The U.S. Securities and Exchange Commission has filed civil fraud charges against Michael J. Moore, a Nevada auditor whose work was allegedly so deficient that it amounted to no audit at all. The SEC claims that Mr. Moore's "auditors" were high school graduates with little training in auditing or even accounting. Mr. Moore himself had allegedly only worked as a bookkeeper, and had little or no auditing experience.
The SEC says that Mr. Moore's firm served 300 companies from 2005 to 2008. The regulator alleges that the firm's audits had many deficiencies, but the lawsuit only provides details for two specific audits. One was for Tombstone Exploration Inc., a Canadian mining company that did not properly account for millions of shares issued to its president. The other was for Ethos Environmental Inc., a San Diego company that allegedly recorded $9-million in fictitious sales, or 92 per cent of the 2007 total. (All figures are in U.S. dollars.) In both cases, audits by Moore & Associates allegedly failed to identify the problems.
The complaint, filed on Aug. 27, 2009, in the District of Nevada, identifies Mr. Moore as a certified public accountant licensed in Texas and Nevada. The SEC says that he was the president and majority owner of Moore & Associates, and was its only CPA from inception until late 2008. During this time, the firm had approximately 300 clients, which were mostly developing stage or shell companies. According to the complaint, Moore & Associates received $3-million in fees from these clients between 2005 and 2008.
During this time, the firm's 12 employees received little training in auditing, the SEC claims. "One employee stated that she merely filled out checklists but performed no auditing procedures," the complaint states. Others only recently learned to read "Qs and Ks" the SEC says.
Ethos became a customer of Moore & Associates after its prior auditor raised questions about the company's third quarter 2007 sales, the SEC says. Ethos had terminated the prior auditor before the questions could be resolved. In April, 2008, less than three months after the prior auditor stated its concerns, Moore & Associates allegedly represented that it had audited the statements in accordance with the applicable standards.
According to the complaint, Moore's audit missed problems with the company's revenue that went undetected until the second half of 2008. At that time, the majority shareholders of Ethos replaced the chief executive officer and directors of the company, and conducted an internal investigation into revenue reporting. The new board determined that the ousted CEO had directed the recording of $9-million in fictitious sales. Furthermore, he had misappropriated $2.2-million of the company's money to pay personal expenses, the complaint states.
With the other company, Tombstone Exploration, the SEC claims that Moore & Associates failed to identify that the company had issued millions of unaccounted-for shares to its president. (The complaint does not identify the president, but the company's 2006 annual report stated that he was Alan Brown of Nanaimo, B.C.) In its 2006 and 2007 reports, Tombstone failed to disclose that it had issued 5.5 million and 8.5 million shares, including five million to the president, the complaint states.
The SEC says Tombstone hired Moore & Associates on June 29, 2007, the same day it had dismissed its prior auditor. Weeks later, on July 16, 2007, Moore & Associates issued an unqualified audit report for the 2006 results. The SEC claims that the audit failed to test equity transactions and failed to identify mathematical inconsistencies between the statement of cash flow and the statement of shareholders' equity.
One month later, the SEC's division of corporate finance sent a letter to Tombstone identifying deficiencies with the company's financials. The letter asked the company to reconcile expenses related to stock issued for services, and to account for $900,000 of its $1.2-million in assets. Tombstone later restated the results, and disclosed that it had previously omitted the issuance of $4.95-million in stock. It also reduced its assets by $900,000.
In addition to the alleged Ethos and Tombstone deficiencies, the SEC says Moore & Associates conducted deficient audits on four other companies, Studio One Media Inc., Biocoral Inc., Centergistic Solutions Inc. and Standard Drilling Inc. The complaint does not contain details of these audits.
The regulator sought appropriate civil penalties, disgorgement of ill-gotten gains and an order preventing Mr. Moore and Moore and Associates from violating portions of the U.S. Securities Act.
Simultaneous with announcing the charges, the SEC announced that Mr. Moore and his company have settled the case. Without admitting any wrongdoing, they have agreed to pay a $130,000 civil penalty and to disgorge $179,750 in ill-gotten gains. They have also consented to an administrative order that suspends them from appearing before the commission as an accountant.
In addition to the SEC charges, Mr. Moore is facing a parallel case from the Public Company Accounting Oversight Board. In an administrative order dated Aug. 27, 2009, the PCAOB has revoked the registration of Moore & Associates and has barred Mr. Moore from working for a registered public accounting firm.
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