UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Act of 1934
Release No. 42046 / October 21, 1999
Accounting and Auditing Enforcement Release No.1195
Administrative Proceeding
File No. 3-10084
:
In the Matter of :
: ORDER INSTITUTING PUBLIC
: PROCEEDINGS AND IMPOSING
Rick W. Gossett, CPA : A SANCTION PURSUANT TO
: RULE 102(e) OF THE
: COMMISSION'S RULES OF PRACTICE
Respondent. :
:
:
I.
The Securities and Exchange Commission ("Commission") deems it
appropriate and in the public interest that public administrative proceedings
be, and hereby are, instituted pursuant to Rule 102(e)(3)(i)(A) of the
Commission's Rules of Practice against Rick W. Gossett ("Gossett").1
II.
In anticipation of the institution of these administrative proceedings,
Gossett has submitted an Offer of Settlement ("Offer"), which the
Commission has determined to accept. Solely for the purpose of this proceeding
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 findings
contained herein, except as to the Commission's findings of jurisdiction over
him and the subject matter of this proceeding and of the entry of the injunction
set forth in paragraph III.D below, which Gossett admits, Gossett consents to
the issuance of this Order Instituting Public Proceedings and Imposing a
Sanction Pursuant to Rule 102(e) of the Commission's Rules of Practice
("Order") and to the entry of the findings and the imposition of
relief set forth below.
III.
FINDINGS
On the basis of this Order and the Offer submitted by Gossett, the Commission
finds2 that:
A. Gossett, age 47, is a certified public accountant and has been licensed
since 1988. During the year ended June 30, 1994 ("FY 1994"), Gossett
was employed as Chief Financial Officer and Treasurer at KnowledgeWare, Inc.
("KnowledgeWare").
B. During FY 1994, KnowledgeWare was a Georgia corporation with principal
offices located in Atlanta, Georgia. At all times relevant hereto,
KnowledgeWare's common stock was registered with the Commission pursuant to
Section 12(g) of the Securities and Exchange Act of 1934 ("Exchange
Act"). KnowledgeWare's common stock was quoted on the NASDAQ National
Market System.
C. On September 22, 1999, the Commission filed a complaint
("Complaint") against Gossett and others (SEC v. Tarkenton,
1:99-CV-2497-CC) alleging, in relevant part, as follows:
1. During FY 1994, Gossett and other KnowledgeWare employees knowingly or
recklessly engaged in a fraudulent scheme to overstate materially
KnowledgeWare's revenue and net income in quarterly financial statements that
were filed with the Commission and disseminated to the public.
2. As a result of such scheme, KnowledgeWare filed materially false and
misleading interim reports on Forms 10-Q with the Commission for the quarters
ended September 30, 1993 ("First Quarter 10-Q"), December 31, 1993
("Second Quarter 10-Q") and March 31, 1994 ("Third Quarter
10-Q"). Specifically, KnowledgeWare materially overstated revenue and net
income in each of those quarterly reports. In addition, KnowledgeWare falsely
reported a profit in the Third Quarter 10-Q for both the quarter and the nine
months ended March 31, 1994 when, in fact, KnowledgeWare incurred a loss in both
periods.
3. As part and in furtherance of such scheme, Gossett prepared, in part, the
First Quarter 10-Q, Second Quarter 10-Q and Third Quarter 10-Q and the financial
statements included therein, when he knew, or was reckless in not knowing, that
these reports and financial statements were false and misleading because:
a. KnowledgeWare improperly recognized revenue with respect to purported
sales transactions in which the purported purchasers, so-called
"resellers," had been granted, by means of a "side letter"
or orally, unconditional return rights and/or contingent payment terms or had
never placed a purchase order at all;
b. the reports did not disclose that material amounts of accounts receivable
arising from the foregoing purported sales to "resellers" were unpaid
and uncollectible;
c. despite the foregoing facts, there was no provision at all for bad debt
expense recorded for the quarters ended September 30, 1993 and March 31, 1994;
d. despite the foregoing facts, the entire provision for bad debt expense
recorded for the quarter ended December 31, 1993 was attributable to a single
transaction and was therefore also understated;
e. in light of the foregoing facts, the balance in the allowance for doubtful
accounts receivable was insufficient to cover the amount of uncollectible
accounts receivable at the end of the quarters ended September 30, 1993,
December 31, 1993 and March 31, 1994; and
f. the Third Quarter 10-Q falsely attributed KnowledgeWare's mounting cash
flow problems to the use of extended payment terms and increased sales to
modestly capitalized "resellers" who were "slow to pay,"
rather than to the facts set forth in sub-paragraph (a) above.
