UNITED STATES OF AMERICA Before The SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 36949 / March 11, 1996 Accounting and Auditing Enforcement Release No. 768 / March 11, 1996 Administrative Proceeding File No. 3-8972 -------------------------- In the Matter of : ORDER INSTITUTING PROCEEDINGS : AND OPINION AND ORDER PURSUANT LOUIS R. WEISS, CPA : TO RULE 102(e) OF THE COMMISSION'S : RULES OF PRACTICE : -------------------------- I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute public administrative proceedings against Louis R. Weiss ("Weiss") pursuant to Rule 102(e)(1)(ii) -[1]- of the Commission's Rules of Practice [17 C.F.R. 201.102(e)]. In anticipation of the institution of these proceedings, Weiss has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except that he admits the Commission's jurisdiction over him and the subject matter of these proceedings, Weiss has consented to the issuance of this Order Instituting Proceedings and Opinion and Order Pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order"). ---------FOOTNOTES---------- -[1]- Rule 102(e)(1)(ii) of the Commission's Rules of Practice provides, in relevant part, that the "Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice of and opportunity for hearing in the matter ... (ii) ... to have engaged in unethical or improper professional conduct ...." ==========================================START OF PAGE 2====== Accordingly, IT IS ORDERED that proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice be and hereby are instituted. II. On the basis of this Order and the Offer that Weiss has submitted, the Commission makes the following findings: A. Weiss is a CPA licensed to practice in Colorado and is the sole shareholder of Louis Weiss & Associates, Inc. Weiss has audited at least eight SEC clients during the last three years. B. Bion Environmental Technologies, Inc. ("Bion") is a Colorado corporation with its administrative office in Denver, Colo- rado. It is engaged in the business of designing, marketing, installing and operating waste water treatment systems. Bion Technologies, Inc. ("BT") was incorporated on September 20, 1989 and reorganized with a public shell named RSTS Corporation ("RSTS") on April 9, 1992. The name was changed to Bion in September 1993. C. FACTUAL BACKGROUND 1. Bion, during the period 1992 through 1994, filed with the Commission quarterly reports, annual reports, and a Form SB-2 registration statement that, among other things, materially overstated assets and revenues. -[2]- The misstated financial statements were filed with: (1) Forms 10-Q, 10-K and SB-2 filed from 1992 to 1993 and improperly characterized as an asset a convertible promissory note ("Note") with a face amount of $666,667 that inflated Bion's claimed assets by as much as 70%; and (2) a Form 10-KSB for the period ended March 31, 1994 that no longer claimed the Note as an asset, but overstated revenue, understated expenses, overstated marketable equitable securities, and improperly deferred salaries. These 1994 errors understated Bion's reported net loss of $320,459 for its 1994 fiscal year by $133,315. 2. Weiss issued an audit report on the financial statements of Bion for each of the fiscal years ended ---------FOOTNOTES---------- -[2]- Bion submitted an offer of settlement to the entry of a cease and desist order from future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1 and 13a-13 thereunder, which was accepted by the Commission. Sec. Exch. Act Rel. No. 36111; AAER No. 700 (August 16, 1995). ==========================================START OF PAGE 3====== March 31, 1993 and 1994. Weiss' unqualified audit report on the March 31, 1993 financial statements was included in Bion's Form 10-K filed with the Commission on June 24, 1993 and was also included in a Form SB-2 Registration Statement filed by Bion on September 27, 1993. Weiss' unqualified audit report on the March 31, 1994 financial statements was included in the fifth amendment to Bion's Form SB-2 registration statement filed with the Commission on April 18, 1994 and was included in Bion's Form 10-KSB filed on July 14, 1994. 3. The audit of the March 31, 1993 financial statements was deficient in that, among other things, it allowed Bion to materially overstate the value of its assets by the amount of the Note plus accrued interest on the Note. The audit of the March 31, 1994 financial statements was deficient in that, among other things, it allowed Bion to materially understate the amount of its net loss. 4. In auditing Bion's financial statements for its fiscal year ended March 31, 1993, Weiss took no exception to Bion's improper classification of the Note as an asset. In addition, Weiss audited Bion's financial statements for its fiscal year ended March 31, 1994 and failed to detect material departures from Generally Accepted Accounting Principles ("GAAP"). 5. Weiss failed to perform these audits in accordance with Generally Accepted Auditing Standards ("GAAS") and incorrectly opined in his audit reports that Bion's financial statements were prepared in conformity with GAAP. In addition, Weiss signed the initials of another CPA on certain audit working papers for the 1993 audit, when in fact there was no concurring review partner. D. DEPARTURES FROM GAAP IN THE 1993 FYE FINANCIAL STATEMENTS 1. The Note that had been included as an asset in Bion's financial statements had been acquired from Chippewa Resources Corporation ("Chippewa") -[3]- on April 9, 1992 in exchange for the transfer of 250,000 shares of Bion (formerly RSTS) restricted stock to Chippewa from the former RSTS majority shareholder. The Note was reported as a receivable in the amount of $748,798, which included the $666,667 face amount of the note ---------FOOTNOTES---------- -[3]- In October 1992, Chippewa merged with BRI Holdings, Inc. and changed its name to Underwriters Financial Group, Inc. ("UFG"). UFG is referred to as Chippewa throughout this Order. ==========================================START OF PAGE 4====== plus accrued interest, and comprised 70% of Bion's total assets. Accounting for the Note by Bion and Weiss 2. At the time of the reorganization of BT with RSTS, the parties to the reorganization valued the 1,050,000 shares of RSTS stock that the BT shareholders would receive at $2,800,000 or $2.67 per share. This amount was used as the basis for determining the value of the Bion (originally RSTS) shares Chippewa received and, therefore, the face amount of the Note Chippewa gave to Bion. -[4]- Weiss communicated to Bion's management prior to the reorganization that the Note could be recorded as an asset by Bion at the $666,667 valuation. 