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UNITED STATES OF AMERICA
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In the Matter of RALPH SANCHEZ, CPA, Respondent. |
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ORDER INSTITUTING PUBLIC
ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSI0N'S RULES OF PRACTICE, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Ralph Sanchez ("Sanchez"), a certified public accountant, pursuant to Rule 102(e) (1) (ii) of the Commission's Rule of Practice. 1
II.
In anticipation of the institution of this administrative proceeding, Sanchez has submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the Commission's findings contained herein, except that he admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, Sanchez consents to the entry of this Order and the findings and imposition of remedial sanctions set forth below.
III.
On the basis of this Order and Sanchez's Offer of Settlement, the Commission makes the following findings:2
A. RESPONDENT
Sanchez, age 50, is a certified public accountant licensed in Florida and a partner with the firm of Sanson, Kline, Jacomino & Company ("Sanson Kline") located in Miami, Florida. Sanchez was the engagement partner for his firm's initial audit of the financial statements of Madera International, Inc. ("Madera") for the fiscal year ended March 31, 1999.
B. ISSUER
Madera was at all times relevant to this proceeding a Nevada corporation headquartered in Coral Gables, Florida engaged in the timber business. Its common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the Electronic Bulletin Board operated by the National Association of Securities Dealers.
C. MADERA'S FALSE FINANCIAL STATEMENTS
Madera's major asset as reported in its fiscal 1999 financial statements consisted of timber properties located in the Brazilian rain forest valued at $27 million. This asset accounted for 72% of Madera's total assets and 75% of Madera's stockholders' equity. Madera had no credible evidence showing that it had clear title to the timber properties and had no reasonable basis to value the properties at $27 million. The $27 million valuation was arbitrarily determined by Madera management. By reporting its ownership of the timber properties at a value it could not support, Madera failed to comply with generally accepted accounting principles ("GAAP") and materially overstated its assets and stockholder's equity at March 31, 1999.
D. SANCHEZS' FAILURE TO COMPLY WITH PROFESSIONAL STANDARDS
Sanchez failed to conduct the fiscal 1999 audit of Madera in accordance with generally accepted auditing standards ("GAAS") in that, among other things, he failed to exercise due care and obtain sufficient competent evidential matter concerning the ownership and value of the timber properties. Codification of Statements on Auditing Standards ("AU") § 326.01. Sanchez failed to perform adequate procedures or make adequate inquiries concerning the value or ownership of the timber properties. Instead, Sanchez improperly relied on management representations and the fact that the timber properties had been reported at the $27 million value in Madera's financial statements that were audited by a predecessor accounting firm for the prior four years.
Sanchez's reliance on management representations with regard to the timber properties was all the more improper because Sanchez was on notice that the representations of Madera management were not reliable. During the audit, Sanchez had discovered false sales booked by Madera during fiscal 1999. In an attempt to deceive him concerning the purported sales, Madera management had furnished him with fraudulent sales invoices, shipping documents and cash receipts records. When Sanchez brought his concerns to management, he received no adequate explanation. Although he did make certain that the false sales were reversed, Sanchez made no effort to determine why Madera management had provided him with the false documentation.
Knowing that Madera management had furnished him with false documentation and made false representations concerning the bogus sales, Sanchez should have approached other areas of the audit with increased professional skepticism and should have questioned whether he could rely on management representations, particularly with regard to the ownership and valuation of Madera's major asset, the timber properties. AU § 333.04 states:
[i]f a representation made by management is contradicted by other audit evidence, the auditor should investigate the circumstances and consider the reliability of the representation made. Based on the circumstances, the auditor should consider whether his or her reliance on management's representations relating to other aspects of the financial statements is appropriate and justified."
Moreover, Sanchez failed to consider the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121"). FAS 121 requires that long-lived assets, in this case the timber properties, be reviewed for impairment "whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable." FAS 121 cites as an example of events that indicate that the carrying amount of an asset should be assessed, "a current period operating cash flow loss combined with a history of operating or cash flow losses...." Sanchez knew that Madera had a history of operating losses and that the property in question was not and had not been producing any revenues or cash flow for Madera. Yet Sanchez failed to consider the requirements of FAS 121 and failed to assess whether the timber properties should be written down in value. Sanchez's should have approached this crucial aspect of the audit with increased skepticism due to his knowledge that Madera management had lied to him and furnished him with false documentation in connection with the false sales revenue.
IV.
Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer of Settlement submitted by Sanchez and accordingly,
IT IS HEREBY ORDERED, effective immediately, that:
A. Sanchez is denied the privilege of appearing or practicing before the Commission as an accountant.
B. After one year from the date of this order, Sanchez may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as:
C. The Commission's review of an application by Sanchez to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Sanchez's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.
By the Commission.
Jonathan G. Katz
Secretary
1 | Rule 102(e) (1) of the Commission's Rules of Practice provides, in pertinent 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: "... (ii) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct...." |
2 | The findings herein are made pursuant to Sanchez's Offer of Settlement and are not binding on any other person or entity in this or in any other proceeding. |
http://www.sec.gov/litigation/admin/34-44816.htm
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