UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities and Exchange Act of 1934 Release No. 40987 / January 28, 1999 Accounting and Auditing Enforcement Release No. 1103 / January 28, 1999 Administrative Proceeding File No. 3-9478 : : In the Matter of : ORDER MAKING FINDINGS AND : IMPOSING REMEDIAL SANCTIONS : PURSUANT TO RULE 102(e) OF THE JAMES BOGNER, CPA : COMMISSION’S RULES OF PRACTICE : Respondent. : : I. On October 10, 1997, the Securities and Exchange Commission ("Commission") instituted public administrative proceedings against James Bogner ("Bogner" or "Respondent") pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order Instituting Proceedings").[1] **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. II. Following the institution of these administrative proceedings, Respondent has submitted an Offer of Settlement ("Offer of Settlement"), which the Commission, after due consideration, has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, and prior to a hearing pursuant to the Commission’s Rules of Practice, Respondent consents to the issuance of this Order Making Findings and Imposing Remedial Sanctions pursuant to Rule 102(e) of the Commission’s Rules of Practice ("Order Making Findings") and to the entry of the findings and imposition of the remedial sanctions set forth below, without admitting or denying the findings contained in this Order Making Findings, except as to the jurisdiction of the Commission over him and over the subject matter of this proceeding, which Respondent admits. III. FINDINGS On the basis of the Order Instituting Proceedings and the Offer of Settlement submitted by Respondent, the Commission finds[2] that: BACKGROUND A. Respondent, age 50, is a certified public accountant, the sole shareholder and employee of the firm, Bogner & Company, P.C., located in Denver, Colorado. B. Between April 1991 and October 1992, Bogner & Company was the outside auditor for Aqua Buoy Corporation (now known as Chester Holdings, Ltd.) ("Aqua Buoy"), a public company with its principal offices then located in Englewood, Colorado. At the time of the transactions and events described in this Order, Aqua Buoy’s securities were registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act"), and trades in Aqua Buoy common stock were reported on the National Association of Securities Dealers Automated Quotation system ("NASDAQ"). C. During its 1991 and 1992 fiscal years, Aqua Buoy made a series of acquisitions of certain businesses and assets (referred to herein as the "1991 Acquisitions" and the "1992 Acquisitions"). The 1991 Acquisitions were: (1) a manufacturing facility, from a South African entity named Aqua Buoy International, Inc.; (2) a residential retirement hotel business in California named Leven Oaks; and (3) a company named H & R Corporation, which owned a commercial building in Michigan. The 1992 Acquisitions were: (1) a bankrupt sweater manufacturer named Lord Jeff Knitting Co., Inc. ("Lord Jeff Acquisition"); and (2) certain trademarks, tradenames, and equipment from a bankrupt boat manufacturer named Pearson Yachts Corporation ("Pearson Acquisition"). Aqua Buoy paid for each acquisition with unregistered stock, plus some cash or promissory notes. AQUA BUOY'S DEPARTURES FROM GAAP D. In its annual report on Form 10-K for the year ended June 30, 1991 and in its quarterly reports filed during the fiscal year ended June 30, 1992 ("1992 Quarterly Reports"), Aqua Buoy materially overstated the values of the 1991 Acquisitions and the Pearson Acquisition by using a price for the unregistered stock issued in connection with these acquisitions that exceeded the market price of publicly-traded Aqua Buoy stock. In addition, in its 1992 Quarterly Reports, Aqua Buoy materially overstated the value of the Lord Jeff Acquisition by erroneously claiming that it had issued 4 million shares of restricted stock to acquire Lord Jeff when, in fact, it had only issued 1.375 million shares for this acquisition. On October 16, 1992, Aqua Buoy filed its annual report on Form 10-K for the fiscal year ended June 30, 1992 ("1992 Form 10-K"). In its 1992 Form 10-K, Aqua Buoy restated the value of unregistered stock issued for the Pearson Acquisition by using a per share price approximately 50% lower than the market price for publicly-traded Aqua Buoy stock at the time of the Pearson Acquisition. However, in the 1992 Form 10-K, Aqua Buoy continued to overstate the value of the Lord Jeff Acquisition and the 1991 Acquisitions. First, Aqua Buoy overstated the value of the Lord Jeff Acquisition by at least $1,799,000, by falsely claiming that 2 million shares of Aqua Buoy stock had been issued for the Lord Jeff Acquisition, when, in fact, only 1.375 million shares had been issued for that purpose. Second, Aqua Buoy overstated the aggregate valuation of the three 1991 Acquisitions by at least $2,219,000 because Aqua Buoy continued to value those acquisitions using the initial market price of registered Aqua Buoy stock (based on the date of the acquisition), despite the fact that Aqua Buoy had issued unregistered stock for those acquisitions. Thus, the method of valuations that Aqua Buoy used for these three 1991 