A federal appeals court has ruled that the Securities and Exchange Commission cannot "conscript" the accounting industry as "an insurer of his client's honesty and an enforcement arm" of the regulatory agency.
In a decision involving the big accounting firm of Arthur Young & Co., and its auditing for allegedly fraudulent oil and gas tax shelters by GeoTek Resources Fund Inc., the Ninth Circuit Court of Appeals has unanimously upheld a lower court action that found not a "scintilla" of evidence to support SEC charges against Young.
Arthur Young audited GeoTek's statements from 1966 to 1971 and the SEC contended in a case filed in 1973 that the accountants knew of or should have detected fraud allegedly involved with the oil drilling venture that raised $30 million from some 1,600 investors -- many of them well-off individuals.
GeoTek's organizer, John Burke, pleaded guilty to making false statements to the SEC and later served 15 months in prison.
The SEC's citation of the Young accounting firm, however, has been fought from the beginning. U.S. District Court Judge William Sweigert, of San Francisco, said in a 1976 decision the SEC had hot shown any securities law violations by Young.
In its appeal to the Ninth Circuit, the SEC said the lower court erred in not granting an injunction by which Arthur Young would agree not to violate securities laws in the future.
The three-judge panel said, however, that Congress had not permitted the SEC to make accountants the enforcers of laws. In unusually blunt language, the court added:
"We can understand why the SEC wishes to so conscript accountants. Its frequently late arrival on the scene of fraud and violations of securities laws almost always suggests that had it been there earlier with the accountant it would have caught the scent of wrongdoing... what it cannot do, the thought goes, the accountant can."
Arthur Young Chairman William Kanaga said yesterday that last week's decision is a "pronouncement of extreme importance to the accounting profession and the business community. We have no dispute with the SEC over the issue that compliance with the law is vital, but we strongly believe the accounting profession should not be made an enforcement arm of government."