As a result of an investigation of alleged violations of the Code of Professional Conduct of the AICPA, Mr. Kawana, with the firm of Kruse Mennillo LLP, entered into a settlement agreement under the Joint Ethics Enforcement Program effective November 8, 2016.
Information came to the attention of the Ethics Charging Authority (“ECA”) (comprised of the AICPA Professional Ethics Executive Committee) alleging a potential disciplinary matter with respect to Mr. Kawana’s performance of professional services on the audit of the financial statements of an employee benefit plan as of and for the year ended December 31, 2011.
The ECA reviewed the auditor’s report, financial statements and working papers for the engagement as well as Mr. Kawana’s responses and other relevant documents he submitted to support his response. Based on this information, there appears to be prima facie evidence of violations of the rules of the AICPA’s Code 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 initially failed to obtain sufficient appropriate audit evidence to support the opinion on the financial statements in the areas of internal controls; participant data; and parties-in-interest/related party transactions. (SAS 106, AU §326)
2. The workpapers did not contain evidence that a service auditor’s report was obtained, reviewed and evaluated. (SAS 109, AU §314, AICPA Audit & Accounting Guide – Employee Benefit Plans (“AAG-EBP”) par. 6.13-6.27)
3. The note disclosure related to information certified by the trustee in the originally issued and revised financial statements was incomplete as it failed to include the net depreciation in fair value of investments. (AAG-EBP par. 5.13)
4. The originally issued and revised auditor’s reports failed to state that the accompanying supplemental schedules are presented for the purposes of additional analysis and are not a required part of the basic financial statements but are required by the Department of Labor’s Rule and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. (AU §551.06)
5. The note disclosure relating to the comprehensive basis of accounting other than generally accepted accounting principles (“GAAP”) in the originally issued and revised financial statements failed to adequately describe the basis of presentation and how that basis differs from GAAP. (AU §623.09-.10)
6. Note 2 to the originally issued and revised financial statements inaccurately disclosed that Great West is the trustee of the Plan assets. (SAS 32, AU §431)
7. There is inconsistency within the disclosures related to investments in the revised financial statements. Investments on the face of the financial statements, those disclosed in Note 5, and those on the Schedule of Assets (Held at End of Year) indicate that the investments held by the Plan are mutual funds. However, Note 7, related to fair value measurements, describes the funds as common collective trusts, which if accurate, are improperly disclosed as Level 1 investments. (SAS 32, AU §431)
Rule 203 – Accounting Principles
1. The disclosures in the originally issued and revised financials contained the following errors and/or omissions.
a. Failed to describe the nature and effects on net assets of the plan amendment that was made on May 26, 2010. (AAG-EBP par. 3.50b, FASB ASC 962-205-50)
b. The allocation provisions to participants’ accounts related to administrative expenses and employer contributions. Furthermore, the accounting for the disposition of forfeitures was not disclosed. (AAG-EBP par. 3.50a, FASB ASC 962-205-50)
c. The basis for determining contributions by employers and, for a contributory plan, the method of determining participants’ contributions. (AAG-EBP par. 3.50d, FASB ASC 962-205-50)
d. Whether the employer absorbed significant costs of the Plan’s administration. (AAG-EBP par. 3.50e, FASB ASC 962-205-50)
e. Failed to identify investments that represented 5 percent or more of total net assets. (FASB 962-325-45-7, AAG-EBP 3.50h)
f. The date through which subsequent events have been evaluated as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued (FASB ASC 855-10-50)
2. The originally issued financial statements did not make required disclosures for assets measured at fair value on a recurring basis. (FASB ASC 820)
Rule 501, Interpretation 501-5 – Failure to follow requirements of governmental bodies, commissions, or other regulatory agencies
As the partner responsible for his firm’s peer review compliance, Mr. Kawana failed to ensure it complied with the state board and AICPA requirements to undergo a peer review.
In consideration of the ECA forgoing further investigation of Mr. Kawana’s conduct as described above and in consideration of the ECA forgoing any further proceedings in the matter, Mr. Kawana 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.
c. To neither admit nor deny the above specified charges.
d. To his expulsion from membership in the AICPA upon the effective date of this agreement.
e. 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.
f. That the ECA shall publish his name, the name of his firm, the charges, and the terms of this settlement agreement.