STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
DEPARTMENT OF PROFESSIONAL )
)
Petitioner, )
)
vs. ) CASE NO. 84-2830
)
STUART C. WARDLAW, CPA, )
)
Respondent. )
) DEPARTMENT OF PROFESSIONAL )
)
Petitioner, )
)
vs. ) CASE NO. 84-2833
)
JAMES E. ETUE, CPA, )
)
Respondent. )
)
RECOMMENDED ORDER
Pursuant to notice, an Administrative Hearing encompassing four days at two settings was held before Ella Jane P. Davis, Hearing Officer Division of Administrative Hearings, in Fort Lauderdale, Florida. The issue for determination was whether disciplinary action should be taken against the Respondents' respective licenses as Certified Public Accountants for the reasons set forth in the Amended Administrative Complaints filed February 13, 1985.
APPEARANCES
For Petitioner: Joseph W. Lawrence, II Chief Attorney
130 North Monroe Street Tallahassee Florida 32301
For Respondent Etue: Russell Forkey Esquire
400 Southeast 12th Street
Ft. Lauderdale, Florida 33316
Pamela Burdick, Esquire Post Office Box 22828
Ft. Lauderdale, Florida 33315
For Respondent Wardlaw: Michael S. Shannon, Esquire
318 Southeast 8th Street
Ft. Lauderdale, Florida 33316
INTRODUCTION
By Amended Administrative Complaints filed February 13, 1985, Stuart C. Wardlaw and James E. Etue were charged with violations of Chapter 473, Florida Statutes, as licensed Certified Public Accountants in the State of Florida.
Specifically, it was alleged in Count I of the respective amended administrative complaints that Respondents violated Section 470.036(1)(j), Florida Statutes, by the suspension or revocation of their right to practice before any state or federal agency; in this case, the United States Securities and Exchange Commission (SEC). Furthermore, it was alleged in Count II that the 1979 and 1980 financial statements and related accountants' reports for A.T. Bliss and Company demonstrated noncompliance by the Respondents with generally accepted and prevailing standards of accounting practice and failure to comply with technical standards of accounting practice as adopted by the Board of Accountancy.
Petitioner presented live testimony of expert witnesses Thomas Reilly C.P.A., Leo T. Hury, C.P.A., deposition testimony of expert witnesses David Levy
and Lauren Puritz C.P.A.; and live testimony of Allan E. Karp, C.P.A., as well as 13 documentary exhibits (one filed posthearing, upon stipulation of the parties).
The Respondent Wardlaw presented no witnesses and Respondent Etue presented live testimony of himself, Respondent Wardlaw, Sandor Lenner, Susan Missal Lenner, and David Levy C.P.A. Deposition testimony of Reva Steinberg and Charles C. Harper was also admitted. Eight exhibits were admitted on behalf of Respondents. Two exhibits were admitted by stipulation of the parties as HO Exhibits A and B.
At the close of hearing, the parties stipulated that 15 days would be acceptable from date of rulings on objections to deposition questions within the depositions which had been admitted as exhibits at hearing in lieu of prolonging the hearing by publication of same. Thereafter, only Petitioner and Respondent Etue availed themselves of the opportunity to file posthearing proposals. The parties also subsequently stipulated to a change of dates for filing responses to proposals, and Respondent Etue, without leave of the undersigned but also without objection from any party, subsequently filed an amendment to his response. Accordingly, the 30 days for entry of this recommended order is deemed waived.
All proposals and responses have been considered and rulings on each proposed finding of fact have been made in the Appendix to this recommended order.
FINDINGS OF FACT
At all times relevant, Respondents Wardlaw and Etue were Certified Public Accountants licensed by the State of Florida.
A Complaint for Preliminary and Permanent Injunction and Other Equitable Relief was filed by the Securities and Exchange Commission (SEC) which alleged, among other charges against other codefendants, that Wardlaw and Etue had engaged and, unless enjoined, would engage directly and indirectly in aiding and abetting others (notably A.T. Bliss & Co. and some of its principals), in
acts, practices and a course of business that constituted and would constitute violations of Section 17(a) of the Federal Securities Exchange Act of 1934, as amended, 15 U.S.C. 78m(a), Rules 13a-1 and 13a-13, 71 C.F.R. 240.13a-1 and 240.13a-13.
