The Securities and Exchange Commission yesterday charged Price Waterhouse & Co., one of the Big Eight accounting firms, and several Price Waterhouse partners with violating securities laws by issuing a misleading audit report on AM International Inc., an office copier equipment manufacturer.
Price Waterhouse's chairman and senior partner, Joseph E. Connor, called the charges "unjustified" and vowed to fight them "despite the significant savings in cost and executive time that would be achieved by a settlement."
Four of AM's former and present employes, who were also named in the SEC's complaint, have consented to an injunction against further violations without admitting or denying the allegations. The company itself consented in 1983.
The SEC charged in its complaint that AM overstated its 1980 pre-tax operating income by at least $22 million. During 1980-1981 the company allegedly inflated revenues by counting leases as sales, deferring charges and expenses, shifting income from one quarter to another and inflating inventories. The company also failed to disclose that changes in accounting had a positive effect on its operating results.
Faced with a cash crunch, AM filed for Chapter 11 bankruptcy in April 1982, but has since emerged and is continuing operations.
Price Waterhouse issued an unqualified 1980 audit stating that the financial statements were prepared in accordance with generally accepted accounting principles GAAP .
The SEC charged that the auditing firm "knew or, but for a conscious or reckless disregard for the facts, would have known of numerous instances where the financial statements of AM were not in accordance with" GAAP and said that statements made by the accounting firm in its audit report were "materially false and misleading." Partners named in the complaint were Daniel W. Jerbasi, Benjamin Perks, and Michael D. LeRoy.
In his statement, Price Waterhouse's chairman declared, "On the basis of hindsight observations the SEC is second guessing a difficult audit made of a company with serious business problems and attempting to blame the auditors for business judgments made by AM management."