As a result of an investigation of alleged violations of the codes of professional conduct of the AICPA and the Massachusetts Society of CPAs, Mr. Sherman, with the firm of Smith, Watson and Company, LLP, entered into a settlement agreement under the Joint Ethics Enforcement Program effective December 14, 2016.
Information came to the attention of the Ethics Charging Authority (“ECA”) (comprised of the AICPA Professional Ethics Executive Committee and the Massachusetts Society of CPAs Professional Ethics Committee) alleging a potential disciplinary matter with respect to Mr. Sherman’s performance of professional services on the audit of the financial statements of an employee benefit plan as of and for the year ended June 30, 2012.
The ECA reviewed the auditor’s report, financial statements and working papers for the engagement as well as Mr. Sherman’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 and Massachusetts Society of CPAs’ codes of professional conduct as follows:
Rule 202 – Compliance with Standards
1. The auditor failed to obtain sufficient appropriate audit evidence to support the opinion on the financial statements in the following areas (SAS 106):
a. Audit planning [AICPA Audit and Accounting Guide - Employee Benefit Plans (AAG-EBP) 5.48];
b. Risk assessment (AAG-EBP 5.65);
c. Internal controls (AAG-EBP 6.13-.27);
d. Participant data (AAG-EBP 10.04-.06; 10.15-.16);
e. Benefit payments (AAG-EBP 9.03);
f. Plan tax status (AAG-EBP 12.02-.03); and
g. Subsequent events (AAG-EBP 12.19).
2. The auditor failed to document the timing of when workpapers were completed and when they were reviewed (SAS 103; AU §339.18).
3. The note in the financial statements disclosing the summary of information certified by the trustee failed to include investment income (AAG-EBP 5.13).
4. The auditor’s report does not specifically identify the supplemental schedule to which its opinion was disclaimed (AU §551.06b).
Rule 203 – Accounting Principles
1. The statement of net assets available for benefits and related notes were not comparable (FASB ASC 205-10-45).
2. The original financial statements did not disclose or incompletely disclosed the following:
a. Accounting policy for allocations (FASB ASC 962-205-50);
b. The basis for determining the employer’s matching contributions (FASB ASC 962-205-50);
c. That administrative expenses were paid by the plan sponsor (FASB ASC 962-205-50);
d. The federal income tax status of the plan (FASB ASC 962-205-50);
e. Related party (party-in-interest) transactions (FASB ASC 850-10-50); and
f. Amounts of forfeitures (FASB ASC 962-205-50).
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. Sherman failed to ensure it complied with state board requirements, and those of the AICPA and Massachusetts Society of CPAs to have his firm undergo a peer review that included a review of his employee benefit plan practice.
In consideration of the ECA forgoing further investigation of Mr. Sherman’s conduct as described above and in consideration of the ECA forgoing any further proceedings in the matter, Mr. Sherman 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 bylaws Article VII of the Massachusetts Society of CPAs.
c. To neither admit nor deny the above specified charges.
d. To his suspension from membership in the AICPA and the Massachusetts Society of CPAs for a period of two years from the effective date of this agreement. During the period of suspension, he is prohibited from representing himself as a member of the AICPA and the Massachusetts Society of CPAs and from using any AICPA credentials.
e. To comply immediately with professional standards applicable to the professional services he performs and to submit evidence of such compliance.
f. To complete 35 hours of continuing professional education (CPE) courses (Annual Update for Accountants and Auditors; Auditing Employee Benefit Plans; Upcoming Peer Review: Is Your Firm Ready?; Audit Workpapers: Documenting Field Work; Audit Workpapers: Reviewing Field Work Documentation) within twelve (12) 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 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 list to ECA of the highest level of engagements (audits, reviews, and compilations with note disclosures) on which he expects to issue reports in the upcoming 12 months. 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. The ECA will select the five engagements for pre-issuance review from this list.
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 reviews 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, changes in his role during the period he is subject to the pre-issuance reviews or if he has not performed any audits, reviews, or compilations with note disclosures. 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 and undergo the pre-issuance reviews.
h. To further comply with directive e. above, submit six months after the completion of the CPE and 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 the CPE and those pre-issuance reviews and the end of the six-month period following completion of the CPE and 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 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.
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 notes disclosure, 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 Massachusetts 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 Massachusetts 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, and 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 Massachusetts 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 submit within 30-days after he has signed this agreement evidence that his firm has submitted an application to join the Employee Benefit Plan Audit Quality Center. Upon membership in that Center, he agrees that his firm will comply with the directives of that Center.
l. 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.
m. Submit written evidence that he has provided this settlement agreement to the partner at his firm responsible for coordinating his firm’s peer review and the firm’s managing partner within 30 days of accepting this agreement.
n. 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.
o. That the ECA shall publish his name, the name of his firm, the charges, and the terms of this settlement agreement.
p. 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.