Individual consents to Entry of Final Judgment of Permanent Injunction were entered by each Respondent by which they each consented to the entry of a Final Judgment of Permanent Injunction against themselves.
By a Final Judgment of Permanent Injunction as to each Respondent, each Respondent was permanently restrained and enjoined in connection with the offer or sale of any securities issued by A. T. Bliss and Company, Inc. and from other certain wrongful acts.
By an Order Instituting Proceedings and Accepting Resignation from Practice Before the Commission pursuant to Rule 2(e) [See 17 C.F.R. Section 2O1.2(e)] of the Commission's Rule of Practice, each Respondent was separately identified as a Certified Public Accountant who has appeared and practiced before the Securities and Exchange Commission, and based upon certain stated facts, the Commission stated in its separate Orders as to each Respondent the following:
In view of the foregoing, the Commission finds that it is in the public interest to institute proceedings and to impose a remedial sanction.
Accordingly, it is hereby ORDERED:
Proceedings pursuant to Rule 2(e) of the Commission's Rules of Practice be and hereby are instituted against Stuart C. Wardlaw (James E. Etue).
The resignation of Stuart C. Wardlaw (James E. Etue) from practicing before the Commission is hereby accepted.
Stuart C. Wardlaw (James E. Etue) shall not, in his capacity as an independent public accountant, directly or indirectly perform any audit service or render any opinion concerning financial statements which he has reason to believe will be contained
in any filing with the Commission or prepare financial statements which he has reason to believe will be included in filings with the Commission.
(Emphasis supplied)
The public accounting firm of Etue, Wardlaw, and Company, C.P.A., performed accounting services in connection with the issuance of audits of financial statements of A. T. Bliss and Company for the years 1979 and 1980. Respondents Etue and Wardlaw were each 50 percent shareholders of the certified public accounting firm, which was formed December 1, 1979. Etue was President and Wardlaw was Vice-President and Secretary-Treasurer. Neither Wardlaw nor Etue had extensive experience in the field of auditing prior to formation of the firm, having only been licensed as certified public accountants since 1976.
A. T. Bliss and Company (hereafter, Bliss) only became a public corporation in 1980. However, during the latter part of the calendar year 1979, Bliss entered into the business of manufacturing and distributing solar hot water heating systems. Sales were made to various investors, who financed the purchase through 15 and 30 year notes, plus a cash downpayment, with the notes receivable consisting of both recourse and nonrecourse long-term notes.
The 1979 and 1980 audited financial statements prepared by Respondents recognized revenue on the accrual basis. It is the auditor's responsibility to determine whether the company issuing those statements has chosen a method of revenue recognition that complies with generally accepted accounting principles. The accrual method of revenue recognition is the generally accepted and preferred method in public accounting, unless the collectibility of the sales price is not reasonably assured. When collection is over an extended period and because of the terms of the transactions or other conditions there is no reasonable basis for estimating the degree of collectibility, the installment sales or cost recovery methods of revenue recognition may be used and are normally preferred.
Bliss' revenue recognition policy in 1979 and 1980 recognized the sale at the time of executing the contract and receiving the cash down payment, with a recording of all costs of sales and establishing an allowance for doubtful collections.
Petitioner contends that there was insufficient information gathered and sufficient information could not have been gathered by Wardlaw and Etue due to the lack of history of the relatively new company's (Bliss') collections and the length of the extended collection period (15 to 30 years) by which they could reasonably use the accrual method of revenue recognition instead of either the installment method or cost recovery method of revenue recognition, preferably the latter. Respondents contend that sufficient information was collected but not documented. By either assessment, it is clear that there was a violation of generally accepted accounting principles simply in the Respondents' failure to document. The greater weight of the credible expert testimony is accepted that the information gathered or "known" or "understood" by the Respondents concerning the collectibility of a few notes was both of insufficient quantity and quality so as to further offend generally accepted accounting principles. Further, the applicable accounting publications and pronouncements, particularly Accounting Principles Board Opinion 10, (APB 10) strongly suggest that if the collection of the receivables is not reasonably assured, the cost recovery or installment method of revenue recognition should be utilized. In making this finding of fact, the undersigned specifically rejects Respondents' suggestion that both the recourse and non-recourse notes had a high collectibility factor based on the present personal wealth of a small sampling of makers of these notes and based upon the assumption from a still smaller sampling that most solar unit purchasers would stay in for the long haul because they were investing for tax advantages. Equally unpersuasive is the Respondents' argument that because solar units may be attached to buildings and financed over a long period of time Respondents were entitled to utilize real estate sales accounting principles in their financial statements and accountants' reports, all without adequate documentation in their work papers.
