VideoThe company reiterated that all of the accounting corrections expected to be addressed in the restatement fall into the same five categories identified in its June 25 announcement: security classification, accounting for derivative instruments, asset transfers and securitizations, valuation of financial instruments, and "all other corrections."
(Read CFO magazine's recent article that asks whether credit derivatives will encourage more lending or harm the interests of borrowers.)
Former E&Y Partner Arrested on Sarbox-Related Charges
The FBI arrested a former partner of Ernst & Young for allegedly altering and destroying audit working papers related to online credit group NextCard Inc.
Government officials said this is one of the first cases of document destruction brought under the Sarbanes-Oxley Act.
Thomas C. Trauger faces criminal charges for obstructing investigations by both the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission. In addition, the SEC instituted two administrative proceedings — an unsettled proceeding against Trauger and former E&Y audit manager Michael Mullen, and a separate settled proceeding against Oliver Flanagan, a former senior manager at the firm.
The complaint against Trauger, a former partner in Ernst and Young's San Francisco office, contains one count charging him with obstructing the examination of a financial institution and a second count charging falsification of records in a federal investigation in violation of Sarbanes-Oxley. The charges follow a guilty plea by Flanagan to one count of obstructing the examination of a financial institution.
In a separate administrative proceeding, the SEC's Division of Enforcement alleged that Trauger and Mullen engaged in unethical and improper professional conduct as a result of their alleged alteration and destruction of documents. The SEC also instituted a settled administrative proceeding against Flanagan for his role in the alleged document destruction.
According to the allegations in the criminal and civil actions, Trauger, assisted by Flanagan and Mullen, began to alter and destroy copies of working papers related to E&Y's audit work for its client NextCard Inc., a San Francisco-based issuer of credit cards over the Internet. The document destruction allegedly occurred after the working papers had been completed and during an OCC examination of NextCard's banking subsidiary, NextBank.
The bulk of the destruction of documents allegedly followed an October 31, 2001, announcement by NextCard that the OCC and the Federal Deposit Insurance Corp. would require NextBank to revise certain accounting assumptions, which would in turn cause the bank to be severely undercapitalized under federal banking regulations.
According to an affidavit filed by an FBI agent in support of the criminal complaint, Trauger destroyed, altered, and falsified both hard and electronic copies of working papers related to E&Y's audit of NextCard's financial statements for its fiscal year ended December 31, 2000, and E&Y's review of NextCard's financial statements for quarters ending March 31, 2001, and June 30, 2001.
The complaint also alleges that between approximately March 2002 and April 2002, Trauger assisted in the collection and production of altered working papers to the OCC, in response to a subpoena addressed to Trauger.
Finally, the complaint alleges that in April 2003, Trauger gave sworn testimony to the SEC related to NextCard, where he allegedly concealed his alteration and destruction of documents when questioned about his role in the production of E&Y's audit working papers to the OCC.
"This is a bellwether day for the Corporate Fraud Task Force," said Robert McCallum, chairman of the President's Corporate Fraud Task Force and acting deputy attorney general, in a statement. "Today's actions mark one of the first instances in which prosecutors have been able to use an important weapon in the fight against corporate fraud given to us by Congress under the Sarbanes-Oxley Act of 2002 — the ability to prosecute those who would seek to destroy, alter or falsify financial information and records. Today's plea and arrest should remind accountants and lawyers not only of their commitment to represent their clients professionally, but also of our strong commitment to enforcing the law."
For the charge of obstructing the examination of a financial institution, Trauger faces a maximum penalty of five years in prison and a fine of $250,000. For the charge of falsification of records in a federal investigation — the charge brought under Sarbanes-Oxley — he faces a maximum penalty of 20 years in prison and a fine of $250,000.
Short Takes
- H. Carl McCall announced that he is resigning from the board of the New York Stock Exchange. "I have brought about some significant reforms," he said in an interview on Thursday, adding that, now, "I think I should get out of John's way."
"John" is John S. Reed, who was named interim NYSE chairman, succeeding Richard Grasso. According to The New York Times, McCall's last day will be Monday, and Reed will assume his duties on Tuesday.
Reader Comments» Post a comment