Auditing

Three Charged for American Tissue Audit

According to the SEC, the bankrupt paper-products company fraudulently inflated its results by improperly capitalizing $15.6 million of previously ...
Stephen TaubOctober 6, 2005

The Securities and Exchange Commission filed civil fraud charges against three former executives of Arthur Andersen stemming from their 2000 audit of American Tissue Inc.

Two of the individuals, former audit manager John D. Parson and former senior accountant Brendon P. McDonald, agreed to settle
without admitting or denying the allegations. Parson agreed to pay a
$50,000 civil penalty and to be suspended from appearing or practicing before the commission as an accountant. McDonald agreed to a $30,000 penalty and to a five-year suspension, after which he can apply for reinstatement. Former Andersen partner Fred Gold did not reach a settlement with the commission.

The SEC had previously filed a separate federal civil action against American Tissue, a maker of paper products that filed for bankruptcy in 2001, and three of its principal officers. That action has been stayed pending sentencing of the three officers in a related criminal proceeding, the regulator noted.

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The commission’s complaint against Parson, McDonald, and Gold alleged that during its 2000 fiscal year, American Tissue fraudulently inflated assets and earnings by improperly capitalizing $15.6 million of previously expensed supplies and overvaluing its finished-goods inventory by at least $12.5 million.

During Andersen’s audit of American Tissue’s fiscal 2000 financial statements, the three individuals “failed to request sufficient accounting documentation to verify the financial information provided by the company,” maintained the SEC, “or to conduct required testing of American Tissue’s finished goods inventory figures.” As a result, they “knew or were reckless in not knowing” that American Tissue’s finished goods inventory was overstated.”

By issuing an unqualified audit report on those financial statements, added the SEC, Parson, McDonald, and Gold failed “to exercise the due professional care and skepticism required by generally accepted auditing standards.

The SEC also alleged that they “knew, or were reckless in not knowing,” that supplies used in American Tissue’s manufacturing processes had been improperly classified as inventory instead of as expenses. In addition, the three individuals were accused of altering work papers “in an attempt to conceal the failures of their audit work.”