3. On March 31, 1992, just prior to the reorganization of RSTS and BT on April 9, RSTS and BT had net assets of $192 and $8,000, respectively; accordingly, the proforma book value per share of the combined companies was less than one cent. Nevertheless, the 250,000 shares of RSTS restricted stock received by Chippewa were valued at $2.67 per share. Valuation of the Note According to GAAP 4. The Note should not have been reported as an asset ac- cording to GAAP. A promissory note contributed to an entity's equity capital generally should not be shown as an asset until paid. E. DEPARTURES FROM GAAP IN THE 1994 FYE FINANCIAL STATEMENTS Marketable Equity Securities ("MES") 1. GAAP requires that MES be reported on the balance sheet at the lower of cost or market value at the balance sheet date. MES should have been reported at the lower of cost or market value at the March 31, 1994 balance sheet date but was not. The financial statements contained almost none of the disclosures required by GAAP including, but not limited to: the aggregate cost and market value of the current and noncurrent portfolios, the gross unrealized gains and losses, the net realized gain or loss included in the income statement, the basis on which cost was determined, and ---------FOOTNOTES---------- -[4]- $2,800,000 ö 1,050,000 RSTS shares equals $2.67 per share. $2.67 per share x 250,000 RSTS shares transferred to Chippewa equals $666,667, the face amount Bion reported as an asset. ==========================================START OF PAGE 5====== the change in the valuation allowance. Weiss checked off in the Disclosure Checklist portion of his audit working papers that such disclosures had been made. MES were overstated by $21,696 in the March 31, 1994 balance sheet and net loss was understated by the same amount in the statement of operations. Deferred Offering Costs 2. Bion had deferred offering costs in the amount of $264,536 that were included in the March 31, 1994 balance sheet. These offering costs improperly included $41,857 of company salaries that could not be deferred according to GAAP. Consequently, assets were overstated and net loss understated by $41,857. Revenue Recognition 3. Bion recognizes revenue on waste treatment system con- tracts using the percentage-of-completion method, which is a generally accepted method for recognizing revenue on long-term contracts. In applying this method, Bion incorrectly calculated revenue and, consequently, over- stated revenue and understated net loss by $58,543. Unrecorded expenses 4. Bion failed to record $11,219 in expenses, which under- stated liabilities and net loss by that amount. F. DEPARTURES FROM GAAS Failure to Adequately Plan the Audit and Consider Audit Risk 1. GAAS requires that the audit work be adequately planned. This includes the development of an audit program in sufficient detail to document the audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. Weiss' audit programs for both the 1993 and 1994 audits were inadequate to meet this standard. At the very least, the 1993 audit program should have been supplemented to include specific audit procedures with respect to the Chippewa Note. The disclosure checklist used by Weiss was for a nonpublic company. 2. GAAS also requires an auditor to consider audit risk when planning and performing an audit, which is the risk that the auditor may unknowingly fail to appropriately modify his opinion on financial statements that are materially misstated. In the March ==========================================START OF PAGE 6====== 31, 1993 audit, Weiss failed to consider the audit risk resulting from a large and unusual transaction that represented about 70% of the company's assets (the Note). Weiss also failed to consider the substantial audit risk inherent in a transaction involving the reverse acquisition of a publicly held corporate shell by a private company and the simultaneous transfer of a large block of restricted stock of the public entity to a third party. Even though Weiss knew that the Note transaction would give Bion the appearance of a large asset base, his audit plan contained insufficient risk assessment documentation. Failure to Obtain Sufficient Competent Evidential Matter 3. GAAS prescribes that sufficient competent evidential matter be obtained through inspection, observation, inquiries and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. When evidential matter can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than that secured solely within the entity. 4. Weiss failed to obtain sufficient competent evidential matter regarding the Note. All of his underlying accounting and financial data was provided by Bion's management. He obtained insufficient corroborating evidential matter from third parties. 