Based upon the absence of any collection information in the work papers, the 15-30 year collection periods and the fact that none of the notes had any lengthy collection period, those expert opinions that the installment
method or cost recovery method of revenue recognition would have more appropriately presented the financial condition of the company in accordance with generally accepted accounting principles and generally accepted and prevailing standards of accounting practice are accepted.
Although Respondent Etue is correct that APB 10 is couched in permissive not mandatory language, it is significant that Respondents' C.P.A. expert, David Levy testified that the lack of documentation in Respondents' work papers precluded him from forming an opinion that the accrual method of revenue recognition fairly presented the financial position of Bliss and that Respondents' financial statements and accountants' reports do not comply with generally accepted accounting principles.
Bliss' net income, if determined by either of the preferred methods (installment or cost recovery) rather than by the accrual method selected by Respondents would be materially lower than the amount reported in the 1979 and 1980 audited financial statements. See Finding of Fact 8, below.
The significance of this variation could have been minimized or at least lessened by making a full and specific disclosure within the respective financial statements that the accrual method of revenue recognition had been utilized. This was not done by Respondents.
Instead, the Summary of Significant Accounting Policies presented in the notes to the 1979 and 1980 financial statements did not disclose the revenue recognition policy utilized, except by a blanket statement that the financial statements (not necessarily the revenue recognition method of the client company) were presented on the accrual basis. Bliss' revenue recognition policy would materially affect its financial position, results of operations, and changes in financial position. Generally accepted and prevailing standards of accounting practice would require the disclosure of such a significant accounting policy in light of the doubtfulness of collectibility of the long term notes. In making this finding of fact, the undersigned specifically rejects the Respondents' basically antithetical propositions advanced at hearing that either (1) anyone reading these financial statements is so sufficiently knowledgeable that he would automatically infer from the notes thereto that the accrual method of cost recovery had been utilized or (2) most persons reading the financial statements would not have the accounting background to appreciate the information if properly disclosed.
Respondent Etue maintains that the fact that there is a difference in net income using the accrual method versus a cost recovery or installment sales method is immaterial or has little meaning as there is always a difference using the different methods and because depending upon the total volume of sales, there could be differences of billions of dollars. Even accepting this proposal and Respondent Etue's additional proposition that Certified Public Accountant Reilly's demonstrative figures utilized at hearing may have been slightly distorted, it still appears that concerning the revenue recognition policy alone, Bliss' 1979 financial statement showed close to a $735,000 net income rather than a $20,000-plus loss, as reflected by subsequent audits/restatements of that year. Showing close to a 2.3 million dollar net income rather than about $77,000 in the second year (again as reflected by subsequent audits/restatements) surely reflects at least that the Respondents' accounting decisions were major enough to warrant outside consultation or substantial research and documentation of decisions. Respondents failed to consult and failed to document substantial research and decision factors.
These deviations of practice by Respondents are clearly material.
There is no reference whatsoever in the 1979 work papers to the determination of the reasonableness of the 60 percent allowance for doubtful collections for notes receivable.
Note Two (2) to the 1980 Bliss financial statements disclosed that 50 percent of the total notes receivable in 1980 constituted the allowance for doubtful collections for notes receivable. There is no documentation in the audit work papers to substantiate any audit review to determine the reasonableness of the allowance for doubtful collections for notes receivable except the following statement:
"Reserve of 50 percent is reasonable Client has now a full year of experience and knows better the collectibility. Additionally, the ratio of nonrecourse to recourse has changed dramatically in 1980, with more people taking recourse loans. Accordingly, management felt there would be less losses than the 60 percent reserve in 1979 due to the shift. Although there are no dollar statistics to support the
50 percent reserve, it seems to be a reasonable conservative estimate."
