UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 38035 / December 10, 1996 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 861 / December 10, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9199 ------------------------------ : In the Matter of : ORDER INSTITUTING PROCEEDINGS : AND OPINION AND ORDER PURSUANT MICHAEL GOODBREAD, C.P.A. : 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 that public administrative proceedings be, and they hereby are, instituted pursuant to Rule 102(e) of the Commission's Rules of Practice, 17 C.F.R.  102(e),1/ against Michael Goodbread ("Goodbread"). II. In anticipation of the institution of this administrative proceeding, Goodbread has submitted an Offer of Settlement 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 any findings set forth herein, except as to the jurisdiction of the Commission over him and over the matters set forth herein, which he admits, Goodbread consents to the issuance of this Order Instituting Proceedings And Opinion 1/ Rule 102(e)(1), 17 C.F.R.  201.102(e)(1), of the Commission's Rules of Practice provides in relevant part: 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 be lacking in character or integrity or to have engaged in unethical or improper professional conduct . . . . ==========================================START OF PAGE 2====== And Order Pursuant To Rule 102(e) Of The Commission's Rule Of Practice ("Order") and to the entry of findings and imposition of the remedial sanctions as set forth below. III. On the basis of this Order and Goodbread's Offer, the Commission finds that: A. Goodbread Goodbread is a certified public accountant who has been licensed by the State of Florida Board of Accountancy since February 1973. In 1981, Goodbread became a partner with the Jacksonville, Florida office of Touche Ross. In December 1989, Touche Ross combined its practice with Deloitte, Haskins & Sells, whereupon Goodbread became a partner with the Jacksonville, Florida office of Deloitte & Touche. Koger Properties, Inc. ("Koger"), a Florida corporation located in Jacksonville, Florida, at all material times was engaged in the business of developing, constructing, operating and managing office centers located in the southeastern and southwestern United States. Koger common stock is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 and trades on the New York Stock Exchange. Goodbread purchased 400 shares of Koger stock at $26 per share in December 1988. At the time of his purchase Koger was an audit client of Deloitte, Haskins & Sells. However, after the effective date of the combination, Koger became an audit client of the new merged entity, Deloitte & Touche. After the combination of the two firms, Goodbread was assigned to be the audit partner in connection with Deloitte & Touche's audit of Koger's financial statements for the fiscal year ended March 31, 1990. In that capacity, Goodbread had final responsibility within the firm for planning and supervising the performance of the audit in accordance with generally accepted auditing standards ("GAAS"). Goodbread signed the Koger Audit Planning Memorandum on February 21, 1990. Audit planning for the engagement and/or field work was conducted from that time until June 26, 1990, on which date Goodbread signed the Audit Report Record, signifying completion of the Koger audit. Notwithstanding Goodbread's capacity as a partner in the combined firm of Deloitte & Touche after the combination, and particularly his final responsibility for the independent audit of Koger beginning on or about February 21, 1990, Goodbread did ==========================================START OF PAGE 3====== not sell his 400 shares of Koger stock until May 10, 1990. 2/ B. Lack of Independence 1. Violation of Commission's Independence Rules Koger's financial statements were required to be audited by an independent accountant for the fiscal year ended March 31, 1990. Regulation S-X requires auditors of publicly filed financial statements to be independent, stating in rule 2-01(a) that the Commission "will not recognize any certified public accountant or public accountant as independent who is not in fact independent." (17 C.F.R. 210.2-01). Rule 2-01(b) states, "an accountant will be considered not independent with respect to any person...in which...he, his firm or a member of his firm had, or was committed to acquire, any direct financial interest or any material indirect financial interest..." Owning shares of stock in an entity is clearly a direct financial interest in the entity. Accordingly, section 602.02.b of the Codification of Financial Reporting Policies (FRC) states that any stock ownership in a client impairs independence, and that "materiality is not a consideration in the case of a direct financial interest." It is clear from Section 602.01 of the FRC that had Goodbread sold the Koger stock when the merger of the accounting firms became effective that no question would be