Acquisitions was inconsistent with the method that it used for the Pearson Acquisition and with Generally Accepted Accounting Principles ("GAAP"), which require the valuation of unregistered stock to reflect an appropriate discount from the market price of freely tradable stock. E. Aqua Buoy, in the financial statements that were contained in the 1992 Form 10-K, reported total assets of $16,277,000 and total shareholders’ equity of $12,290,000. As a result of the overstated acquisitions, each of these amounts was overstated by at least $4,018,000. **FOOTNOTES** [2]:These findings herein are are not binding on anyone other than Respondent. RESPONDENT'S DEPARTURES FROM GAAS F. Respondent audited the financial statements that were contained in Aqua Buoy’s 1992 Form 10-K and signed an audit report that was included in the 1992 Form10-K. Respondent's audit report contained an unqualified opinion in which he represented that he conducted an audit in accordance with Generally Accepted Auditing Standards ("GAAS") and that Aqua Buoy’s financial statements were fairly presented in conformity with GAAP. Both of these representations were false. Sufficient Competent Evidential Matter G. 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." American Institute of Certified Public Accountants, Professional Standards § 326.01 (1997). "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." Professional Standards § 326.21a. Respondent failed to obtain sufficient competent evidential matter to determine whether Aqua Buoy properly valued the Acquisitions. Moreover, Aqua Buoy provided false information to Respondent who relied on it, instead of obtaining sufficient information from independent sources. Due Professional Care H. GAAS requires auditors to exercise due professional care in performing an audit and preparing the report. Professional Standards § 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." Professional Standards § 230.03. The matter of due professional care concerns what the auditor does and how well he does it. Professional Standards § 230.04. I. Respondent failed to exercise due professional care in the course of performing his audit of Aqua Buoy's 1992 financial statements. An officer of Aqua Buoy falsely told Respondent that Aqua Buoy had issued 2 million shares of Aqua Buoy stock in connection with the Lord Jeff Acquisition, and Respondent failed to use reasonable diligence in determining the number of shares that were actually issued by Aqua Buoy to pay for the Lord Jeff Acquisition, when that fact was discoverable. Respondent also failed to exercise due care by neglecting to examine the inflated valuations assigned to the 1991 Acquisitions even after Aqua Buoy restated the valuation assigned to the Pearson Acquisition. Professional Skepticism J. 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." Professional Standards § 316A.16. K. Respondent failed to perform the audits of Aqua Buoy with an attitude of professional skepticism. Among other things, Respondent relied on the representations of certain Aqua Buoy officers as to the accounting treatment applied to certain acquisitions without taking adequate steps to ascertain either that such accounting treatment was appropriate or that such treatment was, in fact, utilized for those acquisitions. For example, an Aqua Buoy officer falsely told Respondent that Aqua Buoy valued certain acquisitions by using the "pooling of interest" method of accounting. Moreover, Respondent accepted various documents, including a falsified appraisal, as supporting Aqua Buoy's accounting for various acquisitions without taking sufficient steps to confirm the reliability of those documents. CONCLUSION L. Based on the foregoing, the Commission finds that Respondent did not conduct his 1992 audit of Aqua Buoy's financial statements in accordance with GAAS and that Aqua Buoy's financial statements were not presented in conformity with GAAP. The Commission further finds that Respondent engaged in improper professional conduct, within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice, with respect to his audit of Aqua Buoy's financial statements for fiscal year 1992. IV. The Commission deems it appropriate and in the public interest to accept the Offer of Settlement submitted by Respondent Bogner, and accordingly, IT IS HEREBY ORDERED, pursuant to Rule 102(e) of the Commission's Rules of Practice and effective immediately: A. Respondent is denied the privilege of appearing or practicing before the Commission as an accountant. B. After three years from the date of this Order, Respondent 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: 1. 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 Respondent 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 2. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: a. Respondent, 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; b. Respondent 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 c. Respondent 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. 3. The Commission's review of any request or application by Respondent to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. By the Commission. Jonathan G. Katz Secretary