vs. ) CASE NO. 78-1081
EDWARD J. TOOZE, )
Respondent. )
This case was heard pursuant to notice on February 20, 1979, in Dunedin, Florida, by Stephen F. Dean, assigned Hearing Officer of the Division of Administrative Hearings. The Recommended Order in this cause was delayed to permit the filing of memoranda and proposed recommended orders in accordance with the desires of the parties.
This case was presented on an Administrative Complaint filed by the State Board of Accountancy against Edward J. Tooze, alleging that Tooze had violated the provisions of Section 473.04 and 473.251(1)(g), Florida Statutes, and, Rules 21A-4.01, 4.02, and 4.03, Florida Administrative Code, on the basis of factual allegations contained in the Administrative Complaint.
The issue presented is whether Edward J. Tooze violated the aforestated statutes and rules.
For Respondent: Edward J. Tooze, pro se
Edward J. Tooze holds certificate number R-0434 as a certified public accountant in the State of Florida.
Tooze's certificate is currently under suspension pursuant to order of the State Board of Accountancy entered under to authority of Section 473.111(5), Florida Statutes.
Tooze, although under suspension, is subject to the authority of the Florida State Board of Accountancy for violations of Chapter 473 and the rules contained in Chapter 21A, Florida Administrative Code.
Tooze undertook to provide an audited and an unaudited financial statement for Gull-Aire Corporation on September 30, 1976. Said audited and unaudited financial statements were received into evidence as Composite Exhibit #1.
Financial statements are representations made by management, and the fairness of a representation of unaudited statements is solely the responsibility of management. See Section 516.01 of Statements on Auditing Standards, No. 1, (hereinafter referred to as SAS)
The auditor's report dated October 4, 1976, prepared by Tooze, states as follows:
In accordance with your instructions, we submit herewith the balance sheet of
Gull-Aire Corporation as of September 30, 1976.
This statement was prepared without audit, and accordingly we do not express an opinion thereon.
Each page of the unaudited statement bears the language, "Prepared without audit from books of account and information provided by management."
Paragraph 516.04 of SAS provides an example of a disclaimer of opinion as follows:
The accompanying balance of x company as of December 31, l9XX, and the related statements of income and retained earnings and changes in financial position for the year then ended were not audited by us and accordingly we do not express an opinion on them.
(Signature and date)
The form of the disclaimer used by Tooze in the financial statement of Gull-Aire quoted in Paragraph 6 is not identical to the example given in Section 516.04, SAS, No. 1. However, Tooze's statement does reflect that the financial statement was not audited and that Tooze did not express any opinion on it.
The notes to the audited financial statement of Gull-Aire Corporation do not include a summary of significant accounting policies used by Tooze in the preparation of the financial statement.
While only a balance sheet is shown in both of the Gull-Aire financial statements, retained earnings were reported which were the result of the sale of a parcel of real property. No notes were made on either of the reports explaining this sale, and its treatment, although this was a major business transaction and source of income to the corporation for the period covered.
Tooze did not disclose the treatment of income taxes in both the financial statements of Gull-Aire, particularly the tax treatment of the retained earnings in the amount of $45,499.64 from the sale of the real property.
Although Tooze issued two financial statements for Gull-Aire Corporation as of September 30, 1976, one audited and one unaudited, he did not state on the second financial statement the reason for its preparation and explain the accounting decisions which resulted in the change of various entries on the second statement.
Tooze stated to the Board's investigator that he did not obtain a representation letter from the management of Gull-Aire Corporation. Tooze further stated that he did not prepare a written audit program nor obtain and report what internal controls existed within Gull-Aire Corporation.
Tooze also prepared a financial report dated April 30, 1977, for Jack Carlson Company, Inc., which was received into evidence as Exhibit 2.
The disclaimer prepared by Tooze in the Jack Carlson financial statement contained in the letter to the Board of Directors of the company dated September 15, 1977, stated as follows:
We submit herewith our report on the examination of the books and records of Jack Carlson Company, Inc., for the fiscal year ended April 30, 1977, and the following exhibits:
(delete)
The terms of our engagement did not include those standard auditing procedures instant to the rendition of an opinion by an independent Certified Public Accountant.
The limited scope of our examination precludes our expression of an opinion as to the fairness of the over-all representations herein.
The attached statements were made the basis for the preparation of the U.S. Corporation Income Tax Return for the fiscal year ended April 30, 1977.