raised about his independence. However, it was not just his status as engagement partner on the audit that caused a lack of independence, but also his status as a partner of a firm that is the auditor of record for an SEC registrant. As noted above, rule 2-01 of Regulation S-X is clear that a direct financial interest by any member of an accounting firm would impair the firm's independence. The rule goes on to say that "the term member means (i) all partners, shareholders, and other principals in the firm." Thus even if Goodbread had not been the engagement partner for the Koger audit, his ownership of Koger stock was a direct violation of the independence requirements of Regulation S-X. 2. Violation of GAAS and Code of Ethics Regulation S-X requires the audit report to state whether the audit was conducted in accordance with GAAS. GAAS expressly requires that the auditor be independent "[i]n all matters relating to the assignment." Codification of Statements on Auditing Standards, AU  150.02 (Codification hereafter cited as "AU  "). AU  220.04 further provides that: "[t]he profession has established, through the AICPA's Code of Professional Conduct, precepts to guard against the presumption of loss of 2/ Goodbread sold the stock for $20.75 per share. ==========================================START OF PAGE 4====== independence. . . Insofar as these precepts have been incorporated in the profession's code, they have the force of professional law for the independent auditor." (emphasis in original). The AICPA Code of Professional Conduct expressly prohibited Goodbread's Koger stock ownership during the time of the Koger audit. The Code states that "[i]ndependence shall be considered to be impaired if . . . during the period of a professional engagement, or at the time of expressing an opinion, a member or a member's firm . . . [h]ad or was committed to acquire any direct or material indirect financial interest in the enterprise." AICPA Professional Standards, ET  101.02 (Jan. 12, 1988). If an auditor is not independent, "any procedures he might perform would not be in accordance with generally accepted auditing standards and he would be precluded from expressing an opinion on such statements." AU  504.09. Accordingly, under such circumstances, GAAS requires an accountant to "disclaim an opinion with respect to the financial statements" and to "state specifically that he is not independent." Id. Goodbread held a direct ownership interest in Koger stock while participating in the initial phases of the audit of Koger's financial statements. Notwithstanding this lack of independence from Koger, Goodbread caused Deloitte & Touche to issue an unqualified audit report, contained in Koger's Form 10-K for the fiscal year ended March 31, 1990, stating that Deloitte & Touche was independent and that the audit was conducted in accordance with GAAS. Under the circumstances, Goodbread's ownership of stock specifically precluded any representation that the audit was conducted in accordance with GAAS and required Goodbread to make sure that Deloitte & Touche disclaimed an opinion on the financial statements and disclosed the lack of independence. C. Unethical and Improper Professional Conduct Based on the foregoing, Goodbread engaged in unethical and improper professional conduct by: 1. failing to immediately divest himself of stock ownership of an SEC client when he became a partner of the merged firm; 2. violating GAAS by owning stock of a client during the time of an audit engagement; 3. failing to inform his firm of his stock ownership in order to make sure the firm disclaimed an opinion on the financial statements and disclosed the lack of independence; and ==========================================START OF PAGE 5====== 4. causing his firm to issue an unqualified audit report on a client's financial statements under these circumstances. The Commission will continue to aggressively enforce its rule that an auditor's direct, although immaterial, interest in an SEC client causes the auditor to lack independence, in fact and appearance, with respect to that client. IV. Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer of Settlement submitted by Goodbread, and accordingly, IT IS HEREBY ORDERED, effective immediately, that: A. Goodbread be, and hereby is, censured; B. Goodbread will comply with all applicable Commission rules and regulations regarding the independence of auditors from their audit clients as long as he practices before the Commission as an independent accountant; C. Goodbread, or any firm with which he is or becomes associated 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") as long as he practices before the Commission as an independent accountant; and D. Goodbread will comply with all applicable SEC Practice Section requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he practices before the Commission as an independent accountant. By the Commission. Jonathan G. Katz Secretary