The U.S. Court of Appeals for the District of Columbia denied an accountant’s petition for review of the Securities and Exchange Commission’s decision to bar him from practicing as an accountant before the SEC.
Petitioner Gregory Dearlove served as Deloitte & Touche’s engagement partner in charge of the 2000 audit of Adelphia Communications Corporation. As the engagement partner, Mr. Dearlove led a team of 35 accountants charged with auditing Adelphia’s financial statements, and personally signed Deloitte’s 2000 independent auditor’s report of Adelphia. In 2005, the SEC charged him with improper conduct resulting in the violation of applicable professional standards, including his approval of Adelphia’s method of accounting for related party transactions. An administrative law judge concluded that Mr. Dearlove had violated SEC rules and regulations by engaging in one instance of highly unreasonable conduct and repeated instances of unreasonable conduct, and denied Mr. Dearlove the right to practice before the SEC.
Upon review, the SEC found that Mr. Dearlove had engaged only in repeated instances of unreasonable conduct and barred him from practicing before it, but granted him the right to apply for reinstatement after four years. Mr. Dearlove then petitioned the U.S. Court of Appeals for the D.C. Circuit to review the SEC’s decision.
In reviewing the SEC’s decision, the Circuit Court denied Mr. Dearlove’s petition and determined, contrary to his assertions, that the SEC need not find that he violated the common law negligence standard of care, as evidenced by expert testimony, in order to conclude that he had engaged in unreasonable conduct under SEC Rule 102(e)(1)(iv)(B)(2). The Court held that the appropriate standard of care to consider under Rule 102 is provided by the Generally Accepted Auditing Standards (GAAS) only and that the SEC would not be required to receive expert testimony on the standard of care. The Court further found that the record contained substantial evidence to support the SEC’s finding that Mr. Dearlove’s conduct violated the standard of care as set forth in the GAAS, including, among other things, Mr. Dearlove’s approval of Adelphia’s practice of netting accounts receivable of related entities against one another. (Dearlove v. SEC, 2009 WL 2194872 (C.A.D.C. July 24, 2009))