Exhibit 16.3
BERSCH ACCOUNTING S.C.
================================================================================
Certified Public Accountants
633 W. Wisconsin Ave., Suite 405 Milwaukee, Wisconsin 53203
Tel: 414-272-8800 www.berschaccounting.com
Fax: 414-223-4070 email: bersch@execpc.com
March 23, 2001
VIA FAX
Office of the Chief Accountant
SECPS Letter File
Securities and Exchange Commission
Mail Stop 11-3
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
I have read the disclosures in Item 4 of the Amendment No. 2 to the Current
Report on Form 8-K/A dated February 26, 2001 of Biogan International, Inc. which
reported on an event of February 20th, namely, the hiring of KPMG LLC as
auditors commencing with the audit of 12-31-00, and Amendment No. 1 to the
current report on Form 8-K filed on March 8, 2001, reporting on an event of
March 5, 2001 (the resignation 8-K). Both of these amendments were to be filed
on March 14, 2001. The following are my responses to the Company's filings.
Regarding the first paragraph in Item 4, it should be made clear that the
company and its counsel sought to engage a large or "Big 5" firm before they met
us, and during our entire tenure, they never ceased the vigorous pursuit of such
a firm. We agreed, when we took on the job, that ours would be only an interim
role while we helped the company develop the disciplines, the personnel, the
reporting systems, and the internal control necessary to be accepted by another
firm. We never agreed to relax the independence, auditing, or accounting
standards during that period, and we only accepted the job because we had been
referred to Biogan by Lam, Kwok, Kwan & Cheng, C.P.A.'s, (LKKC), a firm we had
worked with in the past, and about whose integrity and competence we were
confident.
There were serious delays in getting started after we had sent our original
engagement letter, and our firm has had accounting and auditing disagreements
with Biogan almost from the first. Biogan was already accumulating penalties
under a clause in their debenture agreement requiring the filing of an SB-2 at
an unreasonably early date, and our engagement letter specifically disclaimed
any responsibility on our part for any penalties for delays. Nevertheless, we
cooperated with Biogan's counsel so they could get Biogan's 6-30-2000 10-Q-SB
filed as rapidly as possible. We knew full well that the two-year history of
what would become the accounting acquirer was not available, but the debenture
holders agreed to waive penalties for a while if an 8-K was filed describing the
acquisition. We also had an understanding that LKKC and Biogan's accountants
would have furnished the missing information in time for us to complete a proper
audit report to be filed with a timely amendment.
1
BERSCH ACCOUNTING s.c.
- ----------------------
When we finished our audit report of 6-30-2000, it was impossible to provide a
full two-year history, because such records did not exist. Because we had
already done audit work for the 6-30-2000 period for the proposed combined
entities we agreed to include a gratuitous short period pro-forma report which
might be useful to readers in understanding the effects of the acquisition
reported in the footnotes. It was described as pro-forma because the document
signing did not take place until after the audit date.
The missing information never came forth, because once the first 8-K was filed
the SEC called Biogan's counsel, and made verbal requests for the two-year
history. We knew the data was not ready, and suggested waiting for written
comments, which we could answer with amended reports in proper order, and
acceptable to SEC staff reviewers. LKKC had been completely invisible to the SEC
until that time, and we had not intended to report reliance on their work.
Apparently their existence, and the existence of their earlier draft report had
been discussed in a telephone call, and the SEC asked for a copy of that report.
Bending to SEC pressure, the company's counsel, against our strongly spoken
advice, and absolutely without our consent, incorporated an audit report from
Lam, Kwok, Kwan & Cheng, C.P.A.s, (LKKC) into an 8K amendment in late October.
This caused confusion by the SEC as to who was actually the auditor, and also
caused the SEC to call us "reckless" for consenting to the inclusion of our
report in that amendment without reviewing it first. They warned Biogan that any
further work by us would be subject to extreme scrutiny. At the same time, SEC
staff was telling us that we were not the auditors, and they stated that they
had no criticism of our report.
