SEC charges three for American Tissue audit

The U.S. Securities and Exchange Commission has charged three former executives of the Arthur Andersen accounting firm with civil fraud for their firm’s fiscal 2000 audit of American Tissue.

Two of the executives — former audit manager John D. Parson and former senior accountant Brendon P. McDonald – agreed to settle without admitting or denying the allegations. Parson agreed to pay a $50,000 civil penalty and to be suspended from appearing or practicing before the commission as an accountant. McDonald agreed to a $30,000 penalty and five-year suspension, after which he can apply for reinstatement.

Former Andersen partner Fred Gold did not reach a settlement with the commission.

A year after the audit, American Tissue – a the time the fourth-largest paper and tissue products maker in the United States — declared bankruptcy. Among its holdings were the pulp and paper mills in Berlin and Gorham, each of which were shut down for months before being acquired and reopened by Fraser Papers.

The SEC complaint against Parson, McDonald, and Gold alleged that during its 2000 fiscal year, American Tissue fraudulently inflated assets and earnings by improperly capitalizing $15.6 million of previously expensed supplies and overvaluing its finished-goods inventory by at least $12.5 million.

During the audit, the SEC alleges, the three individuals “failed to request sufficient accounting documentation to verify the financial information provided by the company or to conduct required testing of American Tissue’s finished goods inventory figures.”

As a result, the SEC concludes, they “knew or were reckless in not knowing” that American Tissue’s finished goods inventory was overstated.”

The agency also alleges that, by issuing an unqualified audit report for American Tissue, Parson, McDonald, and Gold failed “to exercise the due professional care and skepticism required by generally accepted auditing standards.”

They also were accused of altering work papers “in an attempt to conceal the failures of their audit work.”

The former president of American Tissue, Mehdi Gabayzadeh, was found guilty in April on eight criminal counts of fraud, conspiracy to commit perjury, and obstruction of justice in U.S. District Court in Central Islip, N.Y. He is currently awaiting sentencing on the charges. – JEFF FEINGOLD

Categories: News