Hughes, Malcolm W. of Fayetteville, GA
As a result of an investigation of alleged violations of the codes of professional conduct of the AICPA and the Georgia Society of CPAs, Mr. Hughes, with the firm of Malcolm W. Hughes, CPA, entered into a settlement agreement under the Joint Ethics Enforcement Program, effective January 20, 2016.
Information came to the attention of the Ethics Charging Authority (“ECA”) (comprised of the AICPA Professional Ethics Executive Committee and the Georgia Society of CPAs Professional Ethics Committee) alleging a potential disciplinary matter with respect to Mr. Hughes’ performance of professional services on the audit of the financial statements of a not-for-profit entity as of and for the fiscal year ended April 30, 2010.
The ECA reviewed the auditor’s report, financial statements, and working papers for the engagement as well as Mr. Hughes’ responses to such findings. Based on this information, there appears to be prima facie evidence of violations of the rules of the AICPA and the Georgia Society of CPAs’ codes of professional conduct as follows:
Rule 201 – General Standards, A. Professional Competence
The auditor lacked the competence to complete the engagement in accordance with professional standards.
Rule 202 – Compliance with Standards
1. The auditor failed to adequately plan the engagement, assess the risk of material misstatement and consider fraud as evidenced by: (AU §311, §314 and §316)
· The audit program addressing identified risks and assertions affected is labeled as not applicable for every account group;
· The control risk for every account group was labeled as low, although exceptions in control testing were noted that precluded that conclusion;
· The fraud risk assessment labeled management override of controls as not applicable and areas where potential fraud may occur, how it might occur and who might be involved as “none”; and
· The analytical review is labeled both preliminary and final analytical review and contains no documentation of expectations.
2. The auditor failed to adequately document: (AU §339)
· The internal control risk assessment and the link between internal control testing and the conclusions reached; and
· The sampling methodology used in internal control and substantive testing.
3. The original audit report did not clearly indicate the degree of responsibility the auditor is taking for the prior year summarized information. (AU § 508.65; AICPA Audit Guide – Not-for-Profit Entities (AAG-NPO) 14.05-.07)
4. The auditor did not initially identify all major programs because of the failure to ensure programs were properly clustered. (AICPA Audit Guide – Government Auditing & Standards and Circular A-133 Audits (AAG-SLA) 5.31, 173.34)
5. The auditor failed to take appropriate action upon discovery of facts that affected his report on the financial statements. These errors related to an overstatement of deferred revenue and presentation of major programs. (AU §561, as amended)
6. The Report on Internal Control Over Financial Reporting and on Compliance and Other Matters improperly states that the results of the test of compliance were required to be reported under “7”. (AAG-SLA 4.28)
Rule 203 – Accounting Principles
1. The Statement of Activities and Changes in Net Assets presents both unrestricted and temporarily restricted net assets, which is inconsistent with the presentation of net assets on the Statement of Financial Position. Further, the Statement of Activities does not reflect the expiration of donor-restrictions that simultaneously increase one net asset class and decrease another as a separate line item. (FASB ASC 958-210-45 & 55, 958-225-45)
2. The Statement of Activities fails to report all expenses as decreases in unrestricted net assets. (FASB ASC 958-225-45)
3. The financial statements improperly report all expenses as supporting activities and not by functional classification. (FASB ASC 958-720-45)
4. Property and equipment acquired with federal grants was expensed and not capitalized and depreciated. (FASB ASC 958-605-55)
5. The financial statements reflect depreciation of land. (FASB ASC 958-360-35)
6. Revenue was recognized for donated services that did not meet the criteria for recognition. (FASB ASC 958-605-25)
7. The disclosure regarding contributed services fails to include a description of the programs or activities for which the contributed services were used. (FASB ASC 958-605-50)
8. Deferred revenue is materially overstated in the original and revised financial statements. (FASB ASC 605-10-25)
Rule 501, Interpretation 5 – Failure to follow requirements of governmental bodies, commissions, or other regulatory agencies
The auditor failed to obtain the continuing professional education required by Government Auditing Standards. (GAGAS 3.46)
In consideration of the ECA forgoing further investigation of Mr. Hughes’ conduct as described above and in consideration of the ECA forgoing any further proceedings in the matter, Mr. Hughes agreed as follows:
a. To waive his rights to further investigation of this matter in accordance with the Joint Ethics Enforcement Program (JEEP) Manual of Procedures.
b. To waive his rights to a hearing under AICPA bylaws section 7.4 and the Georgia Society of CPAs Article XI Section 4b.
c. To neither admit nor deny the above specified charges.
d. To his suspension from membership in the AICPA and the Georgia Society of CPAs for a period of two years from the effective date of this agreement.
e. To comply immediately with professional standards applicable to the professional services he performs and to submit evidence of such compliance.
f. To complete the following 82.5 hours of continuing professional education (CPE) courses (Not-for-Profit Accounting and Reporting: From Start to Finish; Audit Workpapers: Documenting Field Work; Internal Control Best Practices for Small and Medium-Sized Entities; Applying the Risk Assessment Standards to Smaller Business Audits; Not-for-Profit Accounting & Auditing Update; Applying OMB Circular A-133 to Not-for-Profit and Governmental Organizations; Case Studies in Not-for-Profit Accounting and Auditing; Frequent Frauds Found in Governments and Not-for-Profits; Yellow Book: Government Auditing Standards; Advanced OMB Circular A-133 Issues; Studies in Single Audit and Yellow Book Deficiencies) within two years of the effective date of this agreement and provide evidence of such completion. (e.g., attendance sheets, course completion certificates, etc.)