We made various attempts to straighten out the misunderstanding. We told Biogan
it was their job, not ours, to tell the SEC that the filing of that report had
been an error by their counsel. They finally did withdraw the report, but never
acknowledged that it had improperly included a consent from us, which they most
decidedly never got, leaving the SEC with an unfounded opinion of us, and
leaving us without recourse to rectify the situation without appearing
defensive, and possibly harming any long term relationship even further.
Meanwhile, the Company and its counsel completely abandoned the completion of
the historic accounting in order to assuage the urgings of SEC "staff" for the
qualifications of LKKC and corrections to their report, which should never have
been filed in the first place. We never did, nor ever intended to rely on that
report. We only relied on some of LKKC's workpapers, examined in their office
and/or prepared under our on-site supervision in China.
All of this would still have straightened itself out had we been able to
complete the amended report.
During the process of attempting to get the company to complete its work so we
could audit it, we observed far too much dependence on us to do their work, and
commented frequently on the need to establish better internal control and a real
audit committee. We also discovered that the financials prepared by LKKC for
Biogan included, in the home office asset accounts, a net balance over a half
million dollars more than should have properly been attributed to that
transaction. We were prepared to correct that error with the amended reports we
were trying to prepare.
2
BERSCH ACCOUNTING s.c.
- ----------------------
In the meantime, not only had second quarter report amendments passed their due
dates, but third quarter data was tardy as well, and the company's resources
were still engaged in trying to satisfy "staff", and to allay the threat of
de-listing by NASDAQ. We were asked numerous times to help with that campaign,
which as independent auditors we could not do. About the time the de-listing
threat became imminent, payments under our engagement agreement began to lag,
and we informed Biogan management, counsel, and accountants that under its
terms, we were now free to simply terminate our engagement. We also cited
non-payment of LKKC as part of the problem with getting the data we needed to
correct the filings and bring them up to date. The company denied being in
arrears with LKKC's invoices, even though we had direct confirmation from LKKC
as to what was interfering with their production.
Owing to the problems already on the table, we were really concerned about our
ability to remain as auditors, since no proper arrangements were in place for
the 12-31-2000 audit. We finally sent our engagement letter establishing a
timetable and demanding payment. We knew, of course that Mr. Cerutti, who had
never wanted to work with us in the first place, and Mr. Laverdiere were
feverishly searching for a replacement for us, and we encouraged the company to
make arrangements for a 12-31-2000 physical inventory, no matter who would do
the audit since "staff" had been so concerned about the inventory issue dating
from the 12-30-98 year end. We were prepared to go to China to observe
inventory. That never took place, and in early January we issued an ultimatum
about getting LKKC paid and their work done, and getting us paid a settlement
amount, without which we would not even consider continuing. We met with the
Company's board in California in late January, without their counsel, to settle
our differences, and were paid the first installment. By that time the next
payment was already overdue.
So it can be seen that for several months prior to the February 19, 2001 date
shown in the Company's filing, the Company had been interviewing and searching
for a "Big Five" accounting firm, with the encouragement of the Securities and
Exchange Commission (the "SEC") and had in fact told us they had hired such a
firm. Subsequently, this new firm did not take on the engagement and I was
instructed to continue to proceed with the 12-31-00 year-end audit and that
proper arrangements would be made.
On February 19, 2001, I was once again told that the Company had engaged a new
auditor, KMPG LLP. The draft of the 8-K sent to me for review stated
specifically that I would continue to the completion of third quarter 10-QSB
reports. Of course we never finished them because they could only be done after
the 6-30-00 reports and the 8-KA would be brought into conformance.
On February 23, 2001, I sent three letters to the Company to be executed in
order to expedite the change of auditor and to establish terms for my completion
of that work. These letters, based on standard templates published for use by
the accounting profession, incorporate the Company's consent to allow the
successor auditor access to our workpapers, limitations on the use of the
information obtained via this review, hold harmless agreements, and stipulations
as to accounting disagreements and professional fees. These letters have not
been signed nor returned to me.
3
BERSCH ACCOUNTING s.c.
- ----------------------
On March 5, 2001, at approximately 1:15 P.M. during a telephone conference call
with three members of the Company's board of directors, I was asked to continue
the review of the Company's September 10-QSB. Due to continued lack of payment,
apparently un-resolvable audit issues including scope and accounting matters,
and the company's unwillingness to acknowledge to the SEC the erroneous
inclusion of my consent in SEC filings when none was given, I verbally resigned
from this account as stated in my March 5th letter to the Company and the SEC.
