SEC accuses pair at Andersen of securities violations Advice to N.Y. company led to quarterly losses being reported as profit; Regulation


Federal regulators said yesterday that two Arthur Andersen partners violated securities laws when they advised a company over the phone on accounting policies that resulted in the company reporting profits when it really had losses.

If the allegations by the Securities and Exchange Commission are upheld, the case would greatly increase auditors' responsibility for companies' quarterly financial reports. Quarterly reports are not audited but are heavily relied upon by investors and analysts.

A spokesman for Arthur Andersen LLP said it stood behind the actions of the two partners, both based in New York City, who had given advice to executives at Spectrum Information Technologies Inc., once a high-flying technology company in Purchase, N.Y. The spokesman said the SEC was trying to impose "a new and unrealistic obligation on independent accountants."

But Linda Chatman Thomsen, an assistant enforcement director the SEC, said the partners' advice had been "flat-out wrong" and resulted in false financial information. For example, she said, Spectrum reported a $650,000 profit in the second quarter of 1993, when it actually had "a significant loss."

Auditors cannot give inaccurate advice to their clients during the year, Thomsen said, and then fix the problem by making adjustments to the company's financial books during their audit after the company's year end. "Auditors should exercise due professional care when they give accounting advice," she said.

This marks the first time that regulators have accused a company's outside auditors of violating securities laws after the company filed unaudited quarterly financial statements with the SEC that were found to be false and misleading, Thomsen said.

Unlike a publicly held company's annual financial statements, quarterly reports filed with the SEC, known as 10-Q forms, do not have to be audited by an outside accounting firm.

Matthew Gonring, Arthur Andersen's managing partner for communications, said the partners -- Jeffrey Steinberg and John Geron -- relied on information that Spectrum gave them during phone conversations that was incorrect.

The case is troubling, Gonring said, because partners regularly advise their clients during the year, based on information that their clients give them. "Do the partners need to make sure that the client is being truthful?" he asked. "Are you liable for a conversation if the information given to you by the client is not valid?"

Gonring said the partners planned to fight the SEC's complaint, which will be presented before a federal administrative law judge. If the judge agrees with the SEC finding, the partners could be compelled to agree to a "cease and desist" order, which would subject them to higher penalties if they commit similar violations.

Gonring said the company's management "must bear complete responsibility" for any violations of the securities laws.

The SEC had already brought charges against Spectrum, which filed for bankruptcy in 1995. The SEC contended that Spectrum inflated its 1993 profits. The company settled that complaint about a year ago, neither admitting nor denying wrongdoing.

In 1993, Spectrum executives told investors that the company had patents to technology for transmitting data over cellular phones, and invited companies to sign licensing agreements to use the new technology. Three companies signed up and agreed to pay millions in fees.

But unknown to investors, Spectrum signed a second agreement with the three companies that obligated Spectrum to pay the companies an equal amount in fees, allegedly for advertising. The effect: Millions of dollars would come in to Spectrum over the next few years, but an equal amount would go out.

According to the SEC's complaint, Steinberg and Geron advised Spectrum officials that they could list the licensing revenue as profit immediately, but delay recording the advertising expenses. a result, the company reported a profit in the first and second quarters of 1993, the SEC said, when it had losses.

Gonring said Spectrum executives misrepresented the value of the advertising contracts to the Andersen partners.

Spectrum dismissed Arthur Andersen in late 1993 in part, the firm said, because of disagreements with management over "an accounting matter." The company then hired KPMG Peat Marwick.

In October 1993, Spectrum hired former Apple Computer Chairman John Sculley to take its helm. But in February 1994, Sculley resigned, saying he had been deceived about the company's grave accounting problems and kept in the dark about an SEC investigation. KPMG also soon resigned.

Spectrum emerged from bankruptcy last year. Its stock trades at little more than $1 a share.

Pub Date: 5/27/98

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