Horne, Terry L. of Lebanon, TN

As a result of an investigation of alleged violations of the AICPA and Tennessee Society of CPAs’ codes of professional conduct, Mr. Horne with the firm of Horne CPA, entered into a settlement agreement under the Joint Ethics Enforcement Program effective August 16, 2017.

Information came to the attention of the Ethics Charging Authority (“ECA”) (comprised of the AICPA Professional Ethics Executive Committee and the Tennessee Society of CPAs’ Professional Ethics Committee) alleging a potential disciplinary matter with respect to Mr. Horne’s performance of professional services on the audit of the financial statements of a not for profit entity as of and for the year ended March 31, 2013.

The ECA reviewed the financial statements, selected engagement workpapers as well as other relevant documents Mr. Horne submitted.  Based on this information, there appears to be prima facie evidence of violations of the rules of the AICPA and Tennessee Society of CPAs’ codes of professional conduct as follows:

Rule 201 – General Standards, B. Due Professional Care

1. The presentation of the entity’s U.S. Department of Agriculture Community Facility Loan on the Schedule of Expenditures of Federal Awards is misleading and confusing. 

2. There is an inconsistency between the schedule of findings and questioned costs and the auditor’s report on major program compliance. The report on major program compliance stated that there were no material weaknesses. However, the presentation of finding 2013-C1 in Section III of the Schedule of Findings and Questioned Costs indicates that the finding was a material weakness. 

Rule 202 – Compliance with Standards

1. The auditor’s report incorrectly stated that the financial statements were as of January 31, 2013 and 2012. (AU-C 700.23d)

2. The presentation of the auditor’s report failed to conform to the clarified auditing standards. (AU-C 700-22 thru 43)

3. The wording used in the auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards failed to comply with the clarified auditing standards. (AICPA Audit Guide, “Governmental Auditing Standards and OMB Circular A-133 Audits” (AAG-SLA) 4.54)

4. The wording in the auditor’s Report on Compliance for Each Major Federal Program an on Internal Control Over Compliance required by OMB Circular A-133 failed to comply with the clarified auditing standards. (AAG-SLA 13.26)

Rule 203 – Accounting Principles

1. An escrow balance related to the entity’s USDA loan agreement was incorrectly presented as temporarily restricted net assets. (FASB ASC 958-210-45) 

2. Cash held in an escrow account related to the entity’s USDA loan agreement was incorrectly included in cash and cash equivalents. (FASB ASC 958-210-45)

3. The statement of activities failed to (FASB ASC 958-225-45): 

a. Present the change in net assets for the period as the “increase (or change) in net assets”.

b. Present revenues, expenses, gains and losses by net asset class. 

4. The statement of cash flows: 

a. Incorrectly started with the intermediate measure of operations amount, “Excess of Support and Revenues Over Expenses from Operations”. (FASB ASC 230-10-45)

b. Failed to present a non-operating grant for the purchase of fixed assets as a cash flow from financing activities and simultaneously as a cash outflow from investing activities. (ASC 958-230-55)

c. Incorrectly shows interest income as an addition in the reconciling items to arrive at operating cash flows because the statement started out with an incorrect amount. (ASC 958-230-55)

d. Incorrectly shows the loss on disposal of assets is shown as a subtraction to arrive at cash provided from operations. (ASC 958-230-55)

e. Failed to present all components of cash flows at gross amounts.  (ASC 230-10-45)

5. The statement of functional expenses (ASC 958-205-45):

a. Incorrectly presented 2012 comparative amounts in total rather than by function.  

b. Incorrectly included two line items, “Contractual Services” and “Diabetes Grant Expenditures” that were not natural classifications.  

6. The entity’s accounting policy for classifying items as cash equivalents does not comply with generally accepted accounting principles.  (ASC 230-10-20)

7. The entity failed to disclose the following:

a. Its capitalization policy. (FASB ASC 958-360-50)

b. Information about related party transactions with board members. (FASB ASC 850-10-50)

Agreement:

In consideration of the ECA forgoing further investigation of Mr. Horne’s conduct as described above and in consideration of the ECA forgoing any further proceedings in the matter, Mr. Horne 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 Tennessee Society of CPAs bylaws Article 6.

c. To neither admit nor deny the above specified charges.

d. To his admonishment by the AICPA and the Tennessee Society of CPAs. 

e. To comply immediately with professional standards applicable to the professional services he performs and to submit evidence of such compliance.

f. To complete 20.5 hours of continuing professional education (CPE) courses (GAAP for NFPs: Not-for-Profit Accounting & Financial Reporting; Audit Workpapers: Documenting and Reviewing Field Work; Applying OMB Circular A-133 to NFP and Governmental Organizations; Studies in Single Audit and Yellow Book Deficiencies) within three months 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, 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 three not-for-profit audits and/or audits subject to Government Auditing Standards and/or OMB Circular A-133/Uniform Guidance audits performed by him for a period of one year from the date the reviewer has been approved 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 ECA of the not-for-profit audits and/or audits subject to Government Auditing Standards and/or OMB Circular A-133/Uniform Guidance on which he expects to issue reports during the 12-month period following the effective date of this agreement. The ECA will select three of these engagements for review. 

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 30 days after a report has been issued.  He agrees to have this pre-issuance review performed at his expense.  The ECA has the right to extend the period of time, number and composition 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 not-for-profit audits or audits subject to Government Auditing Standards and/or OMB Circular A-133/Uniform Guidance, 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, submit six months after the end of the pre-issuance review period a list of the not-for-profit audits and audits subject to Government Auditing Standards and/or OMB Circular A-133/Uniform Guidance that he performed during the six-month period following completion of the pre-issuance reviews. 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 not-for-profit audits or audits subject to Government Auditing Standards and/or OMB Circular A-133/Uniform Guidance 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 Tennessee 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 Tennessee 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 the areas of accounting and auditing; Government Auditing Standards; and OMB Circular A-133/Uniform Guidance until he has completed all the directives included in this letter. This restriction will be communicated to those responsible for engaging CPE instructors at the AICPA and the Tennessee 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 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.

l. 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.

m. That the ECA shall publish his name, the name of his firm, the charges, and the terms of this settlement agreement.

n. 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.