In a rare action that could send a chill through the accounting profession, the Securities and Exchange Commission accused two former Coopers & Lybrand auditors of "recklessly ignor[ing] unmistakable red flags" in their review of the financial statements of California Micro Devices.
The stock of the Milpitas, Calif., manufacturer of semiconductor components crashed in 1994 amid allegations of inflated revenue and other accounting irregularities. The CEO, Chan Desaigoudar, and CFO Steven Henke were convicted of fraud and insider trading and sentenced to prison terms last year.
Coopers itself had settled a shareholder lawsuit for $2.3 million back in 1995, but the SEC's decision to go after the engagement auditors--Michael Marrie and Brian Berry-- signals the opening of a new front in the agency's year-old earnings management campaign.
In administrative charges filed in August, the SEC alleged that Marrie and Berry "failed to exercise appropriate professional skepticism," issuing a clean opinion for fiscal 1994, even when the company booked a write-off of one- third of its accounts-receivable balance. A former Cal Micro accounting clerk told CFO magazine that at the end of fiscal 1993, the auditors had detected some $600,000 in improperly recognized revenue that was reversed. More than a year later, a shareholder suit in the wake of the write-off exposed the chicanery.
The Los Angeles attorney for the two men, Michael Perlis, says the SEC is out to "make victims of people already victimized by pervasive fraud by Cal Micro management." He reports that the auditors confirmed 90 percent of receivables in their year-end 1994 audit, and argues that nothing in the accounting literature says that an auditor must audit a write-off. Marrie and Berry, who have both left Coopers, face suspension from securities- related work, or censure.