As a result of an investigation of alleged violations of the codes of professional conduct of the AICPA and the South Carolina Association of CPAs, Mr. Kochenower, with the firm of Cline Brandt Kochenower & Co., P.A. entered into a settlement agreement under the Joint Ethics Enforcement Program (JEEP), effective July 15, 2019.
Information came to the attention of the Ethics Charging Authority (ECA — AICPA Professional Ethics Executive Committee and South Carolina Association of CPAs Professional Ethics Committee) alleging a potential disciplinary matter with respect to Mr. Kochenower’s performance of professional services on the audit of the financial statements of a not-for profit-entity as of and for the fiscal year ended June 30, 2014.
The ECA reviewed the auditor’s report, financial statements, and selected working papers and Mr. Kochenower’s responses to such findings as well as other relevant documents Mr. Kochenower submitted to support his responses. Based on this information, there appears to be prima facie evidence of violations of the rules of the AICPA and South Carolina Association of CPAs’ codes of professional conduct as follows:
Rule 201 - General Standards, B. Due Professional Care
The notes to the financial statements incorrectly include outdated references to FASB Statements 116 and 117, which were superseded by the FASB Accounting Standards Codification in 2009.
Rule 202 - Compliance with Standards
1. The financial statements are contradictory in that the auditor’s report and certain paragraphs of Note 1 disclosed that the College is a discretely presented component unit of the State of South Carolina, though in two other paragraphs of Note 1, the College is disclosed as being a part of the State of South Carolina’s primary government that is not legally separate and therefore, is not considered a component unit of the State. (AU-C §700.16)
2. The first paragraph of the auditor’s report failed to properly identify the Foundation as part of the financial statements that were subject to audit within the reporting entity, though the fact that other auditors performed that portion was disclosed. Similarly, the opinion paragraph of the auditor’s report did not provide an opinion on the discretely presented component unit. (AU-C §700.25, .35, A4, Exhibit A, Illustration 2)
3. The auditor’s “in relation to” opinion over the Schedule of Expenditures of Federal Awards, which was included in the Independent Auditors’ Report on Compliance For Each Major Program and On Internal Control Over Compliance Required by OMB Circular A-133, failed to properly describe the entire audit reporting entity and the departures from the standard report with respect to the work performed by other auditors. (AU-C §725.10)
4. The Summary of Prior Audit Findings failed to report the status of all prior year findings and whether they had been fully corrected. (AICPA Audit Guide – Government Auditing Standards and Circular A-133 Audits (“AAG-GAS”) par. 13.45-.47, OMB Circular A-133, §__.315(b))
5. The Schedule of Expenditures of Federal Awards failed to report the following required elements (AAG-GAS 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 reported; and
b. The total federal awards expended for each individual federal program.
6. The notes to the Schedule of Expenditures of Federal Awards incorrectly disclosed that the College does not participate in any Department of Education loan programs though approximately $6.9 million of FFEL program loans were reported on the face of the schedule. (AU-C §700.16)
7. The auditor failed to perform adequate audit procedures to determine whether the entity appropriately implemented GASB Statement 62 and to determine the impact, if necessary, on the auditor’s report. (AU-C §500.06)
8. The group auditor failed to perform sufficient procedures to make reference to the report of the component auditor as indicated by the following (AU-C 600.43-.45, .A40):
a. There was no documentation in the workpapers that the firm performed procedures to evaluate the component auditor’s competence, such as performing inquiries as to their professional reputation and reviewing the results of peer reviews or other inspections.
b. The financial statements issued by the component auditor were dated after the date of issuance of the group financial statements, and therefore, sufficient competent evidential matter was not available to issue the group auditor’s report.
c. The financial statements issued by the component auditor and included in the group audit reporting package contained violations of U.S. generally accepted accounting principles that were not documented as having been identified and questioned by the group auditor in the workpapers as follows:
i. The basic financial statements for the discretely presented component unit presented only 2014 though the group auditor’s opinion and basic financial statements were comparative.
ii. The impact of the prior period adjustment on each category of net assets was not reflected in the basic financial statements or disclosed in the notes.