Essentially the same statement is contained in the statements for Albeni Corporation and Georgetown Mobile Manor, Inc. No statement of changes in financial position was contained in the financial statement prepared for Jack Carlson Company, Inc.
Section 516.08, SAS, No. 1 provides in pertinent part as follows:
When financial statement's are issued proporting to present fairly financial position, changes in financial position, the results of operations in accordance with generally accepted accounting procedures, a description of all significant accounting policies of the reporting entity should be reported as an integral part of the financial statement. (Emphasis supplied)
Tooze prepared financial statements for Albeni Corporation which were received as Exhibit #3, and financial statements for Georgetown Mobile Manor, Inc., which were received as Exhibit #4.
The financial statements of Carlson, Georgetown and Albeni were all unaudited. Tooze did not provide an explanation or note to the financial statements describing significant accounting policies which he applied in preparing the statements.
In the financial statement of Albeni Corporation, Tooze indicated that "these interim financial statements are intended primarily for internal management use."
The fixed assets in the financial statement of Georgetown Mobile Manor, Inc., constitute $301,642 out of $345,000 of the company's assets. Depreciation and accumulated depreciation are reported as $103,641. The method of computing depreciation was not indicated on the financial statement.
In the unaudited financial statements prepared for Carlson and Albeni, the basis of stating inventories and the methods used to determine inventory costs were not disclosed, although inventories constitute a significant percentage of both companys' assets.
CONCLUSIONS OF LAW
The Board of Accountancy charges Edward J. Tooze with violation of Sections 473.04 and 473.251(1)(g), Florida Statutes, and with violation of Rules 21A-4.01, 4.02, and 4.03, Florida Administrative Code.
Technically, one cannot be charged with violation of Section 473.04, Florida Statutes, which is a provision granting authority to the Beard to adopt rules and regulations proscribing a standard of professional conduct and defining unethical practices.
Section 473.251(1)(g), Florida Statutes, provides that anyone certified to practice as a certified public accountant or a public accountant may have his licensed revoked or suspended for a definite period not to exceed five years upon a finding by the Board that said person has violated any provision of Chapter 473 or rules adopted by the Board.
The facts presented reveal that Tooze's certificate is currently under suspension pursuant to Section 473.111(5), Florida Statutes. This suspension resulted from Tooze's failure to meet Board requirements relating to continuing professional education. Tooze is currently engaged in meeting the Board's requirements and preparing to sit for the Board's examination.
Rule 21A-4.01, Florida Administrative Code, provides:
A practitioner shall not undertake any engagement in the practice of public accounting which he or his firm cannot reasonably expect to complete with professional competence.
Rule 21A-4.02, Florida Administrative Code, provides:
A practitioner shall not permit his name to be associated with financial statements in such a manner as to imply that he is acting as an independent certified public accountant or public accountant unless he has complied with the applicable generally
accepted auditing standards. Statements on Auditing Standards are, for purposes of this rule, deemed and construed to be interpretations of generally accepted auditing standards and departures from such statements must be justified by those who do not follow them.
Rule 21A-4.03, Florida Administrative Code, provides:
A practitioner shall not express an opinion that financial statements are presented in conformity with generally accepted accounting principles if such statements contain any departure from any such principle which has a material effect on the statements taken as a whole, unless he can demonstrate that due to unusual circumstances the financial statements would otherwise have been misleading. In such cases his report must describe the departure, the approximate effects thereof, if practicable, and the reasons why compliance with the principle would result in a misleading statement.
The Board argued that Tooze departed from generally accepted accounting standards and that the financial statements in question do not conform with generally accepted accounting procedures in a manner that Tooze is in violation of Rules 21A-4.02 and 4.03, and therefore was not competent to conduct the audit contrary to provisions of 21A-4.01.
It is first noted that contrary to Section 473.04, Florida Statutes, the Board has only defined in part the standards of professional conduct. Although generally accepted accounting standards are defined by incorporation and reference to statements on auditing standards within Rule 21A-4.02, Rule 21A-4.03 does not define generally accepted accounting procedures. From the language of Section 473.04, Florida Statutes, it is clear that the legislature intended that all standards of professional conduct and unethical conduct be reduced to writing.
With regard to the allegations that Tooze did not comply with Section 516.01, Statements on Auditing Standards (SAS) in his disclaimer on his unaudited financial statement for Gull-Aire Corporation, the statement contained in Tooze's financial statement is sufficient to place anyone reading it on notice that the statement was not audited and Tooze did not express an opinion upon it. Each page of the statement indicates that it was unaudited.