g. To comply with directive e. above, Mr. Hughes agrees to hire an outside party, acceptable to the ECA to perform pre-issuance reviews of the reports, financial statements, and working papers of all government and single audit engagements performed by him for one year from the date the reviewer has been approved by the ECA. In addition, Mr. Hughes must undergo a pre-issuance review on three other engagements not subject to government auditing standards or OMB Circular A-133 performed by him that year. He must submit the names of the chosen reviewers to the ECA for approval no later than 30 days after the effective date of this agreement. Also, no later than 30 days after the effective date of this agreement, he must submit a list to the Subcommittee of the highest level of engagements (audits, reviews and compilations with note disclosures) on which he expects to issue reports in the upcoming 12 months from which the non-government or non-single audit engagements will be selected. The following information should be included regarding the engagements listed: anticipated number of hours to be spent on the engagement, level of professional services rendered, your role and anticipated hours on each engagement, type of organization, and whether it was an initial engagement.
He agrees to permit the outside party to report quarterly to the ECA on his progress in complying with this agreement as stated herein to comply with professional standards. The report should provide the reviewer’s comments in detail for each engagement and should include a description of the nature of the entity reviewed, the entity’s year end and the date of the review. The first report is due 120 days after the reviewer has been approved by the ECA with subsequent reports due every 90 days thereafter. He agrees to have this pre-issuance review performed at his expense. The ECA has the right to extend the period of time and number of engagements subject to pre-issuance review if there are deficiencies.
He agrees to inform the ECA of any changes in the composition of his practice or changes in his role as an engagement partner during the period he is subject to the pre-issuance reviews. If his practice changes and he is no longer involved with audits or no longer acts in a supervisory capacity on such engagements, he must inform the ECA of this change and the ECA may require that he attest every six months for three years as to the nature of his practice. If, during the three-year attestation period he returns to performing such engagements he must inform the ECA and undergo the pre-issuance reviews.
h. To further comply with directive e. above, Mr. Hughes is to submit a list of the highest level (audits, reviews, and compilations with note disclosures) of engagements that he performed in the period between the date of completion of the pre-issuance reviews in directive g. and the end of the six-month period following completion of the pre-issuance reviews. The following information should be included regarding the engagements listed: number of hours spent on each engagement, his role and total hours on each engagement, level of professional services rendered, type of report issued, type of organization, and whether it was an initial engagement. The ECA will select one of these engagements for review. He will be informed of this selection and will be asked to submit information to include a copy of his report, the financial statements, and working papers related to that engagement for review by ECA. The ECA may extend the period to select an engagement to ensure a suitable selection is available. A peer review undergone by his firm would not exempt him from this requirement.
He agrees to inform the ECA of any changes in the composition of his practice or changes in his role until a suitable work product is selected for review. If his practice changes and he is no longer involved with audits, reviews, and compilations with note disclosures or no longer acts in a supervisory capacity on such engagements, he must inform the ECA of this change and the ECA may require that he attest every six months for three years as to the nature of his practice. If, during the three-year attestation period he returns to performing such engagements he must inform the ECA of this change and the ECA will select a suitable work product for review.
After an initial review of such report, financial statements, and working papers, the ECA may decide he has substantially complied with professional standards and close this matter. Or, the ECA may decide that an ethics investigation of the engagement he submitted is warranted. If at the conclusion of the investigation, the ECA finds that professional standards have in fact been violated, the ECA may refer the matter to the trial board for a hearing or take such other action as it deems appropriate.
i. To be prohibited from serving as a member of any ethics or peer review committee of the AICPA or the Georgia Society of CPAs until he has completed all directives in this letter. This restriction will be communicated to those responsible for appointments to such committees. In addition, if he applies to join any committee of the AICPA or the Georgia Society of CPAs he must inform those responsible for such appointments of the results of this ethics investigation. This requirement shall remain in effect until the ECA determines that the work product submitted to comply with directive h. above substantially complies with professional standards.
j. To be prohibited from teaching continuing professional education courses approved by the AICPA or the state societies in ethics, accounting and auditing until he has completed all of the directives included in this letter. This restriction will be communicated to those responsible for engaging CPE instructors at the AICPA and the Georgia Society of CPAs. This requirement shall remain in effect until the ECA determines that the work product submitted to comply with directive h. above substantially complies with professional standards.
k. To submit within 30-days after he has signed this agreement evidence that his firm has submitted an application to join the Governmental Audit Quality Center. Upon membership in that Center, he agrees that his firm will comply with the directives of that Center.
l. To be prohibited from performing peer reviews in any capacity until the directives in this letter have been completed. This prohibition will remain in effect until the ECA determines that the work product he submitted to comply with directive h. above substantially complies with professional standards. This restriction will be communicated to his peer review oversight agency.
m. That the ECA shall provide a copy of this settlement agreement to the AICPA’s Peer Review Division staff, his peer review administering entities and his firm’s peer reviewer.
n. That the ECA shall publish his name, the name of his firm, the charges, and the terms of this settlement agreement.
o. That the ECA shall monitor his compliance with the terms of this settlement agreement and initiate an investigation where the ECA finds there has been noncompliance.