Considerable testimony was heard from each Respondent as to how this note came to be created. Recitation of most would be subordinate and unnecessary and contrary to the concept of ultimate findings of fact. However, the basic facts adduced are that it arose through collaboration of Wardlaw and Etue to at least some degree. See Finding of Fact 14, below.
Despite all of the foregoing the uncertainty in determining a 50 percent allowance suggests strongly that Respondents as auditors merely accepted representations from Bliss' principals without adequate empirical testing and auditing of the judgment and further demonstrates the uncertainty of collections, thereby more strongly indicating that a different approach than the accrual method of revenue recognition should have been selected, because in the accrual method of revenue recognition, the sale is recognized at the time of the entry into a long term note and here, under the circumstances of the instant case, there was inadequate data to form a conclusion as to the collectibility of all monies due under the note. Pursuant to the most credible expert accountants' testimony, this failure in the audit with regard to the 50 percent reserve was a failure to comply with generally accepted and prevailing standards of accounting practice and constituted a departure from generally accepted accounting principles and generally accepted auditing standards, but it also appears from the evidence as a whole to be at least partly attributable to Respondents' inexperience in auditing, which was alluded to earlier. The greater violation occurred by the Respondents' failure to recognize the impartiality required of them in certified public accounting practice and their willingness to impose, as it were, their C.P.A. "imprimatur" upon the Bliss financial statements by an opinion without any qualifying language (an unqualified opinion). See Finding of Fact 7, above.
Pursuant to Financial Accounting Standards Board (FASB) provisions
169.105 and 165.109, receivables of the nature retained by Bliss, must be
recorded at their present value. The discount resulting from the determination of the present value should be reported on the balance sheet as a direct deduction to the face amount of the note, or properly disclosed in the footnotes to the financial statements.
There was no adjustment to present value for lower than prevailing interest rates in the 1979 financial statements, nor any disclosure in the footnotes to the financial statements beyond that previously discussed. The 1980 financial statement, disclosed in Note 2 that the 50 percent allowance for doubtful collections included both a provision for uncollectibility as well as a reduction in value due to a lower than prevailing interest rate. The footnote did not distinguish between the two and the total allowance was included in the operating expenses, when the greater weight of the credible expert witness testimony is that the adjustment to present value for lower than prevailing interest rates should have been made as a reduction of sales. The failure to separately disclose the discount and the reserve for doubtful accounts fails to conform with generally accepted accounting principles, specifically APB 21, which requires that the discount is to be made as a reduction of sales.
The audit note disclosed that the entire 50 percent allowance was management's estimated allowance for doubtful collections and, after the fact, and without any supportable calculations, the 50 percent figure now included the adjustment in value due to a lower than prevailing interest rate. Proceeding as Respondents did resulted in a material misstatement of gross revenue and operating expenses for 1980, which fails to comply with generally accepted and prevailing standards of accounting practice and which fails to conform to generally accepted accounting principles.
Cost of sales were not presented separately in the 1979 and 1980 audited Bliss financial statements or auditors' notes thereto. Although there is expert testimony by Leo T. Hury, C.P.A., to the effect that failure to separately present cost of sales is a violation of the custom of accounting and not a violation of generally accepted accounting principles, Mr. Hury also felt it departed from generally accepted auditing standards. Moreover, APB 4 states that separate disclosure of the important components of the income statements, such as sales and other sources of revenue, including costs of sales, is presumed to make the financial statement more useful. The cost of sales as a separate item permits the reader of the financial statement to determine the gross profit on sales before other income items come into play. Under the circumstances of the instant case the best that can be said of this violation of "custom" is that it constituted only one of several components of a material misstatement of financial condition, which, if not an independent and specific departure from generally accepted and prevailing standards of public accounting practice, generally accepted accounting principles, and generally accepted auditing standards, was one component of such a departure.
The 1979 and 1980 work papers associated with the Bliss audit do not document or justify Respondents' study of accounting policy issues in relation to the financial statements so as to accord with generally accepted auditing standards. In making this finding of fact, the undersigned specifically rejects Respondent Etue's proposal that sufficient competent evidential matter was obtained but not documented in the 1979 work papers while the 1980 work papers evidence compliance with generally accepted auditing standards. The proposal is rejected because the expert testimony is consistent that an accountant's "work papers" are to be a "catch all" of supporting documentation for not only the final figures reported but for his studies of accounting issues, judgment calls of accounting policies and principles, and his explanation of selected
methodologies as well. Failure of the work papers to adequately reveal how these decisions were reached either indicates that the studies were not done, not documented, or the work papers were defectively maintained, any of which constitutes at least minimal noncompliance with generally accepted and prevailing standards of accounting practice.
