The state Board of Accountancy has decided to examine whether outside accountants were negligent in failing to detect problems at Technical Equities before the San Jose investment and management firm collapsed in 1986, a board official said Tuesday.
The official said the board decided to review a finding by an administrative law judge recommending that no disciplinary action be taken against four individual accountants and their former employer, KMG Main Hurdman.
The board can uphold the opinion or take its own action against the individuals and the defunct accounting firm. A decision is expected at the board’s October meeting.
The case is unusual because it is an attempt to discipline a firm that no longer exists. Main Hurdman merged with Peat Marwick in 1987 to create Peat Marwick Main. State officials said any disciplinary action would not affect the new firm.
However, the four individuals, three of whom work for the new firm, still face the possibility of the loss of their licenses.
Main Hurdman was the outside accounting firm for Technical Equities for many years before the investment company filed for bankruptcy protection in February, 1986. The failure of the firm, known as TE, cost 1,200 investors about $150 million and resulted in 600 civil lawsuits, in some of which Main Hurdman was a defendant. Main Hurdman settled most of the lawsuits recently by agreeing to pay $17.9 million to the investors.
TE founder Harry C. Stern and another former executive have agreed to plead guilty to federal criminal charges and to cooperate in a continuing federal investigation.
Main Hurdman had issued audit reports vouching for the financial health of the San Jose firm. The latest report, which noted no weakness at TE, came seven months before the firm was closed.
After its own review, the Board of Accountancy staff sought to revoke the licenses of Main Hurdman and the four accountants on the final audit. The staff said the accountants were negligent in ignoring warning signs of problems.
In May, however, the administrative law judge dismissed the accusations and recommended no disciplinary action. The full state board had the option of accepting the opinion or reviewing the evidence itself.
Richard Miller, an attorney with Peat Marwick Main in New York and former general counsel to Main Hurdman, said the decision to review was not surprising because of the complexity of the case. He said he expects the full board to agree with the judge’s findings.
Samuel Yellen, the state board president, did not participate in the decision because he is a managing director in Peat Marwick’s Los Angeles office, a board official said.