, Solucorp’s director and president, Peter R. Mantia proceeded to have the effective date and signature date of the agreement backdated to September 15, 1997, blatantly ignoring Ohlhauser’s advisement.
Once again, Ohlhauser recognized the error and instructed Solucorp’s officers to fix it. Solucorp’s officers refused.
According to MacKay, Ohlhauser was informed by Solucorp’s officers that although the agreement was not finalized until December 31, it was, in fact, still in place. “When it came to the actual signing of the agreement,” says MacKay, “it was just a formality.”