The disclosures related to the endowment did not contain all required elements, including (FASB ASC 958-205-50) disclosure of investment return, separated into investment income and net appreciation or depreciation of investments; a description of the Foundation’s policy for the appropriation of the endowment assets for expenditures (its endowment spending policies); and a description of the Foundation’s endowment investment policies, including the Foundation’s return objectives and risk parameters, how the objectives relate to the endowment spending policies, and the strategies employed for achieving those objectives.
In consideration of the ECA forgoing further investigation of Mr. Kochenower’s conduct as described above, and in consideration of the ECA forgoing any further proceedings in the matter, Mr. Kochenower agreed as follows:
a. To waive his rights to further investigation of this matter in accordance with the JEEP manual of procedures.
b. To waive his rights to a hearing under AICPA bylaws section 7.4. and the South Carolina Association of CPAs bylaws section 15.2.
c. To neither admit nor deny the above specified charges.
d. To his admonishment by the AICPA and the South Carolina Association 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 the following continuing professional education (CPE) courses within six months of the effective date of this agreement and provide evidence of such completion (for example, attendance sheets, course completion certificates, and so on).
Yellow Book: Government Auditing Standards — 9.5 hours
Fundamentals of Governmental Accounting and Reporting — 8.5 hours
Studies on Single Audit and Yellow Book Deficiencies — 9.0 hours
Total — 27.0 hours
g. To comply with directive (e), above, he agreed 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 engagements subject to Government Auditing Standards performed by him during the one-year period following 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 of 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 engagements subject to Government Auditing Standards on which he expects to issue reports in the upcoming 12 months from which the engagements subject to pre-issuance review will be selected.
He agreed 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.
He agreed to inform the ECA of any changes in the composition of his practice, changes in his role, or if he has not performed any engagements subject to Government Auditing Standards during the period he is subject to the pre-issuance reviews. If his practice changes and he is no longer involved with engagements subject to Government Auditing Standards, no longer acts in a supervisory capacity on such engagements or he has not performed such engagements during the above specified period, 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 undergo the required pre-issuance reviews.
h. To further comply with directive (e), above, submit, six months after completion of the pre-issuance reviews, a list of the highest level (audits, reviews, and compilations with note disclosures) of engagements that he performed in the six-month period following the date he completed 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 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 agreed 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 he has not performed such engagements during the above specified period, 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 AICPA Joint Trial Board for a hearing or take such other action as it deems appropriate.
i. To be prohibited from performing peer reviews in any capacity until the above 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 prohibition will be communicated to his firm’s peer review administering entity.
j. To be prohibited from serving as a member of any ethics or peer review committee of the AICPA and the South Carolina Association of CPAs until he has completed all directives in this letter. This prohibition will be communicated to those responsible for appointments to such committees. In addition, if he applies to join any other committee of the AICPA and the South Carolina Association of CPAs, he must inform those responsible for such appointments of the results of this ethics investigation. This prohibition shall remain in effect until the ECA determines that the work product he submitted to comply with directive (h), above, substantially complies with professional standards.
k. To be prohibited from teaching CPE courses approved by the AICPA or the state CPA societies in accounting, auditing, Uniform Guidance, and Government Auditing Standards until he has completed all directives in this agreement. This prohibition will be communicated to those responsible for engaging CPE instructors at the AICPA and the South Carolina Association of CPAs. This prohibition shall remain in effect until the ECA determines that the work product he submitted to comply with directive (h), above substantially complies with professional standards.
l. That the ECA shall provide a copy of this settlement agreement to the AICPA’s Peer Review Division staff, his firm’s peer review administering entity, and his firm’s peer reviewer.
m. That the ECA shall publish his name, the name of his current 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.