The Respondents only minimally agree upon what separate responsibilities each had with regard to Bliss' account and financial statements. As might be expected, the elements of "control," "final authority," "sign-off authority," "final say," and "ultimate authority" were used by both Respondents with some considerable variation of meaning. Where there was agreement or only minor deviation, those portions of their respective evidence has been reconciled and accepted. However, each Respondent has a high stake in the outcome of these proceedings and where each characterized their respective responsibilities with regard to the Bliss account generally, and with regard to the 1979 and 1980 Bliss financial statements specifically, in diametrically different ways, greater reliance has been placed on the testimony of Allan Karp, the independent contract accountant who performed the 1980 field work. By any and all points of view, however, and for want of better legal terminology, it would appear that this was a situation that fluctuated from both to neither of the C.P.A. Respondents "minding the store."
Respondent Wardlaw was the titular "partner in charge" of both the 1979 and 1980 Bliss audits. Respondent Etue had obtained the client initially and both he and Wardlaw initially met with the client. Prior to introducing Wardlaw to the Bliss principals Etue advised them that he, Etue, was on probation with the Board of Accountancy and Wardlaw would be in charge of the audit. Etue had performed two audits prior to the formation of the public accounting corporation that came under the review of the Florida Board of Accountancy and both of which led to the imposition of the discipline of probation in 1978 and 1981. 1/ Etue's reasons for Wardlaw taking charge of the audits were the language in his prior stipulation with the Board of Accountancy and because he believed he needed improvement in auditing. Petitioner desires that the inference be drawn from portions of each Respondent's testimony taken out of context that Etue concealed from Wardlaw that he, Etue, had done previous audits and represented that he, Etue, was precluded from doing Bliss' audits, and that by these misrepresentations Etue maneuvered Wardlaw into assuming the partner-in-charge responsibilities for the express purpose of avoiding oversight by the Board of Accountancy of the Bliss audits. However, the full context of the Respondents' respective testimony, the internal contradictions of Wardlaw's testimony, and the general vagueness of both Respondents' testimony do not support Petitioner's inference and preclude its acceptance.
The custom of the profession of certified public accounting is that the "partner-in-charge" bears the ultimate responsibility of the conduct of a certified audit, including supervision of subordinates, final review of the auditor's work, and recommendations for corrections and changes. That is not precisely what occurred as between these Respondents.
Although Wardlaw was responsible for the field work in the 1979 audit, one Sherry Carasik in Wardlaw's office nine miles from where Etue's office was located did the bulk of the work under his supervision, including preparation of the work papers and tests of transactions involved in the field work. Etue had no supervisory responsibility for the 1979 audit and did little if any of the actual field work. Etue did, at Wardlaw's request, however, prepare a list of items to be performed in the audit. This does not support the inference that Etue deferred to Wardlaw's superior auditing experience but quite the opposite,
supports the inference that Etue was instructing Wardlaw or they were jointly deciding courses of action with Wardlaw deferring to Etue. Later, Etue also drafted the confirmation letters to be mailed to all investors and edited Wardlaw's letter to Bliss recommending changes to the footnote disclosure.
Respondent Wardlaw testified that all major decisions concerning accounting policies re Bliss were discussed with Respondent Etue and concurrence and "joint decisions" were reached between them. Allan Karp materially confirms this testimony with regard to the 1980 audit procedure on the few occasions he was able to view the two Respondents together. It was Karp's view that Respondent Etue was his primary employer who supervised Karp in performance of the 1980 Bliss audit with Wardlaw dropping by periodically but mostly operating out of his separate office. Wardlaw's involvement in the 1980 audit was in the nature of a review partner performing a "cold review" after audit completion but before finalization. In 1980, Etue also assisted Karp with inventory as part of the field work, discussed with Karp his concerns about related parties, and helped Karp locate materials for a portion of the audit. The joint decisions with regard to assessing collectibility have been discussed supra.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction of the parties and subject matter hereto.
