UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39601 / January 30, 1998 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1010 / January 30, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9541 : ORDER INSTITUTING PUBLIC In the Matter of : ADMINISTRATIVE : PROCEEDINGS PURSUANT : TO RULE 102(e)(1)(ii) OF : THE COMMISSION'S RULES OF PAUL G. MOUNT, CPA : PRACTICE, MAKING FINDINGS : AND IMPOSING REMEDIAL : SANCTIONS Respondent. : : I. The Securities and Exchange Commission ( Commission ) deems it appropriate and in the public interest that public administrative proceedings pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice be, and hereby are, instituted against Paul G. Mount ( Mount ).<(1)> II. <(1)> Rule 102(e)(1) 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 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. ======END OF PAGE 1====== In anticipation of the institution of these administrative proceedings, Mount has submitted an Offer of Settlement ( Offer ), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the Commission s findings contained herein, except as to the Commission s jurisdiction over him, which is admitted, Mount consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e)(1)(ii) of the Commission s Rules of Practice, Making Findings and Imposing Remedial Sanctions. III. FINDINGS<(2)> A. BACKGROUND National Trade Trust ( NTT ) was organized in Minnesota in January 1989 as a private business trust. NTT provided short-term financing to clients in exchange for an interest in the client s accounts receivable, purchase order contracts, or inventory. NTT charged these clients a financing fee, called a discount fee, ranging from 36% to 60% annually on the amount advanced to each client. Between approximately February 1990 and March 1994, NTT raised approximately $8 million from the offer and sale of securities in the form of promissory notes ( Notes ). NTT has defaulted on the Notes and currently owes approximately $6.5 million to over 200 investors. Mount, age 43, is, and at all relevant times was, a certified public accountant licensed with the state of Minnesota. He is one of two partners at a Bloomington, Minnesota accounting firm, Mount & Borresen, Ltd. ( M&B ). M&B was NTT s independent auditor from 1991 until 1994. Mount was the sole partner responsible for auditing NTT s financial statements. Mount, through M&B, was engaged to conduct the audits of NTT s financial statements for the fiscal years ended December 31, 1990, 1991 and 1992. These financial statements, together with audit reports prepared by Mount, were included in NTT s offering statement, and amended offering statements, on Form 1-A for certain of the Notes ( the offering statements ). The offering statements were filed with the Commission pursuant to Regulation A of the Securities Act of 1933 ( Securities Act ) at various times between December 1991 and July 1993. By virtue of the foregoing, Mount practiced before the Commission within the meaning of Rule 102(e) of the Commission's rules of practice in connection with the audits of NTT's fiscal 1990, 1991, and 1992 financial statements. <(2)> The findings herein are made pursuant to Mount s Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. ======END OF PAGE 2====== In the audit reports referred to above, Mount, through M&B, rendered unqualified opinions on NTT s fiscal 1990, 1991, and 1992 financial statements. In those reports, Mount stated that NTT's balance sheet and related statements of operations, trust capital and cash flows were presented fairly in all material respects, in conformity with Generally Accepted Accounting Principles ( GAAP ). In addition, Mount stated that his audits were conducted in accordance with Generally Accepted Auditing Standards ( GAAS ). B. NTT S FINANCIAL STATEMENTS NTT s fiscal 1990, 1991, and 1992 financial statements materially overstated NTT s assets, net worth and income, presenting NTT as a profitable enterprise when it consistently experienced operating losses. These financial statements departed from GAAP in three material respects. 1. Avails Transaction NTT overstated its net worth by recording contracts for 30 second advertising spots on several small regional television stations (referred to as Avails ) as an asset on its fiscal 1991 and 1992 balance sheets. The Avails were acquired through a transaction where NTT issued Preferred Certificates of Trust in exchange for the Avails. In conjunction with this transaction, NTT avoided writing down $427,536 in uncollectible advances made to related parties by transferring them to another related party as a finders fee. This transaction lacked economic substance and should not have been included in NTT s balance sheet. The Avails purchase agreement provided that the transaction could be terminated if NTT s auditors ... fail or cease to recognize the Avails conveyed hereby as having value as capital assets in an amount equivalent to their cost... Moreover, the Preferred Certificates of Trust had no value to the party that sold the Avails unless and until the Avails were used or sold by NTT. NTT never sold or used any of the Avails and the agreement was subsequently cancelled. The Avails purchase agreement stated that the Preferred Certificates of Trust had a face value of $1 million and that the Avails had a monetary value of $1 million. Notwithstanding this fact, NTT's trustee assigned a $2 million market value to the Avails. As a result, NTT's assets were overstated by $2 million and equity was overstated by $1.4 million.<(3)> NTT's fiscal 1991 and 1992 financial statements reflect <(3)> The overstatement of NTT s equity is comprised of $1 million in Avails Certificates and $427,536 attributable to the failure to write down NTT s worthless related party receivables. The difference between the $2 million overstatement in NTT's assets and the $1,427,536 overstatement in NTT s equity ($572,464) was recorded as a liability in NTT s December 31, 1991 balance sheet, under the caption Due to Client. ======END OF PAGE 3====== net worth of approximately $1.2 million and $1.5 million, respectively. 