UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act Release No. 40495 / September 29, 1998 Accounting and Auditing Enforcement Release No. 1082 / September 29, 1998 Administrative Proceeding File No. 3-9740 : : ORDER INSTITUTING PUBLIC In the Matter of : PROCEEDINGS AND OPINION AND : ORDER PURSUANT TO RULE 102(e) DONNA LAUBSCHER, CPA and : OF THE COMMISSION'S RULES SHERALD GRIFFIN, CPA : OF PRACTICE : Respondents. : : I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Donna Laubscher ("Laubscher") and Sherald Griffin ("Griffin") (collectively the "respondents") pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice.[1]/ II. In anticipation of the institution of these administrative proceedings, each respondent has submitted an Offer of Settlement for the purpose of resolving these proceedings, which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. 201.1 et seq, the respondents, without admitting or denying the findings contained herein, except that they admit to the jurisdiction of the Commission over them and over the subject matter of these proceedings, consent to the entry of the findings and the imposition of the remedial sanctions set forth below. III. FINDINGS On the basis of this Order Instituting Proceedings ("Order") and the Offer of Settlement submitted by each respondent, the Commission finds that: **FOOTNOTES** [1]:/ Rule 102(e)(1)(ii) [17 C.F.R. 201.102(e)(1)(ii)] provides in pertinent part that the Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for a hearing in the matter to have engaged in improper professional conduct. . Henry & Horne PLC ("Henry & Horne") is an accounting firm with offices located throughout Arizona. . Laubscher is an audit manager with Henry & Horne. She has been employed with Henry & Horne since 1989, has been a certified public accountant ("CPA") since 1985, and is admitted as a CPA in Nevada and Arizona. . Griffin is a director of Henry & Horne. He has been employed with Henry & Horne since 1973, has been admitted as a CPA since 1967, and is admitted as a CPA in California and Arizona. . O'Connell & Associates ("OCA") was a limited partnership of approximately 50 limited partners, whose general partner was Thomas B. O'Connell ("O'Connell"). Although O'Connell hired individuals from time to time to do clerical work or conduct research, OCA was almost exclusively run by O'Connell. . Henry & Horne audited the financial statements of OCA for fiscal years 1991 through 1994. For each of those years, Henry & Horne issued audit reports containing unqualified opinions which stated that its audits were conducted in accordance with Generally Accepted Auditing Standards ("GAAS").Laubscher was the audit manager for these audits and Griffin was the director in charge. FACTS . OCA was created to generate profits for its limited partners from trading in securities, options, and commodities. At some point, O'Connell began to defraud the partnership. In July 1996, he pleaded guilty to criminal charges relating to his scheme. . As part of his scheme, O'Connell told the auditors that OCA's assets were in an account at a brokerage firm called "Eclipse Co." Eclipse Co., however, was a fiction. O'Connell created account statements with an Eclipse Co. letterhead, that showed purported asset balances for the purported OCA account, and gave these false account statements to Henry & Horne in connection with its audits of OCA. . As described below, Laubscher and Griffin did not detect O'Connell's fraud during four audits, for the years ended December 31, 1991 through 1994, due to deceptions by O'Connell, combined with failures by Laubscher, the audit manager, and Griffin, the first review director, in connection with the audits. . Laubscher and Griffin obtained Eclipse account statements, showing purported OCA balances, from O'Connell. The Eclipse statements showed OCA having year-end treasury bill balances of $6.7 million in 1991, $10.5 million in 1992, $16.2 million in 1993, and $23.4 million in 1994. . For the fiscal year 1991 audit, Laubscher did not request a written confirmation from Eclipse of OCA's purported asset balance. Instead she obtained verbal confirmation of OCA's asset balance from someone who claimed to be a representative of Eclipse. For the fiscal year 1992 and 1993 audits, Laubscher requested written confirmations from Eclipse of OCA's account balances, but did not receive completed confirmation forms for those years. For 1993, she received only a faxed letter from Eclipse confirming the OCA beginning, not ending, balance, signed by an R.B. Casey. Laubscher did not become suspicious when Eclipse failed to provide completed confirmation forms for 1992 and 1993, but relied on the Eclipse account statements that O'Connell gave her, as well as the 1993 faxed letter showing Eclipse's beginning balance. . Laubscher and Griffin did not discover that OCA had been audited prior to Henry & Horne's engagement, even though their permanent file contained a document that referred to OCA's prior CPA. Henry & Horne's permanent file did not indicate that the CPA had conducted an audit of the partnership and O'Connell told Laubscher and Griffin that OCA had never been audited prior to engaging Henry & Horne, but that the previous CPA had prepared OCA's prior tax return. Laubscher contacted the prior CPA to discuss a question regarding the prior tax return, but did not inquire as to whether the