Big Accounting Firm Charged With Fraud : Price Waterhouse Hit for AM International Audit

NEW YORK —  The Securities and Exchange Commission on Thursday charged the accounting firm of Price Waterhouse and three of its partners with fraud in connection with accounting abuses at AM International, the Chicago-based maker of duplicating, word-processing and graphics equipment.

In a civil case brought in federal court here, the SEC said that Price Waterhouse and its partners “knew, or, but for a conscious or reckless disregard for the facts, would have known of numerous instances where the financial statements of AM were not in accordance with generally accepted accounting principles.”

As a result, AM International’s 1980 pretax profits were overstated by at least $22 million, the suit charged.

Price Waterhouse is defending itself against a number of lawsuits by people who claim to have lost money investing in AM.

Injunction Sought

The SEC also named seven former AM officials as defendants.

In its complaint, the agency said that “AM, by reason of the actions of certain of the defendants . . . failed to disclose major changes in accounting methods that had a positive effect upon operating results. . . . As a result . . . AM’s consolidated financial statements were materially false and misleading because results of operations, assets and shareholders’ equity were overstated, liabilities understated and statements of changes in financial position were misstated.”

The SEC sought an injunction to prevent all of the defendants from future violations of the anti-fraud, reporting, internal accounting controls and books-and-records provisions of federal securities laws.

AM International, once led by former U.S. budget chief Roy L. Ash, was headquartered in Los Angeles until 1981.

In 1983, the company signed a consent decree after the SEC charged it with related reporting, accounting and disclosure violations.

In 1982, it entered into Chapter 11 bankruptcy proceedings, emerging last year after paying its creditors $86 million.

Joseph E. Connor, chairman and senior partner of Price Waterhouse, said the charges against the accounting firm were “unjustified.”

“On the basis of hindsight observations,” he said, “the SEC is second-guessing a difficult audit made of a company with serious business problems and attempting to blame the auditors for business judgments made by AM management.” He called the 1980 audit “a solid, professional job.”

Connor said that, “despite the significant savings in cost and executive time that would be achieved by a settlement, the principle is of overriding importance to us, and we will, therefore, fight rather than settle.”

Los Angeles Office

The Price Waterhouse partners named in the SEC complaint are Daniel W. Jerbasi, a partner in the firm’s Los Angeles office who had the final responsibility for issuing the audit report on AM at the time of the violations; Benjamin Perks, now the partner in charge of the company’s Tucson office, and Michael D. LeRoy, another Los Angeles partner who was the senior manager of the AM audit.

Four of the former AM executives--James H. Combes, R. Jeffrey Ornstein, Walter Rea and Daniel C. Clark--signed consent decrees in which they neither admitted nor denied the charges but pledged not to violate federal securities laws in the future.

The cases of the other three--Robert H. Lander, Richard Kaufman and Edgar Bolton--”will be litigated,” according to an SEC lawyer.

None of the men could be reached for comment.