2. NTT s Asset Valuations NTT overstated the value of most of its assets by recording them at their purported fair market value on its restated fiscal 1990 balance sheet<(4)>, and on its fiscal 1991 and 1992 balance sheets. NTT provided short-term financing to clients and should have recorded this financing based on the amount of cash advanced. Instead of valuing assets based on the amount advanced to the client, NTT inflated its asset values by assigning valuations based on the purported fair market value of the underlying assets used to secure the advance. NTT s accounting treatment of these purchases was not in conformity with GAAP. NTT recorded the difference between (i) the amount advanced to the client, and (ii) the inflated value of the assets in which it held a security interest, as a liability - Due to client. For example, NTT improperly recorded a client's executory contract as an asset on its fiscal 1992 financial statements. This contract extended for several years and was cancelable upon ninety days notice. This contract alone was material to NTT's 1992 balance sheet, inflating assets by over $2 million or approximately 25%. While this reporting had no effect on NTT's net worth or income statement, it resulted in the material overstatement of NTT's assets. 3. Loss Provisions NTT provided short-term financing to start-up companies, related party entities, companies with a history of operating losses, and companies to which conventional lenders would not lend. The vast majority of NTT's assets were concentrated in these financing activities. NTT failed to establish adequate provisions for this high-risk financing, including advances provided to companies which had previously filed for bankruptcy, advances which were undercollateralized and advances which had been outstanding for over 120 days. Statement of Financial Accounting Standards No. 5, Accounting for Contingencies ( FASB 5 ), states that an estimated loss from a loss contingency must be charged to income if it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Despite the probability that many of these advances would not be repaid, NTT continued to accrue earnings on this financing and failed to record adequate provisions for losses. NTT failed to record any provision for losses for fiscal 1990 and 1991, and recorded only an $80,000 provision in fiscal 1992. NTT s probable losses for fiscal 1990 and 1992 were at least $33,500 and <(4)> NTT s fiscal 1990 financial statements were restated in 1992. ======END OF PAGE 4====== $1,174,000, respectively.<(5)> As a result of failing to record adequate loss provisions, NTT reported a $2,600 loss for fiscal 1990 (when actual losses exceeded $30,000), and reported income of $216,000 in fiscal 1992 (when actual losses exceeded $950,000). IV. MOUNT'S IMPROPER PROFESSIONAL CONDUCT A. Mount Failed to Obtain Sufficient Competent Evidential Matter Auditors are required to obtain sufficient competent evidential matter to support their opinion on the financial statements. One of the standards of GAAS requires that: Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. AUDITING STANDARDS, AU 326.01 In the event that an auditor is not able to obtain sufficient competent evidential matter, the auditor should qualify or disclaim the opinion. Mount failed to obtain sufficient competent evidential matter to verify the outstanding balance and collectibility of NTT s financing activities and the purported fair market value of NTT s assets, including the Avails, and failed to qualify or disclaim his opinion as required by AU 508.20.<(6)> B. Mount Lacked Professional Skepticism and Failed to Exercise Due Professional Care GAAS requires that an auditor exercise due professional care and the proper degree of professional skepticism to achieve reasonable assurance that material misstatements will be detected. AUDITING STANDARDS, AU  230.01 and 316.08. An assessment of the risk of material misstatements must be made during the planning of the audit. The factors to be considered when assessing this risk include: 1. Management operating and financing decisions are dominated by a single person. 2. Management s attitude toward financial reporting is unduly aggressive. 3. Internal or external matters that raise substantial doubt about <(5)> NTT s related party loans were transferred to another related party in connection with the Avails transaction discussed below. As a result, these loans did not appear on its fiscal 1991 balance sheet. <(6)> Prior to 1995, this standard was numbered AU 508.38. ======END OF PAGE 5====== the entity's ability to continue as a going concern are present. 4. Significant and unusual related party transactions not in the ordinary course of business are present. AUDITING STANDARDS, AU 316.10. These factors existed at the time of Mount s audits of NTT, and should have raised his level of skepticism. First, NTT's Trustee dominated NTT s operations and was aggressive in NTT s financial reporting. Second, NTT s ability to continue as a going concern was questionable throughout the period Mount audited NTT. NTT s predecessor auditor had provided NTT with a going concern opinion in 1989. The factors which caused this auditor to issue a going concern opinion in 1989, were still present during the audits of NTT s fiscal 1990, 1991, and 1992 financial statements. Finally, NTT engaged in significant and unusual related party transactions. Mount lacked professional skepticism in analyzing NTT s financing to related parties, the Avails transaction, and the inflated value of its assets. Based on the foregoing, the Commission finds that Mount engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission s Rules of Practice. IV. ORDER IMPOSING SANCTIONS Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Mount and accordingly, IT IS HEREBY ORDERED, effective immediately, that: A. Mount is denied the privilege of appearing or practicing before the Commission as an accountant; B. After four years from the date of the Order, Mount may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as: 1. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which Mount undertakes that, in his practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission; 2. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: a. Mount, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the ======END OF PAGE 6====== SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ( SEC Practice Section ) as long as he appears or practices before the Commission as an independent accountant; b. Mount, or his firm, has received an unqualified report relating to his or the firm's most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and c. Mount 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 accountant. 3. The Commission s review of any request or application by Mount to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Mount's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 7======