As a result of an investigation of alleged violations of the codes of professional conduct of the AICPA and the Colorado Society of CPAs, Mr. Cutler, with the firm of John Cutler & Associates, LLP, entered into a settlement agreement under the Joint Ethics Enforcement Program effective May 23, 2017.
Information came to the attention of the Ethics Charging Authority (“ECA”) (comprised of the AICPA Professional Ethics Executive Committee and the Colorado Society of CPAs Professional Ethics Committee) with respect to Mr. Cutler’s performance of professional services on the audit of the financial statements of a governmental entity as of and for the year ended December 31, 2012.
The ECA reviewed the auditor’s report and financial statements for the engagement as well as other relevant documents Mr. Cutler submitted. Based on this information, there appears to be prima facie evidence of violations of the rules of the AICPA and Colorado Society of CPAs’ codes of professional conduct as follows:
Rule 202 – Compliance with Standards
The following errors were noted on the Schedule of Expenditures of Federal Awards: (AICPA Audit Guide – Government Auditing Standards and Circular A-133 Audits (“AAG-SLA”) par. 7.20, OMB Circular A-133 §_.310 (b))
a. For federal awards received as a sub-recipient, the identifying number assigned by the pass-through entity was not disclosed.
b. The individual federal programs within a cluster of programs were not identified and totaled.
Rule 203 – Accounting Principles
1. Expenditures in the Statement of Revenues, Expenditures and Changes in Fund Balance are not properly disclosed by character (i.e., current, intergovernmental, capital outlay, and debt service), as capital outlay and debt service expenditures are listed as current expenditures. (GASB Cod. §1800.136, NCGA Stmt 1 par. 70)
2. The financial statements did not disclose the entity’s policies regarding whether it considers restricted or unrestricted (the total of committed, assigned, and unassigned fund balance) amounts to have been spent when an expenditure is incurred for purposes for which both restricted and unrestricted fund balance are available, and whether committed, assigned, or unassigned amounts are considered to have been spent when an expenditure is incurred for purposes for which amounts in any of those unrestricted fund balance classifications could be used. (GASB Cod. §1800.183)
3. The financial statements are unclear as to the timing of the liquidation of compensated absences; the statement of net position implies that the balance is current since it is not included in the break out of long-term liabilities, but Note 6, which presents the rollforward of long-term debt includes the liability as part of long-term debt without providing for an amount due within one year, implying that the balance is all long-term. (GASB Cod. §C60.109-.111)
In consideration of the ECA forgoing further investigation of Mr. Cutler’s conduct as described above and in consideration of the ECA forgoing any further proceedings in the matter, Mr. Cutler 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 Colorado Society of CPAs bylaw Article III.
c. To neither admit nor deny the above specified charges.
d. To be admonished by the AICPA and the Colorado Society of CPAs.
e. That the ECA shall publish his name, the name of his firm, the charges, and the terms of this settlement agreement.
f. To comply immediately with professional standards applicable to the professional services he performs and to submit evidence of such compliance.
g. To complete 23.5 hours of continuing professional education (CPE) courses (Governmental Accounting and Reporting; Applying the Uniform Guidance for Federal Awards in Your Single Audit) within six months of the effective date of this agreement and provide evidence of such completion (e.g., attendance sheets, course completion certificates, etc.).
h. To comply with directive f. above, Mr. Cutler 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 two audits performed by him and selected by the ECA. 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 ECA of the audits on which he expects to issue reports in the 12 months following the effective date of this agreement. The following information should be included regarding the engagements listed: anticipated number of hours to be spent on each engagement, level of professional services expected to be rendered, his role and anticipated hours on each engagement, the type of organization, whether it is subject to Government Auditing Standards and/or OMB Circular A-133/Uniform Guidance and whether it will be an initial engagement. The ECA will select two engagements from the list for pre-issuance review and communicate them to him.
Mr. Cutler 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 quarterly report is due 120 days after the pre-issuance reviewer has been selected by the ECA with each subsequent quarterly report 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 during the period he is subject to the pre-issuance reviews. If his practice changes and he no longer performs audits, no longer acts in a supervisory capacity on such engagements, or if he has not performed any audits subject to Government Auditing Standards, Mr. Cutler 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 undergo the required pre-issuance reviews.
i. To further comply with directive f. above, Mr. Cutler agrees to submit six months after the date the CPE and pre-issuance reviews are completed, 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 CPE and pre-issuance reviews, and the end of the six-month period following the date of completion of the CPE and pre-issuance reviews. The following information should be included regarding the engagements listed: his role and hours spent on each engagement, level of professional services rendered, type of report issued, type of organization, whether it is subject to Government Auditing Standards and/or OMB Circular A-133/Uniform Guidance and whether it was an initial engagement. The ECA will select one of these engagements for review. Mr. Cutler 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 the 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.
Mr. Cutler 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 performing audits, reviews and/or compilations with note disclosures, no longer acts in a supervisory capacity on such engagements, or does not perform any 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.
j. To be prohibited from serving as a member of any ethics or peer review committee of the AICPA or the state CPA societies until he has completed all directives in this agreement. 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 Colorado 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 he submits to comply with directive i. above substantially complies with professional standards.
k. To be prohibited from teaching continuing professional education courses approved by the AICPA or the state CPA societies in any area of auditing and accounting and Uniform Guidance until he has completed all of the directives included in this agreement. This restriction will be communicated to those responsible for engaging CPE instructors at the AICPA and the Colorado Society of CPAs. This requirement shall remain in effect until the ECA determines that the work product he submits to comply with directive i. above substantially complies with professional standards.
l. To be prohibited from performing peer reviews in any capacity until the directives in this agreement have been completed. This prohibition will remain in effect until the ECA determines that the work product he submits to comply with directive i. above substantially complies with professional standards. This restriction will be communicated to his peer review oversight agency.
m. 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.