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December 21, 2006
TO: ACCOUNTING/TREASURERS MEMBERS No. 31-06
COMPLIANCE MEMBERS No. 53-06
MONEY MARKET FUNDS ADVISORY COMMITTEE No. 9-06
RE: SEC SANCTIONS AUDITOR IN CONNECTION WITH MUTUAL FUND AUDITS
The Securities and Exchange Commission recently issued an order making findings and
imposing remedial sanctions pursuant to Rule 102(e) of the Commission’s Rules of Practice against a
certified public accountant (“Respondent”) in connection with his audits of a money market fund and a
bond fund.1 The Respondent consented to the entry of the SEC Order without admitting or denying
the SEC’s findings. The action involved allegations that the Respondent engaged in improper
professional conduct by allowing his firm to issue audit reports with an unqualified opinion falsely
representing that the funds’ financial statements were prepared in conformity with generally accepted
accounting principles (“GAAP”) and that the audits were conducted in accordance with generally
accepted auditing standards (“GAAS”).
Findings
During the audit of the money market fund the Respondent became aware that more than half
of the securities in the money market fund’s portfolio had stated maturity dates exceeding the 397 day
period set forth in Investment Company Act Rule 2a-7. The Respondent, who was the concurring
review partner on the engagement, failed to ensure that the engagement partner performed audit
procedures to determine whether the securities were in fact eligible for a money market fund or to
otherwise test the fund’s compliance with Rule 2a-7. As a result, the Respondent failed to detect that
the fund’s financial statements and related notes contained material misrepresentations, including that
1 See In the Matter of James T. McCurdy, CPA, SEC Release No. 34-54945, Accounting and Auditing Enforcement Release
No. 2525, Administrative Proceeding File No. 3-12322 (December 15, 2006) (“SEC Order”). Copies of the SEC Order are
available on the SEC’s website at http://www.sec.gov/litigation/admin/2006/34-54945.pdf.
2
the fund was a “money market fund” and that it was proper for the fund to use the amortized cost
method to value its portfolio securities.
The Respondent also engaged in improper professional conduct during the audits of a bond
fund’s financial statements for the years ended October 31, 1999 and October 31, 2000. The 1999
audit failed to detect (i) that the fund was over-accruing interest for bonds that had missed interest
payments, were in default, or had previously been sold and were no longer held by the fund; (ii) that a
significant portion of the fund’s interest receivable balance was uncollectible; and (iii) that the fund’s
financial statements were not fairly presented in conformity with GAAP.
The uncollectible interest was included in the fund’s trial balance and used to compute the
fund’s daily net asset value for at least six months, during which time the net asset value was overstated
by between $.01 and $.34 per share. The overstated interest receivable balance came to light during the
2000 audit. As a result of the discovery, the fund was re-priced, the fund wrote off the uncollectible
interest, and it was determined that the fund made a return of capital that had not been disclosed to
shareholders. None of these events was disclosed in the October 31, 2000 financial statements.
Furthermore, despite knowing that a portion of the interest the bond fund wrote off during the fiscal
year ended October 31, 2000 related to the prior fiscal year, the Respondent did not take any steps to
determine whether the bond fund should restate its financial statements for prior periods.
As a result of the conduct described above the SEC Order found that the Respondent engaged
in improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission’s Rules of Practice
in connection with the audits of the money market fund and the 1999 and 2000 audits of the bond
fund.
The Respondent consented to a finding that he engaged in improper professional conduct and
a prohibition from appearing or practicing before the Commission as an accountant, with a right to
apply for reinstatement after three years.
Gregory M. Smith
Director - Operations/Compliance & Fund
Accounting