As a result of an investigation of alleged violations of the Code of Professional Conduct of the AICPA, Mr. Clarke, with the firm of Anderson M. Clarke, C.P.A., P.C., entered into a settlement agreement under the Joint Ethics Enforcement Program, effective September 11, 2017.
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. Clarke’s performance of professional services on the audit of the financial statements of a not for profit as of and for the fiscal year ended June 30, 2012.
The ECA reviewed information publicly available on the Federal Audit Clearinghouse’s website, Mr. Clarke’s responses to the ECA’s inquiries as well as other relevant documents Mr. Clarke submitted to support his response, including work papers, financial statements, relevant emails and other correspondence. 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 202 – Compliance with Standards
1. The auditor’s report was not modified to indicate that the financial statements were presented in conformity with an Other Comprehensive Basis of Accounting. Additionally, the financial statements do not describe how that basis differs from generally accepted accounting principles for all material matters. (AU §623.05, .08-.10)
2. The auditor failed to restrict his report on internal control (Yellow Book Report) or his report on major program compliance. (AU Sec. 532.04 & .13, SAS 87)
3. The auditor incorrectly used $500,000 as the threshold to determine Type A programs to audit as major. (AICPA Audit Guide – Government Auditing Standards and Circular A-133 Audits (AAG-SLA) Appendix B; OBM Circular A-133 §_.520)
4. The paragraph in the auditor’s report that references the report on internal control over financial reporting failed to describe the purpose of that report. (AAG-SLA 4.22)
Rule 203 – Accounting Principles
Rule 501, Interpretation 501-5 – Failure to follow requirements of governmental bodies, commissions, or other regulatory agencies
The auditor’s firm failed to obtain an external peer review every three years as required by Government Auditing Standards. (Government Auditing Standards – Yellow Book – paragraph 3.96)
In consideration of the ECA forgoing further investigation of Mr. Clarke’s conduct as described above and in consideration of the ECA forgoing any further proceedings in the matter, Mr. Clarke 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 suspension from membership in the AICPA 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 provide an attestation immediately, then every six months for a period of three years that he is no longer performing audit engagements. If he returns to performing such work, he agrees:
- To complete 33.5 hours of continuing professional education (CPE) courses (Comprehending OMB Circular A-133; Applying OMB Circular A-133 to Not-for-Profit and Governmental Organizations; Not-for-Profit Accounting and Reporting Update; Upcoming Peer Review: Is Your Firm Ready?*) prior to accepting such work and to provide evidence of such completion (e.g., attendance sheets, course completion certificates, etc.).
*(Must be completed prior to enrolling in a peer review program.)
- To comply with directive e. above, he agrees to hire an outside party, acceptable to the ECA to perform a pre-issuance review of the reports, financial statements, and working papers on all audits performed by him for one year from the date the reviewer has been approved by the ECA. He must submit the name of the chosen reviewer to the ECA for approval no later than 30 days after he commences performing such engagements.
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 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.
- To further comply with directive e. above, he agrees to submit, six months after the completion of the pre-issuance reviews, 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 those pre-issuance reviews 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 the engagement, his role and total hours on each engagement, level of professional services rendered, type of report issued, type of organization, whether the organization was subject to Government Auditing Standards and/or OMB Circular -133/Uniform Guidance, 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.
- To schedule a peer review of his firm’s system of quality control. The review should be scheduled through his firm’s administering entity within 60 days of acceptance of an engagement subject to peer review. He must submit evidence of the scheduled review by submitting a copy of the review team approval letter issued by his firm’s administering entity. In addition, his firm’s peer review will be due to the ECA six months after the year end date determined by the ECA.
- To submit within 30-days of acceptance of an engagement subject to Government Auditing Standards and/or OMB Circular A-133/Uniform Guidance, 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.
g. To be prohibited from serving as a member of any ethics or peer review committee of the AICPA 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, 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 f. above substantially complies with professional standards.
h. To be prohibited from teaching continuing professional education courses approved by the AICPA or the state societies in not-for-profit accounting and auditing as well as Government Auditing Standards and/or OMB Circular A-133/Uniform Guidance 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. This requirement shall remain in effect until the ECA determines that the work product submitted to comply with directive f. above substantially complies with professional standards.
i. 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 f. above substantially complies with professional standards. This restriction will be communicated to his peer review oversight agency.
j. 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.
k. That the ECA shall publish his name, the name of his firm, the charges, and the terms of this settlement agreement.
l. 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.