-1- UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 40280 / July 30, 1998 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1057 / July 30, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9660 ______________________________ : In the Matter of : :ORDER INSTITUTING PUBLIC BARBARA J. CAVALLO, :PROCEEDING AND OPINION AND :ORDER PURSUANT TO SECTION Respondent. :21C OF THE SECURITIES :EXCHANGE ACT OF 1934 ______________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding be, and hereby is, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Barbara J. Cavallo caused violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. II. In anticipation of the institution of this proceeding, Cavallo 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 Commission's findings contained herein, except as to the Commission's finding of jurisdiction over her and the subject matter of this proceeding, Cavallo consents to the issuance of this Order Instituting Proceedings ("Order") and to the entry of the findings and the imposition of the relief set forth below. -2- III. FACTS Based on the foregoing, the Commission finds[1] that: 1.Summary During 1993, 1994 and 1995, Scientific Software-Intercomp, Inc. ("SSI"), an engineering and software company in the oil and gas industry, headquartered in Denver, Colorado, materially overstated its revenue and earnings by backdating or misdating contracts, booking revenue without contracts, overaccruing project revenues and providing confidential side letters modifying payment obligations. As a result of these practices, SSI reported false and misleading information in its Annual Reports for fiscal 1993 and 1994, its Quarterly Reports for the first three quarters of fiscal 1994 and the first quarter of fiscal 1995.[2] Beginning in at least 1993, SSI began recognizing revenues on contracts with value added resellers ("VAR"s) that included confidential side letters given by SSI either excusing payment to SSI until the VAR received a resale payment from a third-party, or rendering the contract ineffective and cancelable until a specified future event, normally the sale of SSI's software to the VAR's customers. In all, in the third and fourth quarters of 1993 and throughout 1994, SSI recognized revenue of over $2 million from at least nine agreements with VARs that had been given side letters either excusing payment or rendering the agreement ineffective, contrary to generally accepted accounting principles ("GAAP"). For the quarter ended March 31, 1995, SSI recognized $700,000 from a government contract for which there was no agreement and for which no formal written documentation had been received by SSI by quarter-end. **FOOTNOTES** [1]:The findings herein are made pursuant to the Offer of Settlement submitted by Cavallo and are not binding on any other person or entity in this or any other proceeding. [2]:On September 11, 1997, the Commission filed a civil injunctive complaint in the United States District Court for the District of Columbia against SSI alleging violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Simultaneous with the filing of the complaint, SSI consented, without admitting or denying the allegations of the complaint, to injunctive relief and agreed to restate its financial statements for the years ending December 31, 1993, 1994 and 1995. See SEC v. Scientific Software- Intercomp, Inc., 97-CV-2091 (JGP) (D.D.C.), Litigation Release No. 15485 (September 11, 1997). -3- 2.Respondent Barbara J. Cavallo, age 51, was SSI's controller for the company's Pipeline and Facilities Division ("P&F Division") in Houston, Texas[3] from November 1993 until March 1996, when she became acting Financial Controller for SSI. During the relevant period, Cavallo reported directly to SSI's corporate-level Controller and CFO. 3.Issuer Scientific Software-Intercomp, Inc. is a Colorado corporation with executive offices in Denver, Colorado. SSI's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was listed on NASDAQ. As of June 26, 1997, 8,840,138 shares of SSI common stock were outstanding. 4.SSI's Pipeline and Facilities Division During the relevant period, SSI's P&F Division provided software and consulting services for major oil and gas companies, principally in the areas of oil field monitoring and simulation and leak detection. For 1994, the P&F Division contributed approximately 26% of the total revenues of the company as a whole. Beginning in the early 1990s, the P&F Division began a marketing program using VARs to sell its software products. Under a VAR arrangement, SSI entered an agreement with the VAR to sell the SSI's software, and the VAR would market the software. The agreement required that the VAR's purchase would be unconditional and the software shipped to the VAR would be fully usable by the VAR on delivery. SSI also provided consulting services to customers, including VARs, pursuant to long term contracts. These services were principally on-site maintenance and upgrade services, sold in connection with larger software packages. 