As a result of an investigation of alleged violations of the codes of professional conduct of the AICPA and the Texas Society of CPAs, Mr. Leathers with the firm of Edwards and Leathers, P.C., 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 Texas Society of CPAs’ Professional Ethics Committee) alleging a potential disciplinary matter with respect to Mr. Leathers’ 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, 2013.
The ECA reviewed the auditor’s report, financial statements and certain working papers for the engagement as well as Mr. Leathers’ 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 Code of Professional Conduct and Texas Society of CPAs Code of Professional Ethics (this code consists of both the Texas State Board of Public Accountancy (TSBPA) Rules of Professional Conduct and the AICPA Code of Professional Conduct (collectively the “Codes”) as follows:
1.310.001 Compliance with Standards Rule (Prior to December 15, 2014 - Rule 202) - (TSBPA 501.60)
1. The auditor initially failed to obtain sufficient appropriate audit evidence to support the opinion on the financial statements in the following areas (SAS 122; AU-C §500).
a. Internal controls [AICPA Audit and Accounting Guide - Employee Benefit Plans (AAG-EBP) 4.11-.28];
b. Investments and investment transactions (AAG-EBP 8.129);
c. Benefit payments (AAG-EBP 7.201-.202);
d. Participant data (AAG-EBP 7.184-.185);
e. Benefit obligations (AAG-EBP 7.220);
f. Parties in interest (AAG-EBP 2.103-104); and
g. Administrative expenses (AAG-EBP 7.209).
2. The auditor initially failed to adequately document procedures performed with respect to contributions received and receivable (SAS 122, 123; AU-C §230; AAG-EBP 7.184).
3. The revised auditor’s report failed to identify the schedule of reportable transactions (SAS 119, 122, 125; AU-C §725).
1.320.001 Accounting Principles Rule (Prior to December 15, 2014 - Rule 203) - (TSBPA 501.61)
1. The original financial statements improperly state that the plan provided dental and vision benefits (FASB ASC 965-205-50).
2. The original financial statements failed to disclose the stop-loss provisions of the plan and the stop-loss rebate amounts due to the plan (FASB ASC 965-205-50).
3. The original financial statements failed to adequately disaggregate significant types of investments in the fair value measurements note (FASB ASC 820-10-50).
4. The Form 5500 reconciliation note in the original financial statements was inaccurate (FASB ASC 965-205-50).
5. Investments greater than 5% of net assets available for benefits in the original financial statements were not adequately disaggregated (FASB ASC 965-325-50).
6. The date through which subsequent events were evaluated was not updated in the revised financial statements (FASB ASC 855-10-50).
1.400.050 Government Bodies, Commissions, or Other Regulatory Agencies (Prior to December 15, 2014 – Rule 501, Interpretation 501-5) (TSBPA 501.90)
1. The original supplemental schedule of assets held at end of year did not identify parties-in-interest as required by DOL 29 CFR 2520.103-10.
2. The supplemental schedule of reportable transactions was not attached to the original financial statements as required by DOL 29 CFR 2520.103-10.
In consideration of the ECA forgoing further investigation of Mr. Leathers’ conduct as described above and in consideration of the ECA forgoing any further proceedings in the matter, Mr. Leathers 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 Article III of the bylaws of the Texas Society of CPAs.
c. To neither admit nor deny the above specified charges.
d. To his admonishment from membership in the AICPA and the Texas 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 30.5 hours of specified continuing professional education (CPE) courses (Auditing Employee Benefit Plans; Audit Workpapers: Documenting Field Work; Audit Workpapers: Reviewing Field Work Documentation; Upcoming Peer Review: Is Your Firm Ready?) within six 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 five employee benefit plan audit engagements performed by him for 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 listing of the employee benefit plan audits on which he expects to issue reports in the next 12 months from which the engagements subject to pre-issuance review 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 to be rendered, type of organization, his role and anticipated hours on each engagement, anticipated date the report will be released, and whether it will be 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 these pre-issuance review performed at his expense. The ECA has the right to extend the period of time and the 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, changes in his role during the period he is subject to the pre-issuance reviews or if he has not performed any audits of employee benefit plans. If his practice changes and he is no longer involved with audits of employee benefit plans, no longer acts in a supervisory capacity on such engagements, or has not performed such engagements during the above specified period, he must inform the ECA of this 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, he agrees to submit six months after the completion of the pre-issuance reviews above, 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, 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, changes in his role or if he has not performed any audits, reviews, or compilations with note disclosures until a suitable work product is selected for review. If his practice changes, and he is no longer involved with audits, reviews, or compilations with note disclosures, no longer acts in a supervisory capacity on such engagements, or has not performed such engagements during the above specified period, he must inform the ECA of this, 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 Texas 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 other committee of the AICPA or the Texas 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 accounting, auditing, or employee benefit plans 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 Texas 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.