statement was withdrawn after registrant was advised by our Division of Corporation Finance ("Division") that such statement failed to meet the requirements of the Act.3

LACK OF INDEPENDENCE OF CERTIFYING ACCOUNTANT

Schedule A of the Act, which specifies the information and documents required in a registration statement, provides that financial statements be furnished which are certified by an independent public or certified accountant. Rule 2-01 of our Regulation S-X states that we will not recognize any accountant as independent who is not in fact independent, and cites as an example that an accountant will be considered not independent with respect to any person or any affiliate thereof in whom he has a financial interest or with whom he is connected as a promoter, director, officer or employee. The rule further states that in determining whether or not an accountant is in fact independent with respect to a particular registrant, we will give appropriate consideration to all relevant circumstances, including all relationships between the accountant and that registrant or any affiliate of that registrant, and will not confine ourselves to the relationship existing in connection with the filing of documents with us.

Shapiro's relationship as a partner of Bollt, who is a promoter, director, officer, and controlling stockholder of registrant and therefore an affiliate thereof, rendered him not independent with respect to registrant and accordingly disqualified him from certifying its financial statement. This is clear not only from a reading of Rule 2-01 but also from our prior decisions and published releases.

In Richard Ramore Gold Mines, Ltd., we held that an accountant who was an employee or a partner of another accountant who was a substantial stockholder of a company was not independent with respect to certifying that company's financial statements. We stated that the purpose and intent of the requirement of certification by an independent accountant would be defeated and evaded if the stockholder-accountant is disqualified but his partner or employee is not.5 Under this principle we have held that an accounting firm could not be considered independent for the purpose of certifying the financial statements of a corporation in which 1 member of the accounting firm owned a substantial amount of stock. The same conclusion

3 A prior registration statement (File No. 2-13789) had also been withdrawn by registrant after it had been advised by our Division that such statement failed to meet the requirements of the Act. Among other asserted deficiencies, the prior statement failed to include an accountant's certificate with respect to the financial statements therein. 4 Under Rule 1-02 of Regulation S-X, an affiliate of a specified person is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.

52 S.E.C. 377, 389 (1937).

6 Accounting Series Release No. 2 (May 6, 1937).

of non-independence was reached when 1 partner of the accounting firm merely served as a member of the board of directors, even though such partner did not participate in any way in the audit and another partner certified the financial statement in his own and not the firm's name.7

Rule 13 of the Rules of Professional Conduct of the AICPA provides that a member shall not express an opinion on financial statements of any enterprise financed by the public distribution of securities if he or his immediate family has a substantial financial interest in such enterprise. As respondents concede, this rule, as interpreted by the Committee on Professional Ethics of the AICPA, precludes a public accountant from rendering an opinion with respect to an enterprise financed through the public distribution of securities if his partner in the practice of accounting has a substantial interest in the enterprise.8

The lack of independence of a partner in a public accounting firm affects the partnership and every other partner. Bollt himself was admittedly not qualified to give an independent report on the financial statements of the company he controlled; we find that his partner Shapiro and the partnership itself were equally lacking in the requisite independent capacity.

UNETHICAL AND IMPROPER PROFESSIONAL CONDUCT

Respondents contend that we should not find them to have engaged in unethical or improper professional conduct. They assert that Bollt and Shapiro had had no prior experience with matters before us, were unfamiliar with our rules, decisions and releases and the interpretation of the AICPA regarding independence, and in good faith concluded that Shapiro could be considered independent because he himself had no financial interest in or position with registrant.

BOLLT AND B&S

Bollt recognized that he himself was not qualified, because of his substantial financial interest and controlling position, to furnish an independent report regarding registrant's financial statement. He testified that he discussed the selection of Shapiro to certify the financial statement with his attorney, Sol M. Alpher, who helped prepare the registration statement and who was also secretary and a director of registrant and signed the registration statement. Bollt asserted that he was familiar with the AICPA rules, but had not read our rules or decisions of the AICPA interpretation of its rules regarding

7 See Accounting Series Release No. 47 (January 25, 1944), Examples Nos. 8 and 9. 8 Interpretation of Rule 13, CPA Handbook, American Institute of Accountants, Vol. I. App. A, pages 7-8.

independence of public accountants, nor had he made any inquiries of our Staff. Instead he relied on Alpher's opinion that Shapiro was independent within the intent of the registration requirements. In our opinion any common sense interpretation of independence would have led to the conclusion that the partner of the promoter and controlling stockholder of an enterprise is not independent with respect to the enterprise, and the parties concerned should have realized that at the very least such a relationship should be disclosed. We consider it significant in this connection that nowhere in the registration statement was any mention or disclosure made of the fact that Bollt and Shapiro were partners, although such information was required in response to 1 item in the registration statement and this fact or the fact that they had a common business address could have been reasonably expected to be mentioned in 2 other places.

Bollt signed the registration statement as a principal officer and director of registrant. One item of the registration statement, entitled "Relationship with Registrant of Experts Named in Registration Statement," calls for the disclosure of any substantial interest in registrant or its parents of the accountant certifying the financial statements. Bollt, as a person who controlled registrant, was a parent of registrant within the definition thereof in Rule 1-02, and Shapiro, in view of his partnership with Bollt, had a substantial interest in Bollt. Yet no disclosure of the partnership was made.

