Solucorp Industries LTD.; Joseph S. Kemprowski; Peter R. Mantia; James G. Spartz; Robert Kuhn; Victor Herman; Arle Pierro; W. Bryan Fair; and Glenn R. Ohlhauser

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

Litigation Release No . 16785 / October 31, 2000

Accounting and Auditing Enforcement Release No. 1337 / October 31, 2000

SECURITIES AND EXCHANGE COMMISSION V. SOLUCORP INDUSTRIES LTD.; JOSEPH S. KEMPROWSKI; PETER R. MANTIA; JAMES G. SPARTZ; ROBERT KUHN; VICTOR HERMAN; ARLE PIERRO; W. BRYAN FAIR; AND GLENN R. OHLHAUSER, 99 Civ. 11965 (WCC) (SDNY) (December 13, 1999)

SEC SUES SOLUCORP INDUSTRIES LTD.'S AUDITOR IN PENDING CIVIL ACTION FOR VIOLATING SECTION 10A

On October 31, 2000, the Commission filed an Amended Complaint in the above-mentioned action. The Amended Complaint adds Glenn R. Ohlhauser ("Ohlhauser"), a Chartered Accountant with the Canadian accounting firm MacKay & Partners, as a defendant for failing to take appropriate action on discovering possible illegal conduct during an audit of Solucorp Industries Ltd.'s financial statements in 1998, in violation of Section 10A of the Securities Exchange Act of 1934. The action is the first civil injunctive action brought by the Commission against an auditor for violating Section 10A, which imposes on auditors certain obligations upon discovering possible illegal conduct.

The illegal conduct at issue is Solucorp management's backdating of a license agreement in order to cover-up Solucorp's improper recognition during the quarter ended September 15, 1997 of $500,000 in license fees, or 40% of its revenues. The Commission's Complaint filed December 13, 1999 alleges that Solucorp recognized the revenue notwithstanding that as of September 30, 1997, Solucorp did not have a final licensing agreement but only an agreement in principle to enter into a licensing agreement. (See Lit. Rel. No. 16388/December 13, 1999) The Complaint further alleges that the parties did not finalize the terms of their license agreement until on or after November 9, 1997, and did not memorialize their agreement in writing until on or after December 18, 1997. On executing the agreement on or about December 30, 1997, the Complaint alleges that Mantia directed that the effective and signature dates be backdated to September 15, 1997, which they were.

The Commission has amended the Complaint to allege that when Solucorp gave MacKay a copy of the September 15, 1997 agreement during MacKay's audit of the financial statements for the period ended December 31, 1997, Ohlhauser reasonably concluded that the agreement appeared to have been backdated for improper accounting purposes. Having concluded that Solucorp may have backdated the license agreement for suspect purposes, Ohlhauser should have, but did not comply with the provisions of Section 10A requiring him to take the following steps in accordance with Generally Accepted Auditing Standards ("GAAS"): (1) determine whether it was likely that Solucorp committed an illegal act by backdating the agreement; (2) determine the possible effect of the illegal act on Solucorp's financial statements for the six-month transition period ended December 31, 1997, including the contingent monetary effect of penalties, fines and damages; and (3) inform the appropriate level of Solucorp's management and assure that Solucorp's audit committee was adequately informed about the illegal act.