CPA firm had previously audited OCA. . Laubscher and Griffin failed adequately to follow an audit reviewer's instructions that would likely have uncovered the fraud. During the 1993 audit, Henry & Horne's second review director made a note in the audit workpapers directing Laubscher to verify the validity of Eclipse and the OCA assets purportedly in an account at Eclipse. Laubscher failed to take adequate steps to do so. To confirm Eclipse's existence, she called Chicago directory assistance and confirmed Eclipse had a telephone number and a Chicago address, and to confirm OCA's assets, she mailed a confirmation form to Eclipse. The confirmation form was not returned completed, and instead, Laubscher received a faxed letter from an R.B. Casey at Eclipse, confirming the 1993 beginning account balance. Laubscher also relied on the Eclipse account statements that O'Connell gave her. DEPARTURES FROM GAAS . GAAS requires that an auditor plan and perform audits to obtain reasonable assurance that financial statements are free of material misstatement. Laubscher and Griffin failed to obtain reasonable assurance that OCA's financial statements for fiscal years 1991 through 1994 were free of material misstatement. Failure to Communicate With Predecessor Auditor . Inquiry of a predecessor auditor is a "necessary procedure because the predecessor may be able to provide the successor [auditor] with information that will assist him in determining whether to accept the engagement." (AU  315.04) . Laubscher and Griffin did not discover the existence of OCA's predecessor auditor, although their records contained the name of OCA's prior CPA. O'Connell, as part of his scheme to defraud investors, told Laubscher that OCA had never been audited prior to fiscal year 1991. Laubscher relied on this representation, in spite of the opportunity to make inquiry of OCA's prior CPA concerning the existence of prior audits. Failure to Obtain Sufficient Competent Evidential Matter . GAAS states that "[s]ufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit." (AU 326.01) "When evidential matter can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than that secured solely within the entity." (AU 326.19a). "If the auditor has experienced poor response rates to properly designed confirmation requests in prior audits, [she] may instead consider obtaining audit evidence from other sources." (AU 330.23). "When the auditor has not received replies to positive confirmation requests, he or she should apply alternative procedures to the nonresponses to obtain the evidence necessary to reduce the audit risk to an acceptably low level." (AU 330.31). For the OCA audits, Laubscher failed obtain sufficient competent evidential matter and failed to reduce the audit risk to an acceptably low level, by relying almost solely on Eclipse Co. account statements she received from O'Connell. . For the 1991 fiscal year audit, Laubscher obtained oral confirmation for $6.7 million in purported account balances from an individual who claimed to represent Eclipse. Laubscher sent written confirmation forms to Eclipse for fiscal years 1992, 1993 and 1994. She only received a reply from Eclipse in response to the confirmation form sent in connection with the fiscal year 1994 audit. She received no reply to the confirmation form sent in connection with the fiscal year 1992 audit, and for the 1993 fiscal year audit, she received only a faxed letter from R.B. Casey at Eclipse confirming the 1993 beginning year balance of assets purportedly held in Eclipse accounts. In addition to, and sometimes in place of written confirmation, Laubscher also relied on daily, monthly, and year end Eclipse account statements supplied to her by O'Connell. . In addition, Laubscher unreasonably relied on the Eclipse account statements from O'Connell as competent evidential matter, when the statements did not contain information frequently found on such documents, such as the name of an assigned account executive, or self-regulatory organization affiliations. Failure to Exercise Due Professional Care . GAAS requires auditors to exercise due professional care in performing an audit and preparing the report. (AU 230.01) In the course of performing an audit, the auditor must employ "such skill as [he or she] possess[es] with reasonable care and diligence . . . undertak[ing] for good faith and integrity, but not for infallibility." (AU 230.03). The matter of due professional care concerns what the auditor does and how well he does it. (AU 230.04) . Laubscher and Griffin failed to exercise due professional care in the course of performing the OCA audits. They relied exclusively on ineffective alternative audit procedures, after not receiving a written confirmation from Eclipse of OCA's purported asset balances in the Eclipse account, they did not discover the existence of the prior auditor or review prior audit workpapers, and they failed adequately to follow a reviewer's instructions concerning verification of Eclipse's existence and OCA's assets, purportedly held in an account at Eclipse. Failure to Maintain an Attitude of Professional Skepticism . GAAS states that audits should be planned and performed with an attitude of professional skepticism. GAAS requires that "[t]he auditor neither assumes that management is dishonest nor assumes unquestioned honesty. Rather, the auditor recognizes that conditions observed