As a result of an investigation of alleged violations of the Code of Professional Conduct of the AICPA, Mr. Taylor, with the firm of Jerkins, Lowe & Company, entered into a settlement agreement under the Joint Ethics Enforcement Program effective October 16, 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. Taylor’s performance of professional services on the audit of the financial statements of an employee benefit plan as of and for the fiscal year ended June 30, 2012.
The ECA reviewed the findings of the U.S. Department of Labor’s Employee Benefits Security Administration and Mr. Taylor’s responses to such findings as well as other relevant documents he submitted to support his responses including the auditor’s report, financial statements, and working papers. Based on this information, there appears to be prima facie evidence of violations of the rules of the AICPA Code of Professional Conduct as follows:
Rule 201 – General Standards, A. Professional Competence
The auditor undertook an engagement that he could not reasonably expect to complete in accordance with professional standards.
Rule 202 – Compliance with Standards
1. The auditor failed to properly date the reports on the original and revised financial statements (SAS 1, 29, 98, 103; AU §530.07).
2. The auditor’s report does not state that the supplemental schedules are presented for the purposes of additional analysis and are not a required part of the financial statements but are required by the Department of Labor’s Rules and Regulations for reporting and Disclosure under the Employee Retirement Income Security Act of 1974 (AAG-EBP 13.37).
3. The auditor initially failed to obtain sufficient appropriate audit evidence to support the opinion on the financial statements in the following areas (SAS 106; AU §326):
a. Internal controls [AICPA Audit and Accounting Guide- Employee Benefit Plans (“AAG-EBP”) Chapter 6];
b. Risk assessment (AAG-EBP 5.65);
o Investments, specifically obtaining a sufficient certification from the trustee (AAG-EBP 7.16);
c. Contributions received and receivable (AAG-EBP 8.03, .07);
d. Participant data (AAG-EBP 10.04-.06; 10.15-.16);
e. Benefit payments (AAG-EBP 9.03);
f. Parties-in-interest/prohibited transactions (AAG-EBP 11.08-.12);
g. Plan tax status (AAG-EBP 12.03);
h. Commitments and contingencies (AAG-EBP 12.11-.13);
i. Administrative expenses (AAG-EBP 12.17-.18); and
j. Subsequent events (AAG-EBP 12.19).
4. The auditor failed to adequately document procedures performed in the area of notes receivable from participants (SAS 103; AU §339):
5. The auditor failed to obtain a properly tailored management representation letter (SAS 85, 89, 99, 113; AU §333.05).
6. The auditor did not document required communications with those charged with governance (SAS 114; AU §380).
Rule 203 – Accounting Principles
1. The original statement of changes in net assets available for benefits does not separately state changes in net appreciation/depreciation from other sources of investment income (FASB ASC 962-205-45).
2. The original investments note inaccurately reported depreciation amounts (FASB ASC 962-205-45).
3. The original financial statements failed to disclose or inaccurately disclosed the following:
a. The disposition of forfeited non-vested accounts (FASB ASC 962-205-50);
b. For assets and liabilities measured at fair value on a recurring basis, all disclosures required by FASB ASC 820-10-50;
c. Identification of investments that represent 5 percent or more of total net assets, as applicable for the plan (FASB ASC 962-205-50);
d. Material party-in-interest transactions (FASB ASC 850-10-50); and
e. Subsequent events disclosures required by FASB ASC 855-10-50.
Rule 501, Interpretation 501-5 – Failure to follow requirements of governmental bodies, commissions, or other regulatory agencies
1. The supplemental schedule of reportable transactions was not attached to the original financial statements as required by DOL 29 CFR 2520.103-10.
2. The supplemental schedule of assets held at end of year attached to the original financial statements did not identify parties-in-interest as required by DOL 29 CFR 2520.103-10.
In consideration of the ECA forgoing further investigation of Mr. Taylor’s conduct as described above and in consideration of the ECA forgoing any further proceedings in the matter, Mr. Taylor 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 admonishment by the AICPA.
e. To comply immediately with professional standards applicable to the professional services he performs and to submit evidence of such compliance.
f. To complete 23 hours of continuing professional education (CPE) courses (Auditing Employee Benefit Plans; Risk Assessment and Introduction to Internal Control-Audit Staff Essentials, Level I; Understanding the Entity and Assessing Risk-Part 1-Audit Staff Essentials, Level II; Understanding the Entity and Assessing Risk-Part 2-Audit Staff Essentials, Level II; Audit Workpapers: Documenting Fieldwork; Audit Workpapers: Reviewing Fieldwork Documentation) 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 three (3) 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 the 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 3 engagements for pre-issuance 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 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 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, 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 pre-issuance reviews and CPE above, whichever is later, 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 CPE and the end of the six-month period following completion of the pre-issuance reviews and CPE. 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 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 submit within 30-days after he has agreed to audit an employee benefit plan, 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.
j. 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 other 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 h. above substantially complies with professional standards.
k. To be prohibited from teaching continuing professional education courses approved by the AICPA or the state societies in the areas of 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. 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.
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. 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.
n. That the ECA shall publish his name, the name of his firm, the charges, and the terms of this settlement agreement.
o. 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.