5. The working papers for the audit of the 1993 fiscal year contained a one page, handwritten summary prepared by Weiss that discussed the Note-for-Bion-stock transaction and his justification for originally recording the Note as an asset valued at $666,667. There was no other documentation, evidential or otherwise, in the audit working papers concerning the proper accounting treatment of the Chippewa Note. 6. GAAP requires that public companies report notes received in payment for the enterprise's stock as a deduction from shareholders' equity. Weiss did not reference the appropriate accounting literature concerning the Note transaction in his audit working papers even though he knew about it. 7. Weiss' working papers for the audit of the March 31, 1994 financial statements did not contain sufficient detail on offering costs to determine what some of the amounts represented. His analysis of and search for ==========================================START OF PAGE 7====== unrecorded liabilities was insufficient and poorly documented. Weiss' audit of Bion's contracts to determine contract revenues and costs as well as work in progress and accounts receivable was not adequately documented. His audit evidence for MES was limited to account statements from various brokerage accounts. There was insufficient documentation concerning the analysis of MES. Failure to Act With Due Professional Care 8. GAAS requires that an auditor perform his work with due professional care in the performance of the audit and the preparation of the report. Due care imposes a responsibility upon the auditor to observe the standards (GAAS) of field work and reporting. Weiss failed to exercise due professional care by: a. failing to properly plan the audit and to consider the audit risk and potential for material misstatements, particularly in light of the fact that the bulk of the financial presentation for the March 31, 1993 financial statements related to one very material, three-way stock-for-note exchange transaction occurring as part of a reverse acquisition; and b. failing to obtain sufficient competent evidential matter to support the assertions in the financial statements and failing to apply the auditing procedures necessary to afford a reasonable basis for his opinion on the financial statements as discussed in paragraphs F.3. through F.7. Failure to Maintain an Attitude of Professional Skepticism 9. An audit of financial statements in accordance with GAAS should be planned and performed with an attitude of professional skepticism. The auditor neither assumes that management is dishonest nor assumes unquestioned honesty. Rather, the auditor recognizes that conditions observed and evidential matter obtained, including information from prior audits, need to be objectively evaluated to determine whether the financial statements are free of material misstatement. 10. Weiss did not conduct the audit with appropriate skepticism. As the auditor for Chippewa, the maker of the Note, Weiss was fully familiar with Chippewa's financial instability and the likelihood it could not honor the Note with current assets. Additionally, as ==========================================START OF PAGE 8====== auditor for RSTS, Weiss knew that RSTS was a shell with virtually no assets. G. UNETHICAL CONDUCT 1. By letter dated March 16, 1994, a Commission staff accountant requested that Weiss voluntarily produce, among other things, the audit working papers from his audit of Bion's March 31, 1993 FYE financial statements. Weiss agreed to permit the staff accountant to review the requested working papers in Weiss' office on April 11, 1994. Certain of the working papers reflected the initials of a purported concurring review partner. In fact, in anticipation of the audit working paper review, Weiss had signed the initials of another CPA to make the working papers appear to have been reviewed by a concurring review partner when they had not been. 2. One requirement of members of the SEC Practice Section of the American Institute of CPAs is that their audits of public companies be reviewed by a second partner called a concurring review partner. Weiss is a member of the SEC Practice Section and represents himself to be a member by including that information on his correspondence letterhead. He thus had a requirement for a concurring partner review of Bion's audit and in this case had not obtained such a review. Weiss admitted signing another accountant's initials on the work papers and also admitted performing eight other audits of public companies during 1993 for which there were no concurring partner reviews. CONCLUSION Based on the foregoing, the Commission finds that Weiss engaged in unethical and improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice with respect to the audits of Bion's financial statements for its fiscal years ended March 31, 1993 and 1994. The financial statements opined on were not prepared in conformity with GAAP, the audit was not conducted in accordance with GAAS, and the concurring partner's initials were forged on the working papers by Weiss as described above. III. ORDER Based on the foregoing, the Commission finds it appropriate and in the public interest to accept Weiss' Offer and impose the sanctions therein. ==========================================START OF PAGE 9====== Accordingly, IT IS HEREBY ORDERED that: A. Weiss be, and hereby is, denied the privilege of appearing or practicing before the Commission as an accountant; B. Five years after the date of this Order, Weiss may apply to resume appearing or practicing before the Commission as: 1. a preparer or reviewer of financial statements required to be filed with the Commission, or a person responsible for the preparation or review of financial statements required to be filed with the Commission, provided that, in Weiss' practice before the Commission, his work will be reviewed by the independent audit committee of the company or in some other manner acceptable to the staff of the Commission; 2. an independent public accountant, upon submission of an application to the Office of the Chief Accountant of the Commission containing a showing satisfactory to the Commission that: a. Weiss, or any firm with which he is or becomes associated with in any capacity, is and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section"); b. Weiss, or any firm with which he is or becomes associated, has received an unqualified report relating to his or its most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and c. Weiss will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent public accountant; and 3. The Commission's review of Weiss' application to resume appearing or practicing before it may include consideration of any other matters relating to Weiss' character, integrity, professional conduct, or qualifications to practice before the Commission. By the Commission. ==========================================START OF PAGE 10====== Jonathan G. Katz Secretary