Ex-Auditors Settle Securitization Charges

A securitization scheme results in civil charges for three former auditors of a now-defunct factoring firm.

The securitization fraud that is partly responsible for putting a financial-services firm out of business is now causing problems for that company’s former auditors. On Wednesday the Securities and Exchange Commission reached a settlement with three former auditors of National Century Financial Enterprises (NCFE), who were charged with “improper professional conduct” linked to their audit of a receivables securitization.

Press C. Southworth, a retired PricewaterhouseCoopers auditor; Robert M. Harbrecht, a retired Deloitte and Touche auditor; and Brian R. Spires, a former audit manager with Deloitte; were cited by the SEC for violating generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP). Without admitting or denying the commission’s findings, all three agreed to a bar from practicing before the SEC, which means they cannot sign off on audits of public companies or hold the CEO or CFO position at a public company. Southworth can request reinstatement in two years; Harbrecht and Spires can request the same in 18 months and one year, respectively.

“Press is glad to have this unhappy chapter put behind him,” says Southworth’s attorney, Christopher Davies, a partner at Wilmer Cutler Pickering Hale and Dorr, noting that the auditor had retired from accounting before he ever became involved in the investigation. Attorneys for the other two former auditors did not return CFO.com’s request for comment.

A spokesperson for PwC notes the allegations made against Southworth stem from audits that are nearly a decade old, and that the former auditor, who retired from the firm in 2001, no longer practices accounting. Deloitte declined to comment.

At issue are various violations of GAAS and GAAP related to fraud at NCFE that went undetected until 2002, the same year the finance company filed for bankruptcy. In 2004 NCFE began liquidating its assets.

The SEC contends that inaccurate financial reporting and disclosures related to the securitization should have prompted the auditors to question management’s integrity, as is their responsibility under GAAS. In particular the SEC charged that the auditors failed to properly address evidence of possible fraud and illegal acts by the company and its officers. Instead, the auditors placed an “undue reliance on management representations,” with Southworth giving an unqualified audit opinion to NCFE in 1998, and Harbrecht doing the same for the 2000 audit. Spires participated in the 2000 audit.

Securitizations have come under intense scrutiny in recent months as a result of the subprime mortgage crisis. While securitizations of corporate receivables represent a much smaller proportion of the asset-backed commercial paper market than securitized mortgages, they share the same basic structure. That structure has been criticized for poor disclosures and its dependence on legal and rating-agency opinions that are paid for by the issuer.

Although the SEC characterized the deal as “complex,” the NCFE structure is considered a plain vanilla securitization by industry players. NCFE was in the business of buying up medical receivables at a discount from health-care providers that wanted cash up front. NCFE raised funds by securitizing those receivables — selling notes to investors backed by the receivable assets. Investors received regular interest payments and a lump-sum payment when the debt was retired, according to the U.S. Attorney General’s office in Ohio, which has charged eight former NCFE executives with fraud.

Discuss

Your email address will not be published. Required fields are marked *