Opinion ID: 3021453
Heading Depth: 3
Heading Rank: 2

Heading: Schoen and Detweiler compile the financials

Text: The defendants–appellees in this case are Robert Schoen, a certified public accountant, and Detweiler, Hershey and Associates, P.C., Schoen’s employer. In 1997, CitX retained Detweiler and Schoen to compile3 its financial statements. Seitz 2 For clarity, we will refer to the company as CitX and the plaintiff–appellant as Seitz, even though as trustee Seitz is standing in CitX’s shoes for the purposes of this suit. 3 Compilations differ significantly from other forms of financial-statement preparation—reviews and audits. Among the three, compilations represent the “‘lowest level of assurance.’” Otto v. Pa. State Educ. Ass’n–NEA, 330 F.3d 125, 133 (3d Cir. 2003); see also Robert Wooler Co. v. Fid. Bank, 479 A.2d 1027, 1030 (Pa. Super. Ct. 1984) (discussing the difference between audited and unaudited financials). A compilation involves “[p]resenting in the form of financial statements information that is the representation of management (owners) without undertaking to express any assurance on the statements” by the accountant. Am. Inst. of Certified Pub. Accountants, AR § 100.04, at 3313, available at http://www.aicpa.org/download/members/div/auditstd/AR-00 100.PDF (2004) (emphasis added) (footnote omitted). This differs from a review, in which accountants give limited 5 alleges that Detweiler4 went beyond its written engagement agreement and that it missed many “red flags” at CitX. These alleged red flags included that CitX’s “bookkeeper” was actually Bernard Roemmele’s girlfriend, and a high school dropout; CitX was bouncing checks; it was insolvent (i.e., without the PRSI receivable, it had virtually no income); PRSI had been shut down; and yet CitX was selling stock to the public. Detweiler prepared CitX’s financial statements for the assurance based on spot checks of financial information given to them. See Otto, 330 F.3d at 133. An audit gives the greatest assurance, as accountants performing one must verify the financial statements. Id. Accountants “might consider it necessary to perform other accounting services to compile the financial statements.” AR § 100.04, at 3313. For example, “the accountant should possess a general understanding of the nature of the entity’s business transactions, the form of its accounting records, the stated qualifications of its accounting personnel, the accounting basis on which the financial statements are to be presented, and the form and content of the financial statements.” Id. § 100.08, at 3315. But accountants doing a compilation are not under a duty to verify the information provided by the client; that is, they are not required to authenticate, or confirm the truth of, that information. Otto, 330 F.3d at 133–34. 4 In this opinion, we refer to both appellees collectively as Detweiler. 6 period from July 1, 1997, through December 31, 1999. There were two sets of statements, both of which were compilations, as was made plain at the beginning of each statement. The first statement covered the fiscal years ending June 30, 1998, and June 30, 1999; the second covered the six-month period ending December 31, 1999. The second statement included the $2,400,000 PRSI receivable and was accompanied by a note that said in full: In January 2000, the Company, along with its largest customer and several individuals, were named as defendants and charged with certain security violations by the Attorney General’s Office in Florida. As of the date of these financial statements, the Company is not sure what impact, if any, these charges will have on its financial position. As of December 31, 1999, the financial statements reflect accounts receivable in the amount of $2,403,122 from this customer and related deferred revenues in the amount of $960,000.5 5 The second financial statement was even less detailed than the first, and its certification also added a paragraph that did not appear on the front of the two-year report and is not part of a standard compilation certification: Management has elected to omit substantially all of the disclosures ordinarily included in the financial statements prepared on 7 This second financial statement, from which stems this suit, was taken to a February 2000 CitX shareholder meeting. Even with its weakened financial condition and in suspect circumstances (at least one shareholder had by this time decided that the company was a Ponzi scheme), CitX was still able to raise more than $1,000,000 in equity. The company thereby prolonged its existence and went on to accrue millions of dollars in debt.