4. One or more of these materially false and misleading quarterly reports
were incorporated by reference in registration statements on Form S-3, and in
amendments thereto, which KnowledgeWare filed with the Commission and which
Gossett signed.
5. Prior to filing its annual report on Form 10-K for FY 1994 ("1994
10-K"), KnowledgeWare restated portions of its financial statements for the
quarters ended September 30, 1993, December 31, 1993 and March 31, 1994
("Restatement"). In conjunction with the Restatement, KnowledgeWare
filed amended reports on Form 10-Q for the quarters ended September 30, 1993,
December 31, 1993 and March 31, 1994 ("Amended Quarterly Reports"),
which Gossett signed. The Amended Quarterly Reports materially misstated the
circumstances requiring the Restatement.
6. The 1994 Form 10-K and an amended 1994 Form 10-K filed in October 1994,
both of which Gossett signed, also materially misstated the circumstances
requiring the Restatement.
7. Gossett made materially false and misleading statements to accountants in
connection with the preparation and review of financial statements included in
KnowledgeWare's periodic reports filed with the Commission.
D. On October 4, 1999, the United States District Court for the Northern
District of Georgia entered a Final Consent Judgment Of Permanent Injunction And
Other Relief As To Defendant Rick W. Gossett ("Final Judgment") that,
among other things, permanently enjoins Gossett from violating Sections 17(a) of
the Securities Act of 1933 ("Securities Act"), Sections 10(b) and
13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2. Gossett
consented to the entry of the Final Judgment without admitting or denying the
allegations in the Complaint, except as to jurisdiction.
IV.
ORDER IMPOSING SANCTIONS
Based on the foregoing, the Commission deems it appropriate and in the public
interest to impose the sanction specified in the Offer submitted by Gossett, and
accordingly,
IT IS HEREBY ORDERED, effective immediately, that:
A. Gossett is denied the privilege of appearing or practicing before the
Commission as an accountant.
B. Five years from the date of the Order, Gossett 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, provided that Gossett's application is satisfactory to the
Commission and Gossett undertakes therein that, in his practice before the
Commission, Gossett's 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; and
2. an independent accountant provided that Gossett's application contains a
showing satisfactory to the Commission that:
a. Gossett, 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 Gossett appears or practices
before the Commission as an independent accountant;
b. Gossett or the 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. Gossett 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 Gossett appears or practices
before the Commission as an independent accountant.
C. The Commission's review of any request or application by Gossett to resume
appearing or practicing before the Commission may include consideration of, in
addition to the matters referenced above, any other matters relating to
Gossett's character, integrity, professional conduct, or qualifications to
appear or practice before the Commission.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
1 Rule 102(e)(3)(i)(A)
provides, in relevant part, as follows:
The Commission, with due regard to the public interest and without
preliminary hearing, may by order temporarily suspend from appearing or
practicing before it any . . . accountant . . . who . . . has been by name . . .
permanently enjoined by any court of competent jurisdiction by reason of his
misconduct in an action brought by the Commission from violation . . . any
provision of the Federal securities laws (15 U.S.C. ยงยง 77a to 80b-20) or of
the rules and regulations thereunder.
2 The findings herein are
made pursuant to Gossett's Offer of Settlement and are not binding on any other
person or entity in this or any other proceeding.
http://www.sec.gov/litigation/admin/34-42046.htm