Under another section of the registration statement entitled "Management," there is a biographical description of registrant's officers and directors including Bollt. The description of Bollt lists his business activities and membership in fraternal and civic and professional groups, but omits any reference to his partnership with Shapiro and merely stated that he is in "active practice in Maryland as a Certified Public Accountant." While there is no specific requirement that the partnership be mentioned at that point, the omission is significant in view of the detailed list of Bollt's other activities and affiliations.

Finally, Shapiro's certificate included in the registration statement was not on the partnership's printed letterhead but on a blank sheet of paper upon which Shapiro's home address was typed. Alpher testified that he inserted Shapiro's home address in order to indicate that Shapiro was acting in his individual capacity and not as a partner in B&S. However, had Shapiro's business address been used, his relationship with Bollt and registrant would have been apparent, since all of them have the same business address and the business address of Bollt and registrant is listed in the registration statement.

511636-60- -53

Bollt asserts that he was unfamiliar with our rules and decisions on independence, as well as with the interpretation of the AICPA rules thereon; that he delegated to Alpher the task of preparing the registration statement and resolving all related legal problems, and relied on Alpher's determination that Shapiro was independent; that the partnership between Bollt and Shapiro was a matter of public record and was disclosed in listings in the local telephone and accountants' directories; and that Bollt carelessly signed the registration statement without noticing the omissions respecting the partnership relationship, and did not designedly conceal the partnership relationship or cause Shapiro to certify the balance sheet notwithstanding his lack of independence.

We do not find these assertions persuasive, and we agree with the findings of the hearing examiner that Bollt caused his accounting partner Shapiro to certify as an independent accountant the balance sheet of a registrant controlled by Bollt, and that Bollt attempted to conceal from us and the public his relationship with Shapiro.9 In view of the complete omission from the registration statement of any mention of Bollt's relationship with Shapiro or of any fact, such as a common business address, which might have suggested any such relationship, we are convinced that Bollt recognized Shapiro was not qualified to furnish an independent certification and sought to conceal this from us and from the purchasers.10 We conclude that Bollt and B&S engaged in unethical and improper professional conduct in connection with the certification of registrant's balance sheet by Shapiro.

SHAPIRO

Shapiro knew that he was certifying registrant's balance sheet for inclusion in a registration statement which was to be filed under the Act in connection with a proposed offering to public investors of approximately $1,000,000 of securities, and that such certification was required to be that of an independent public accountant. Shapiro testified that he had read Rule 13 of the Rules of Professional Conduct of the AICPA, which does not on its face specifically refer to the situation of a partner of an affiliate of a registrant, but that he did not know of the published interpretation of that rule which did relate to such situation, and that, after discussing the

9 Bollt testified that he disclosed the partnership with Shapiro in a conference with members of the Division after the filing of the registration statement. The staff members present testified, however, that no such disclosure was made.

10 Respondents imply that Alpher himself may have tried to conceal from us the partnership relationship, and assert that Bollt was unaware of any such scheme on Alpher's part and should not be held responsible therefor. However, it is not reasonable under all the circumstances to believe that the attorney would embark upon such a course of conduct in behalf of his client without the client's knowledge and acquies

cence.

question with Alpher, he relied on the latter's opinion that he was qualified to certify registrant's balance sheet notwithstanding his partnership with Bollt.

Shapiro was charged with the professional responsibility of familiarizing himself with our accounting and auditing rules to which his client was subject.11 He was aware that his partnership with the person who controlled registrant was material to the question of his independence, and he should have realized that it precluded him from certifying registrant's financial statement. Any doubt in Shapiro's mind could have been easily resolved by recourse to our rules, accounting releases, published opinions, the interpretations of the rules of the AICPA, and the informal advice of our Staff, any one of which would have indicated to him the lack of independence. Instead he merely accepted the opinion of Alpher who was an officer and director of and an attorney for the very enterprise as to which Shapiro was required to be independent.

We conclude that Shapiro engaged in improper professional conduct in not inquiring into and becoming familiar with our requirements regarding independence, in relying on the opinion of Alpher, and in certifying registrant's balance sheet as an independent public accountant when he was not in fact independent with respect to registrant either under our rules or under generally accepted accounting standards.

The hearing examiner did not find that Shapiro sought to deceive us. We are in accord with the hearing examiner in this respect, and we find that the record, which shows that Shapiro did not participate in the preparation of the text of the registration statement and that his home address rather than the firm address was placed on his report after he signed it and without his knowledge, does not establish that Shapiro sought to conceal from this Commission his relationship with Bollt.

CONCLUSIONS

Respondents urge that disciplinary action is not required. They point to the fact that registrant's balance sheet was a short and simple document and no charge has been made with respect to its adequacy or accuracy and contend that in other cases in which we have taken disciplinary action against public accountants we found that the financial statements themselves contained false or misleading representations.

11 Cf. CPA Handbook, American Institute of Accountants, Volume I, Chapter 5, Pages 23-24, where it is stated that an accountant who has failed to familiarize himself with the accounting or auditing rules of a government agency affecting his client may be subject to discipline.