Ernst & Ernst, one of the country's leading accounting firms, and two of its partners yesterday were charged "with professional misconduct" by the Securities and Exchange Commission.
The SEC action comes after prolonged litigation concerning the auditing in 1964 and 1965 by E&E of the books of its client, Westec Corp.
A onetime high-flying Houston conglomerate, Westec collapsed in 1966 after disclosure of a massive stock manipulation fraud. Its two top executives were sentenced to jail terms for securities violations, conspiracy, and mail fraud. The company has been reorganized under a new name and management.
The SEC charges against the firm and its partners grew out of findings by an administrative law judge. He concluded that Westec's 1964 and 1965 financial statements were "false and misleading" and that the E&E partners auditing the firm "failed to do their job as independent accountants."
As part of its sanctions, the SEC barred E&E from certifying new clients' financial statements filed with the commission for six months.
The two E&E partners, Clarence T. Isensee and John F. Maurer, were barred from practice before the SEC for three years and one year, respectively.
In a release issued yesterday from its Cleveland headquarters, E&E claimed that "the commission's release does not impose any restraints on the firm or affect any of our present or future clients."
An E&S attorney refused comment on the E&E claim, the wording of which seemed to contradict the commission's statement.
In its detailed 39-page description of the Westec case, the SEC alleges that the E&E auditors should have questioned several of the transactions that falsely enhanced the company's profits.
The SEC notes: "It was indispensable to the (Westec) scheme to create the impression that Westec was a dynamic conglomerate with soaring earnings. The 1964 and 1965 financial statements and the shareholder messages, which management based on them, clearly conveyed that impression."
Indeed, Westec's two top executives, who subsequently went to prison, Chairman James W. Williams and President Ernest M. Hall Jr., predicted a 75 percent rise in earinngs in 1965.
The SEC finding suggest that by not questioning certain acquisitions by Westec in 1964 E&E contributed to the false picture given to investors.