Opinion ID: 785790
Heading Depth: 4
Heading Rank: 2

Heading: GAAP and GAAS Violations

Text: 90 Next, Plaintiffs contend that the Complaint alleges violations of GAAS and failure to detect violations of GAAP of such simple and obvious nature and large magnitude so as to support a strong inference of Andersen's scienter. It is well-settled that violations of GAAP and GAAS, standing alone, do not create an inference of scienter, much less a strong one. See Comshare, 183 F.3d at 553 (citing cases). However, when the alleged accounting errors are sufficiently basic and large, their existence, in combination with other factors, may support the requisite scienter inference. Telxon, 133 F.Supp.2d at 1031. 91 Plaintiffs point out that under APB No. 20, a restatement is an admission that financial statements were materially false at the time they were made; therefore, Plaintiffs argue, the alleged accounting errors were material and Andersen's knowledge or reckless disregard of such errors can be inferred. This line of reasoning misapprehends the nature of the scienter inquiry. To support an inference of fraudulent scienter, allegations of GAAP and GAAS violations must extend in nature and magnitude beyond merely the materiality threshold. We reject Plaintiffs' contention that Intrenet's $1.3 million in underreported expenses allegedly resulting from Andersen's auditing failures belies any conclusion that Andersen acted merely negligently. Likewise, the allegations regarding the failure to reserve against accounts receivable do not cry out scienter. MicroStrategy, 115 F.Supp.2d at 636-37. Taking the allegations as true, as we must, Andersen's alleged failures were not so grievous as to suggest that their work was no audit at all. Worlds of Wonder, 35 F.3d at 1426. These are not the sort of in your face accounting violations that, without additional specific, highly suspicious facts and circumstances, support a strong inference of scienter. See MicroStrategy, 115 F.Supp.2d at 637; SmarTalk, 124 F.Supp.2d at 515. 92 Once again, Plaintiffs point to the fact that Intrenet hired an outside consultant in early 2000 as proof that Intrenet and its auditor were aware of the alleged accounting improprieties for an extended period of time before they revealed them to investors. As we have already stated, the Complaint is largely devoid of any factual detail regarding how, when, and what the consultant discovered. An inference of scienter on this basis would be unwarranted.