Respondents are each charged with violations of the following statutes and rules:
473.315 Independence technical standards.
(2) A certified public accountant shall not undertake any engagement in the practice of public accounting which he or his firm cannot reasonably expect to complete with professional competence.
473.323 Disciplinary proceedings.
The following acts constitute grounds for which the disciplinary actions in subsection
(3) may be taken:
(a) Violation of any provision of s. 473.317,
s. 455.22(1), or any other provision of that act;
Upon proof that the licensee is guilty of fraud or deceit, or of negligence, incompetency, or misconduct in the practice of public accounting;
Violation of any rule adopted pursuant to this act or Chapter 455;
Suspension or revocation of the right to practice before any state or federal agency;
21A-22.02 Competence (General Standards). A licensee shall comply with the following general standards and must justify any departures therefrom.
Professional competence. A licensee shall undertake only those engagements which he or his firm can reasonably expect to complete with professional competence.
Due professional care. A licensee shall exercise due professional care in the performance of an engagement.
Planning and supervision. A licensee shall adequately plan and supervise an engagement.
Sufficient relevant data. A licensee shall obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to an engagement.
21A-22.02 Auditing Standards. A licensee 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 unless he has complied with the applicable generally accepted auditing standards. Statements on Auditing Standards as published by the American Institute of CPAs 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.
21-22.03 Accounting Principles. A licensee 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.
Except as discussed below, no violation has been proved by clear and convincing evidence.
Both Respondents moved to dismiss at the close of Petitioner's case. Those motions are now denied and a single recommended order is entered since the consolidated record applies to both Respondents. Separate recommendations are, however, made.
COUNT I
The provisions of the Final Orders by consent are set out with exactitude in the foregoing findings of fact and need not be reiterated here. The right of both Respondents to practice before the Securities and Exchange Commission, a federal agency, was suspended and revoked by that agency. Consent Orders and Judgments are treated as binding contracts between the parties and should Respondents fail to abide by the provisions of their respective Consent
Orders, each Respondent would be subject to further adverse proceedings. See Curtis Wright Corporation v. Exhaust Parts, Inc., 144 So.2d 822 (Fla. 3d DCA 1962), Division of Administration, Department of Transportation v. Tsalickis,
372 So.2d 500 (Fla. 4th DCA 1979). Notwithstanding certain language in United States v. Armour & Co., 402 U.S. 673, 91 S. Ct. 1752 (1971), there has clearly been a "suspension or revocation of the [Respondents'] right to practice before any state or federal agency," as contemplated in Section 473.323 Florida Statutes. We are not involved here with the niceties inherent in certain state licensing statutes which require a "conviction" to sustain a license violation. Under those statutes, a conviction may not be proved by a nolo contendere plea and a withholding of adjudication, a court function similar, but not identical, to Respondents' situation before the SEC. Indeed, a penalty was enacted against Respondents by barring them. Here, the Florida Statute, Section 473.323(1)(j), is facially clear that "suspension" or "revocation" of the right to practice before the agency, for whatever reason, is a punishable license violation and Petitioner has met its burden of proof with regard to Count I by clear and convincing evidence.
COUNT II
A certified public accountant may choose to utilize the accrual, the cost recovery, or the installment method of revenue recognition when he prepares a financial statement. If cost recovery is questionable, as it was with A. T. Bliss, election of the cost recovery or installment method of revenue recognition is clearly preferable over the accrual method of revenue recognition selected by Respondents. Where the expert witnesses differ on this issue, if at all, is in their views of the weight and authoritativeness of particular pronouncements of generally accepted auditing standards and the binding or nonbinding nature thereof within the umbrella of generally accepted accounting principles. It is concluded upon the greater weight of the evidence that both were breached.
Respondents elected to use the accrual method of revenue recognition. Although it was acceptable to reflect on the financial statements that the accrual basis of overall preparation was used regardless of the method of revenue recognition, under the circumstances of this case, Respondents should also have specifically disclosed on the financial statements which method of revenue recognition had been used. Failure to make this specific disclosure resulted in the issuance of their opinion, without qualification, on the financial statements and thus breached generally accepted auditing standards, generally accepted accounting principles and generally accepted standards of accounting practice, so that there was a material effect upon the financial statements as a whole. This constitutes negligence within Section 473.323(1)(g) and violation of the rules set out above, which latter violation also constitutes a violation of Section 473.323(1)(h).