Tooze did not explain or note the fact in his audited financial statement that he had prepared an unaudited statement for Gull-Aire. No
requirement to report such a statement has been presented by the Board. In the absence of some affirmative duty to report this fact, his failure to do so is not a departure from generally accepted auditing standards or generally accepted accounting principles.
It would have been appropriate for Tooze to have reported the accounting policies which were applied in the audited financial statement for Gull-Aire. Had this been done, it would have clarified the treatment on the statement of the real property transaction which resulted in retained earnings. Tooze's failure to report the accounting policies which were applied is a departure from generally accepted auditing standards.
The fact that $45,499.64 is reported in retained earnings is sufficient to conclude that taxes were paid on these funds. Generally accepted auditing standards would require disclosure only to explain significant variations in the customary relationships between income tax expense and pre-tax accounting income when they are not otherwise apparent in the financial statement. There is nothing in the records to support a finding that there is a significant variation in said customary relationships.
Tease did not obtain a representation letter from the management of Gull-Aire. The only citation of authority requiring such a representation appears on Page J of the supplemental exhibit provided by the Board containing certain standards. It is noted that the first report was rendered on October 4, 1976, for the period ending September 30, 1976, and the audited report was rendered October 15, 1976, on the period ending September 30, 1976. Considering the short period of time between the end of the period covered and the date of the report, this is at best a technical violation of this standard.
Tooze is alleged to have failed to report a change in financial position and accounting policies involved in the preparation of the financial statements for Carlson Company contrary to generally accepted auditing standards. However, the requirement for such statements of change in financial position and accounting policies to be reported is specifically limited to circumstances "when financial statements are issued proporting to present fairly financial position..." Tooze's disclaimer specifically states, "The limited scope of our examination precludes our expression of an opinion as to the fairness of the over-all representations herein." Because this statement does not proport to fairly represent financial position, there is no requirement to present a statement of change in financial position or the accounting policies adopted by management. The same qualification appears in Tooze's statement prepared for Albeni Corporation and Georgetown Mobile Manor, Inc.
The statement for Albeni Corporation contains the language, "These interim Financial Statements are intended primarily for internal management uses." The Board asserts that this language does not present sufficient qualification and should have been an unqualified statement regarding non-use by anyone who is not a member of management. However, Section 516.05, SAS, requires only a statement to the effect that the financial statements are restricted to internal use by the client. Tooze's statement is sufficient to meet that requirement. His statement regarding his expressing no opinion as to the fairness of the representations is sufficient to meet the second portion of the requirements stated in the SAS cited above.
On the statements of Georgetown, depreciation of fixed assets is reported; however, the method of depreciation is not reported or disclosed. On the statements for Albeni and Carlson, inventory is not depreciated. With
regard to the Albeni and Carlson statements, there is no evidence that the inventory in question is depreciable. With regard to Georgetown, because depreciation was included, the method should have been reported to conform with Section 2043.02, SAS.
The three departures from generally accepted auditing standards noted above do not indicate that Tooze under took an engagement which he could not reasonably be expected to complete with professional competence. The Board has not demonstrated a violation of Section 21A-4.01, Florida Administrative Code.
In general, the facts demonstrate that Tooze was not conversant with the latest changes in professional standards. This was the primary cause for the departures from generally accepted auditing standards noted above. Clearly, this was the direct result of his failure to maintain continuing professional education for which his license is currently under suspension. Tooze appears to be an intelligent professional who is currently engaged in bringing himself up to date in his profession. When Tooze has satisfied the Board as to his current abilities, he will have eliminated the basic cause for the departures from generally accepted auditing standards noted herein.
Because the cause of the failings noted above were the result of his failure to maintain his professional education, there is nothing to be gained from assessing any further penalty to his present suspension. To do so would be to penalize Tooze twice for essentially the same offense.
Based upon the foregoing Findings of Fact and Conclusions of Law the Bearing Officer recommends that the Board of Accountancy take no action on the violation of Rule 21A-4.02, Florida Administrative Code, and Section 473.251, Florida Statutes.
DONE and ORDERED this 3rd day of April, 1979, in Tallahassee, Leon County, Florida.
STEPHEN F. DEAN
Douglas M. Thompson, Jr. Executive Director
Mr. Edward J. Tooze
