Former E&Y Audit Partner Faces Five Years on Obstruction Charges

Former Ernst & Young audit partner Thomas Trauger went to great lengths to keep from being “second-guessed” and last week pleaded guilty to charges he obstructed a federal investigation.

The subject of the government's probe was NextCard Inc., a San Francisco company that distributed credit cards via the Internet. The company's troubles began when it handed out too many cards to unqualified holders, the Associated Press reported. Federal regulators shut down the company's banking unit in early 2002.

Trauger admitted to knowingly altering, destroying and falsifying records with the intent to impede and obstruct an investigation by the U.S. Attorney's Office, CFO.com reported, but at heart, his goal was seemingly to avoid being "second-guessed" for failing to recognize red flags at a company that he had audited.

SEC official Robert Mitchell was interviewed at the time of Trauger's September 2003 arrest and said the audit partner was trying to "downplay or eliminate evidence of problems" that would have been red flags, according to USA Today, adding that he had previously given the company a clean bill of health.

An FBI affidavit showed that Trauger wanted to give the appearance that E&Y's audit of NextCard had been "right on the mark" so that "some smart-ass lawyer" wouldn't be able to second-guess him, the San Francisco Recorder, a legal newspaper, reported.

Trauger admitted last week that when testifying before the SEC he had failed to disclose that NextCard documents and quarterly working papers had been tampered with.

"This is one of the first cases in which an auditor has pled guilty to destroying key documents in an effort to obstruct a federal investigation," said U.S. Attorney Kevin V. Ryan, in a statement, reported by CFO.com.

Sarbanes Oxley sentencing guidelines could have put Trauger in prison for 25 years and levied a fine of $500,000. Under the plea agreement, he faces five years in prison when sentenced on Nov. 18, the AP reported.

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