5.SSI's Improper Revenue Recognition From at least the third quarter of 1993, and continuing through the first quarter of 1995, SSI materially overstated revenues generated by the P&F Division in a number of ways. SSI executed at least nine license agreements with VARs with simultaneous side letters excusing payment or allowing the VAR to treat the contracts as ineffective until the VAR had resold the software. SSI backdated a significant number of its contracts by signing them "effective" as of the last day of the quarter, even though the actual contracts were signed after quarter-end. SSI recorded revenue from sales of software in quarters where the software was shipped after quarter-end, and backdated shipping documentation. SSI recognized revenue before persuasive evidence of a contract existed and recorded revenue where product had not been delivered. Finally, SSI recorded revenues for work on long term projects that had not been performed. These practices all violated GAAP. 6.Cavallo's Knowledge of the P&F Division's Revenue Recognition Practices From 1994 through June 1995, Cavallo knew that the Houston P&F Division backdated a significant percentage of its contracts by signing them "effective" as of the last day of the quarter, even though the actual contracts were not executed and did not become binding until after the quarter-end. These contracts were recorded as revenue in the prior quarter contrary to GAAP. At the direction of SSI's chief financial officer, Cavallo held the Houston P&F Division's books open for up to 30 days after the end of a quarter, in order to accommodate revenue recognition for that quarter. In addition to holding the books open at the end of each quarter, Cavallo knew that SSI recognized revenue from the Houston P&F Division before persuasive evidence of a contract existed. In particular, Cavallo knew that $700,000 was improperly recognized in the first quarter of 1995 on a contract with the United States Navy for which no documentation except a request for pricing had been exchanged between SSI and the agency by quarter-end. Despite Cavallo's knowledge that SSI had improperly recognized the $700,000 in revenue with no written documentation, she allowed the Houston P&F Division's books to go uncorrected for two quarters. Cavallo also knew that SSI routinely recognized project revenue from the Houston P&F Division in advance of work being completed, contrary to GAAP. Many of SSI's projects were long term service contracts requiring the expenditure of significant man-hours over the course of several months or even years. However, SSI recognized revenues for work that had not been performed. From the time Cavallo joined SSI in late 1993, she identified and raised concerns with management, including SSI's chief financial officer and controller, regarding the accounting practices within the Houston P&F Division. Despite her concerns, SSI's chief financial officer and controller explicitly instructed her to continue holding the Houston P&F Division's books open and to continue recording revenue from backdated contracts or from agreements that lacked written documentation, which she did. IV. OPINION Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder require issuers to file with the Commission materially accurate annual and quarterly reports on Forms 10-K and 10-Q. Among other things, these reports must make disclosures regarding an issuer's periodic revenue and income. Pursuant to instructions applicable to Forms 10-K and 10-Q, the financial statements must conform to Regulation S-X, which requires conformity with GAAP. 17 C.F.R.  210.4-01(a)(1). The American Institute of Certified Public Accountants ("AICPA") issued Statement of Position on Software Revenue Recognition 91-1 ("SOP 91-1") on December 12, 1991, to provide guidance on applying GAAP to software license revenue. Among other things, SOP 91-1 established that for software licenses intended to be evidenced by a written contract, signed by the vendor and the customer, revenue should not be recognized until persuasive evidence of the agreement exists, usually the signed contract. Cavallo was aware that the Houston P&F Division, at the direction of SSI's chief financial officer and controller, kept its books open after the end of quarters and that SSI improperly recognized project and contract revenue where persuasive evidence of agreements did not exist and contracts were not executed at the end of those quarters, contrary to GAAP. Cavallo also knew that SSI improperly recognized revenue from the U.S. Navy contract. Given SSI's failure to respond to or resolve the concerns Cavallo expressed to senior management, Cavallo should not have prepared the financial statements for the Houston P&F Division which she knew would be incorporated into SSI's 1994 Forms 10-Q and 10-K, and the Form 10-Q for the first quarter of 1995 filed with the Commission. Cf. In the Matter of Lynn K. Blattman, Admin. Proc. No. 3-9291 (April 10, 1997); In the Matter of Catherine V. Sprauer, Admin. Proc. No. 3-8490 (September 28, 1994). Therefore, Cavallo was a cause of SSI's violations of Section 13(a) and Rules 12b-20, 13a-1 and 13a-13 thereunder. V. Based on the foregoing, the Commission finds that Cavallo caused violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. VI. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Cavallo cease and desist from causing any violation, and any future violation, of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [3]: The Pipeline and Facilities Division also had offices in London, England and Calgary, Canada, each with their own controllers. The facts set forth here relate to the Houston office of the P&F Division ("Houston P&F Division").