Washington (July 31, 2003) -- Long Island accounting firm Marcum & Kliegman said threats to its managing partner and a dispute about overdue invoices effectively ended its relationship with Phlo Corp., not attempts to coerce the company into paying excessive fees, as charged in a filing with the Securities and Exchange Commission.

Phlo Corp.'s recent 8-K filing charged the accounting firm, along with audit partner David C. Buzkin and managing partner Jeffrey Weiner, with trying to get Phlo to pay "disputed and excessive fees: by threatening to block the company's compliance with SEC reporting requirements."

Phlo dismissed M&K as its public auditor on July 1.

But in a July 14 letter to the SEC, M&K said it was on the verge of severing its relationship with Phlo due to non-payment of "substantial sums of money for prior audit and review work, as well as other services." It added that Phlo's executive vice president and general counsel, Anne P. Hovis, "made certain statements which threatened this accounting firm, as well as its managing partner, Jeffrey Weiner, and otherwise attempted to improperly influence and/or coerce this firm in regard to our audit of the financial statements for the company for the year ended March 3, 2003." The letter said Hovis threatened to file a lawsuit against the firm and Weiner.

The firm said the threats, as well as the "substantial sums" owed to the firm, "called into serious question whether we remained 'independent' under Section 303 of the Sarbanes Oxley Act."

The firm's attorney attempted to resolve the issues via a series of letters, which also indicated that if the matters weren't resolved by 5 p.m. on July 2, M&K "would resign as the auditors of record for the company effective immediately."

Before the firm could send Phlo a formal letter of resignation on July 3, the company sent its own letter dismissing the accounting firm as its auditor.

According to Scott Univer, an SEC expert and former general counsel for accounting firm BDO Seidman, Section 303 states that a company can't use improper threats or coercion to influence an accounting firm's actions. "Basically you can't threaten to take away a lucrative engagement or wield some other carrot or stick to get the firm to roll over and agree with them on an accounting issue," he said. He added that the American Institute of CPAs' standards have always held that non-payment of fees for more than a year and threats of litigation potentially impair an auditor's independence.

Although Marcum & Kliegman would not elaborate on its letter to the SEC, its attorney reiterated the firm's stance.

"Neither Marcum & Kliegman nor this law firm as its counsel received the amended 8-K from Phlo prior to its filing, but we have reviewed it and stand by the information contained in our letter to the SEC, said the firm's attorney, Roy M. Hartman, of Miami-based Sacher, Zelman, Van Sant, Paul, Beiley, Hartman, Terzo, Rolnick & Waldman.

-- Tracey Miller-Segarra

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