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In the Matter of Stewart Parness | U.S. Securities And Exchange Commission | Form 10 K

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  In the Matter of STEWART PARNESSAdmin. Proc. File No. 3-6695SECURITIES AND EXCHANGE COMMISSIONSECURITIES EXCHANGE ACT OF 1934, Release No. 23507;ACCOUNTING AND AUDITING ENFORCEMENT, Release No. 1081986 SEC LEXIS 1051; 48 S.E.C. 529August 5, 1986TEXT: [**529] [*1] ORDER INSTITUTING PROCEEDINGS PURSUANT TOSECTION 15(c)(4) OF THE SECURITIES EXCHANGE ACT OF 1934, ANDFINDINGS AND ORDER OF THE COMMISSIONThe Commission deems it appropriate and in the public interest that proceedings be,and hereby are, instituted pursuant to Section 15(c)(4) of the Securities Exchange Act of 1934 ( Exchange Act ) with respect to Stewart Parness ( Parness ), to determine whetherParness was a cause of Information Displays, Inc.'s ( IDI's ) violations of Section 13(a)and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder andwhether Parness violated Exchange Act Rule 13b2-1.Simultaneously with the institution of these proceedings, Parness has submitted anOffer of Settlement for purposes of disposing of the issues raised in these proceedings.Under the terms of the Offer of Settlement, Parness, without admitting or denying any of the matters set forth herein, consents to the issuance of this Order Instituting ProceedingsPursuant to Section 15(c)(4) of the Securities Exchange Act of 1934, and Findings andOrder of the Commission ( Order ).The Commission has determined that it is appropriate and in the public interest toaccept the [*2] Offer of Settlement of Stewart Parness and, accordingly, issues thisOrder.I.INTRODUCTIONA. RespondentStewart Parness, a certified public accountant, was IDI's Controller from January 10,1983, until he resigned on April 4, 1984. From 1969 to 1978 Parness practiced as a publicaccountant with two firms, [**530] including one national firm. From 1978 to 1983,Parness was Controller and Chief Financial Officer of a publicly-held computer systemsmanufacturer.   B. IssuerIDI was a New York corporation with its headquarters and principal place of businessin Armonk, New York. During all relevant times herein, IDI was a publicly-heldcompany whose stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act. IDI was required to file annual and quarterly reports with theCommission pursuant to Section 13(a) of the Exchange Act. IDI is presently inliquidation proceedings pursuant to a bankruptcy court order in the Southern District of New York.C. Related ActionsOn August , 1986, the Commission instituted an action in the United States DistrictCourt for the Southern District of New York seeking injunctive and other relief againstWilliam Weksel ( Weksel ), [*3] IDI's Chief Executive Officer, President, and BoardChairman, and Albert Bromberg ( Bromberg ), IDI's Executive Vice-President of Operations, Treasurer and a director. The Commission complaint alleged that from thesecond quarter of 1982 through the second quarter of 1983, Weksel and Bromberg causedIDI to overstate its pretax income by over 100 percent, approximately $ 3.1 million, bycausing IDI to improperly record eleven material transactions as sales when no salesactually took place under generally accepted accounting principles ( GAAP ). Wekseland Bromberg caused IDI to include the fictitious sales in periodic reports filed with theCommission and to incorporate them in stock and limited partnership offering documentsin 1982 and 1983. The complaint further alleged that beginning at least in the secondquarter of 1983, Weksel and Bromberg failed to correct certain disclosures regarding thestatus of IDI's principal product when those disclosures became untrue, and made certainadditional misleading statements regarding the product. Finally, the complaint allegedthat Weksel and Bromberg sold IDI shares while in possession of material, non-publicinformation.Simultaneously [*4] with the filing of the Commission's complaint, and withoutadmitting or denying the allegations therein, Weksel and Bromberg consented to theDistrict Court's entry of a Final Judgment enjoining them from future violations of Sections 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 13b2-1 and 13a-13 thereunder andordering them to disgorge a total of $ 311,000.[**531] II.BACKGROUNDA. Description of IDI's BusinessPrior to entering bankruptcy in May, 1984, IDI was in the business of designing,manufacturing, marketing, and servicing computer based interactive graphics systems  that were used to automate the design and drafting process for architects, illustrators, andengineers. IDI's systems included computer hardware and applications software.By 1981, IDI's principal product, the System 150 computer introduced in 1977, wasbecoming technologically obsolete. During 1981, IDI embarked on development of asuccessor product, the CADalyst, which it planned to introduce in late 1982 or early1983.IDI's 1982 sales of the System 150 were lower than IDI's internal, beginning-of-yearprojections. For 1982, [*5] IDI reported pretax income of approximately $1.4 million onrevenues in excess of $12 million, including approximately $8.3 million in sales and $3.5 million in pretax income from research conducted for affiliated partnerships.IDI