The board members agreed to accept my resignation. In fact, under Item 4 in the
Company's 8-K of March 7, 2000 they state, "The decision to resign was made by
the Former Auditors." Note that their statements made in the first sentence of
Item 4 of this 8-K that prior to February 19, 2001 the Company decided to
terminate Bersch Accounting (The Former Auditors) as its independent certifying
accountants is in conflict with their earlier stated position.
Responding to specific issues:
(a) DISAGREEMENTS CONCERNING AUDIT ISSUES INCLUDING SCOPE AND
ACCOUNTING MATTERS. The company has been aware, through
written and verbal communication over the course of several
months, of disagreements concerning meeting with company
personnel, site visits, inventory observation, and internal
control.
(b) INCLUSION, WITHOUT THE CONSENT OF AUDITORS, of material in
Amendment #2 of Form 8-K/A of October 24, 2000. I adamantly
opposed the submittal of the financial statements of Hechi
Industrial Company prepared by Lam, Kwok, Kwan & Cheng (LKKC).
I was unaware that there was a second amendment to the 8-K,
and that the LKKC statements were included, until I received
an email notifying me of the filing. The consent that was
shown in the Edgar filing is not backed up with any
correspondence from me. Additionally, I have letters showing
that LKKC also did not give their consent.
(c) INFORMATION REQUIRING THE AMENDMENT OF PART OF THE AUDIT
REPORT DATED JUNE 30, 2000. The company is aware of a material
overstatement of the equity of the Hechi Industrial Company.
The remainder of this paragraph is an attempt to make us
appear responsible for the Company's problems when the
underlying cause is simply the facts of the case - lack of
records, lack of/or misdirection of resources to solve the
problems, the pressure caused by entering into certain
agreements, especially the debenture agreement.
(d) OUTSTANDING PROFESSIONAL FEES. This paragraph is true.
(e) WITHDRAWAL OF OPINION ON THE PRO FORMA PORTION OF THE JUNE
AUDIT REPORT. While engaged by Biogan it was our intention to
further investigate the problem and rectify it by appropriate
measures, possibly a prior period adjustment, possibly a
re-issuance, possibly a clarification of the sale documents,
possibly a retroactive renegotiation. Now that we are no
longer in a position to do so, withdrawal is our only option.
This has been discussed orally, and for obvious reasons, not
reduced to writing.
(f) RESIGNATION OF THE FORMER AUDITORS. We resigned as stated.
Terminated is not the word.
(g) NEED FOR AN ADJUSTMENT TO THE JUNE AUDIT REPORT AND FOOTNOTES
THERETO. The company knows that there is a question of
overstatement of assets
4
BERSCH ACCOUNTING s.c.
- ----------------------
which has not been resolved. It has nothing to do with the
over-worked dialogue about the accounting treatment of a
reverse acquisition. It is about numbers.
(h) LETTERS SUBMITTED TO THE COMPANY REGARDING THE FORMER
AUDITORS' WORK PAPERS. Our response to the hiring of KPMG LLC
was to invite them to our offices to review our workpapers.
KPMG read the letter we asked them to sign, they agreed, we
set a date, and they never showed up. We also sent out the
letters described elsewhere in this document, which have been
used and signed before, by us and others in the profession.
PARAGRAPH FOLLOWING (h). True
SECOND PARAGRAPH FOLLOWING (h). We don't doubt that the board
of directors agreed to accept our resignation, and if they
decided to save face by calling it a termination, we don't
mind, as long as they keep saying it to themselves. It's when
they say in to others that we object.
To date our firm has received no authorization from the Company to respond to
inquiries from KPMG, or to make workpapers or any other information available to
any third parties. We wish them well, as we have a very favorable impression of
their business opportunities and some very talented people on both sides of the
Pacific.
Very truly yours,
/s/ Dennis W. Bersch
Dennis W. Bersch, CPA
cc: Biogan International, Inc.
Rutan & Tucker