and evidential matter obtained, including information from prior audits, need to be objectively evaluated to determine whether the financial statements are free of material misstatement." (AU 316.16) . Laubscher's and Griffin's actions indicate that they failed to perform the audits of OCA with an attitude of professional skepticism. Among other things, they relied on the purported Eclipse account statements that had been provided to them by O'Connell, without taking adequate steps to confirm that Eclipse was a legitimate brokerage firm, or that the information on Eclipse's account statements was in agreement with OCA's internal books and records. Moreover, for the 1993 fiscal year audit, they relied on a faxed letter showing the Eclipse beginning, rather than ending, year balance. Failure Adequately to Supervise the Audits . GAAS requires that audits be adequately planned and assistants be properly supervised. (AU 311.01) Supervision includes keeping informed of problems encountered; assuring the work of subordinates is properly performed; and assuring that audit work supports the conclusions reached. (AU 311.11 & 311.13) . Griffin, as the director in charge of the OCA audit, was responsible to assure the audit was properly planned and supervised. He failed to do so. The audit failures listed above could not have happened if Griffin had exercised due care in supervising Laubscher on the audits. CONCLUSION . Based on the foregoing, the Commission finds that the audits of OCA were not conducted in accordance with GAAS, and that accordingly, Laubscher and Griffin engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice with respect to the audits of OCA's financial statements for fiscal years 1991 through 1994. IV. The Commission deems it appropriate and in the public interest to accept the offers of settlement submitted by the respondents, and accordingly, IT IS HEREBY ORDERED, effective immediately, that: A. Laubscher is denied the privilege of appearing or practicing before the Commission as an accountant. 1. Three years from the date of this Order, Laubscher may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that she be permitted to resume appearing or practicing before the Commission as: a. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which Laubscher undertakes that, in her practice before the Commission, her work will be reviewed by the independent audit committee of the company for which she works or in some other manner acceptable to the Commission; or b. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: (1) Laubscher, or any firm with which she is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") as long as she appears or practices before the Commission as an independent accountant; (2) Laubscher or the firm has received an unqualified report relating to her or the firm's most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and (3) Laubscher will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as she appears or practices before the Commission as an independent accountant. 2. The Commission's review of any request or application by Laubscher to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Laubscher's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. B. Griffin is denied the privilege of appearing or practicing before the Commission as an accountant. 1. Three years from the date of this Order, Griffin may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as: a. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which Griffin undertakes that, in his practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission; or b. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: (1) Griffin, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") as long as he appears or practices before the Commission as an independent accountant; (2) Griffin or the firm has received an unqualified report relating to his or the firm's most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and (3) Griffin will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant. 2. The Commission's review of any request or application by Griffin to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Griffin's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. By the Commission. Jonathan G. Katz Secretary Service List Rule 141 of the Commission's Rules of Practice provides that the Secretary, or another duly authorized officer of the Commission, shall serve a copy of an Order Instituting Proceedings on each person named in the Order as a party. The attached Order has been sent to the following parties and other persons entitled to notice: Honorable Brenda P. Murray Chief Administrative Law Judge 450 Fifth Street N.W., Stop 11-6 Washington, D.C. 20549 Jill Peterson Securities and Exchange Commission 450 Fifth Street N.W., Stop 4-8 Washington, D.C. 20549 Bohdan S. Ozaruk Senior Counsel Securities and Exchange Commission Northeast Regional Office 7 World Trade Center New York, New York 10048 Jon A. Titus, Esq. Titus, Breuckner & Barry 7373 North Scottsdale Road Suite 252 Scottsdale, Arizona 85253 Counsel for Donna Laubscher Joel P. Hoxie, Esq. Snell & Wilmer 1 Arizona Center 400 East Van Buren Phoenix, Arizona 85004-0001 Counsel for Sherald Griffin Donna Laubscher Henry & Horne PLC 7300 East Camelback Road Scottsdale, Arizona 85251 Sherald Griffin Henry & Horne PLC 7300 East Camelback Road Scottsdale, Arizona 85251