ceased production of the System 150 by year-end 1982, and introduced theCADalyst in January, 1983. Production of the CADalyst signaled a major change in thecompany's business, requiring increased manufacturing capacity, warehouse space andinventory. IDI planned to obtain working capital for this endeavor primarily by engagingin a $14 million public offering of its stock in the first quarter of 1983.By at least the second quarter of 1983, IDI learned that the CADalyst did not meetdesign specifications, often breaking down or computing at slower speeds than expected.As a result of the CADalyst's problems, several customers cancelled orders or returnedequipment which had been taken for evaluation. Sales throughout 1983 were lower thanIDI had projected internally.For the first three quarters of 1983, IDI reported pretaxincome of $ 360,000 on revenues in excess of $12 million, including approximately $8.5million in sales and $ 3 million from research [*6] contracts.III.THE CONDUCT OF STEWART PARNESSStewart Parness participated in improper accounting practices that occurred at IDIwhile he was IDI's Controller from January, 1983 to April, 1984. Parness, a certifiedpublic accountant since 1972, was knowledgable about GAAP, and about the disclosureand accounting requirements for financial reporting by public companies.As Controller at IDI, Parness, in conjunction with his direct supervisors, IDI's Chief Executive Officer ( CEO ) and Executive Vice President for Operations ( EVP ), wasresponsible for the preparation of IDI's financial statements on a consolidated basis. He[**532] reviewed and signed IDI's 1982 annual report on Form 10-K and its first, secondand third quarter 1983 quarterly reports on Forms 10-Q, each of which was filed with theCommission. He also participated in the preparation of IDI's 1983 annual report on Form10-K which was filed in incomplete form, in part because of the misstatements includedin prior Forms 10-Q.  During the first two quarters of 1983, Parness participated with the CEO and EVP infalsely inflating IDI's pretax income. While Parness did not devise or direct any of IDI'simproper practices, [*7] Parness was a cause of IDI's improperly recording sixtransactions each of which was material to income in the quarter in which it was firstreported. In addition, Parness was a cause of IDI 's failure to reverse or provide anallowance for doubtful accounts for two transactions that IDI improperly recorded in1982. As a result of the improper accounting for these eight transactions, IDI overstatedits aggregate pretax income for the first two quarters of 1983 by approximately $2.3million. Had these transactions been properly accounted for, IDI would have experienceda loss in both quarters and for the year ending December 31, 1983. Parness prepared,reviewed and/or signed the periodic reports in which these overstatements were reported.With reference to each of the transactions, Parness (1) knew or recklessly disregardedfacts which precluded IDI's recording the transaction as a sale under GAAP; (2) recordedthe transaction as a sale without a sufficient basis to do so; and/or (3) knew or recklesslydisregarded facts which precluded IDI from maintaining accounts receivable for thetransaction without providing an allowance for doubtful accounts. Had he madereasonable inquiries [*8] into the terms and conditions of the transactions, he would havelearned that they could not be recorded as sales and that no revenue could be recognizedfrom them, or that the receivables were uncollectible and should have been written downto net realizable value.A. IDI's Internal Controls Environment Prior to and During Parness' EmploymentWhen Parness began employment at IDI in January, 1983, there were weaknesses inIDI's existing system of internal controls that facilitated IDI's falsification of its booksand records to reflect non-existent sales. IDI's independent accountants had repeatedlyunderscored certain of the weaknesses within the system. In May, 1981, Peat, Marwick,Mitchell & Co. ( PMM ) wrote IDI 's board of directors a letter citing a materialweakness in IDI's internal controls system. PMM found that there was neither adequatesegregation of responsibilities nor adequate documentation supporting [**533]significant entries in the accounting records. In addition, PMM noted that IDI's EVP wasable to override the accounting system at his discretion through, among other things, theinitiation of unapproved entries which had a material effect o the financial statements.[*9] As an essential check on that lack of segregation, PMM recommended that IDIshould hire a controller, which it did in the summer of 1981.IDI dismissed PMM as its independent accountants in December 1981, and retainedErnest & Whinney ( E&W ). In the management letters issued in connection with its1981 and 1982 fiscal year audits, E&W did not state that IDI 's system of internalcontrols was inadequate, however, E&W suggested that IDI make certain changes.E&W's management letter to IDI's board of directors issued on April 15, 1983, whileParness was IDI Controller, noted that the accounting department should carefullyconsider end-of-quarter sales to determine that all sales were recognized only after title
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