U.K. Firm Settles Botched Audit Case

Aided by British regulators, the SEC settles a case against U.K. accouting firm PKF for its "highly unreasonable" audit of AremisSoft.
Stephen TaubApril 13, 2006

The Securities and Exchange Commission settled civil charges against a U.K. accounting firm and two of its former partners based on their audit of AremisSoft, a Nasdaq-traded company that went bankrupt in 2002.

In announcing the settlement, the SEC acknowledged that it was aided in the case by the United Kingdom Financial Services Authority. In March, the SEC and FSA signed a “comprehensive arrangement” to increase cooperation in market oversight and supervision.

Among other things, the arrangement provides for the exchange of information about regulated entities and investment banking groups that operate both in the United States and the United Kingdom, according to an SEC announcement at the time.

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In the current case, the SEC had filed an action against PKF and one of the firm’s former partners, Anthony Frederick John Mead, that stemmed from “the failed year 2000 audit” of AremisSoft. Regulators were unable to substantiate about $90 million of revenues the company reported in that year.

The commission also settled combined administrative proceedings against PKF, Mead, and Stuart John Barnsdall, another partner who worked on the 2000 audit. The firm and the two former partners settled without admitting or denying the SEC’s findings.

During the 2000 AremisSoft audit, PKF learned that illegal acts may have occurred but didn’t bring that information to the attention of the client’s management, board, or audit committee, the SEC charged. The commission accused Mead of failing to design appropriate audit procedures to determine whether AremisSoft senior management had committed fraud.

PKF issued an audit report signed by Mead that contained an unqualified opinion that PKF had conducted its audit of AremisSoft’s 2000 financial statements in accordance with generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP). At the time, however, “each knew or should have known” that the financial statements did not comply with GAAP, and that the audit had not been done in line with GAAS.

More specifically, in 2000 AremisSoft reported $97.5 million of its $123.6 million total revenue came from two Cyprus-based subsidiaries. In fact, the subsidiaries together had just $1.7 million in revenue for the year, according to the SEC’s complaint.

AremisSoft also claimed $33.3 million in cash at the end of 2000 when it had $9.98 million in the bank account of one its co-CEOs and $10.7 million was not received by AremisSoft until mid-January 2001.

The SEC said Mead found “numerous problems,” including
serious deficiencies in cash and accounts receivable. The regulator also said PKF and Mead found added irregularities “that should have warranted heightened scrutiny.”

PKF and Mead engaged in “highly unreasonable conduct” in connection with the audit of AremisSoft’s 2000 financial statements, the SEC charged. Their acts involved “repeated violations of applicable professional standards in circumstances which each knew or should have known warranted heightened scrutiny,” according to the SEC. Barnsdall, it alleged, engaged in unreasonable conduct that violated professional standards.

PKF agreed to disgorge $309,048 in fees plus interest and to pay a $2 million penalty. The penalty may be distributed to harmed investors under the Sarbanes-Oxley Act even though the infraction happened before Sarbox’s passage.

Mead agreed to his censure and permanent ban from appearing or practicing before the commission as an accountant. He will also pay a $50,000 penalty.

Barnsdall consented to a censure and a two-year ban from appearing or practicing before the commission as an accountant.