To put it in the simplest terms, these Respondents acted as internal company accountants in that they accepted their client's position without independent verification or documentation in their work papers of many essential components of the audit, essentially ignoring the fact that under the circumstances, their unqualified opinion as certified public accountants on the financial statements without full disclosure could materially mislead investors. This constitutes misconduct within Section 473.323(1)(g).
Petitioner has met its burden of proof with regard to Count II by clear and convincing evidence.
REGARDING PENALTY
In light of the foregoing findings of fact and conclusions of law, each Respondent has violated the provisions of Section 473.323(1)(g), (h), and (j). In the case of Respondent Wardlaw, his offenses appear to stem more from inexperience and from following the lead of Respondent Etue than from any intent to defraud. Although the undersigned has rejected Petitioner's proposed inference that Respondent Etue has attempted to deceive Wardlaw and the Board of Accountancy, Petitioner rightly points out that two prior probations of Etue for auditing offenses each of which has included continuing education courses, have not proved helpful in reforming Respondent Etue's view of the independent nature of certified public accounting.
Accordingly, the following recommendations are made.
RECOMMENDATION AS TO DOAH CASE NO. 84-2830
It is recommended that the Board of Accountancy enter a final order placing the license of Respondent Wardlaw on probation for two years subject to review and monitoring by the Board during that period, and requiring Respondent to pay a $2,000 fine.
RECOMMENDATION AS TO DOAH CASE NO. 84-2833
It is recommended that the Board of Accountancy enter a final order suspending the license of Respondent Etue for two years and requiring Respondent Etue to pay a $2,000 fine.
DONE and ORDERED this 28th day of May, 1986, in Tallahassee, Florida.
ELLA JANE P. DAVIS
Hearing Officer
Division of Administrative Hearings The Oakland Building
2009 Apalachee Parkway
Tallahassee, Florida 32399-1550
(904) 488-9675
Filed with the Clerk of the Division of Administrative Hearings this 28th day of May, 1986.
ENDNOTE
1/ Normally, prior discipline of a Respondent's license would be considered only upon issues of aggravation or mitigation with regard to determination of penalty, but in the instant case the prior probations were further put in issue by Respondents to explain which Respondent actually had partner-in-charge authority and to develop their unproved theory that a 1981 Bliss audit by Etue which adopted parts of the 1979 and 1980 financial statements and a subsequent restatement of the 1979, 1980 and 1981 statements by Bliss' subsequent accountants exonerated Respondents' 1979-1980 audit decisions. See Finding of Fact 8.
APPENDIX TO RECOMMENDED ORDER, CASE NOS. 84-2830 & 84-2833
Petitioner's Proposed Findings of Fact (FOF)
Covered in FOF 1.
Covered in FOF 2.
Up to the phrase, "In fact,": Accepted as modified to conform to the evidence of the titles of the P.A. principals in FOF 3. Beginning with the phrase "In fact," to the end of the paragraph: Covered in FOF 14.
Covered in FOF 4.
Covered in FOF 6.
Covered in FOF 7.
Sentence 1: Covered in FOF 7. Sentence 2: Covered in FOF 7 except for a portion of the proposal which is rejected as unnecessary and cumulative.
Paragraph 1: Covered in FOF 9. Paragraphs 2 and 3: Covered in FOF
10.
Paragraphs 1 and 2: Covered in FOF 11. Sentence 1 of Paragraph 3:
Rejected as argumentative and not dispositive of any disputed issue of material fact. Sentence 2 of Paragraph 3: Covered in FOF 11. Paragraph 4: Covered in FOF 11.
Accepted in principle with lesser emphasis in FOF 12.
Sentence 1: Covered in FOF 13. Sentence 2: Accepted but cumulative. Covered in FOF 7 and 13.
Paragraph 1: Unnecessary but see FOF 14. Paragraph 2: Accepted in part and rejected in part as irrelevant and/or for the reasons set out in FOF
Paragraph 3: Accepted in part and rejected in part as not dispositive of material issues at bar and/or for the reasons set out in FOF 14.
Respondent Etue's Proposed Findings of Fact (FOF) (Note: footnotes are accepted or rejected within the ruling on the paragraph within which footnotes appear.)
Covered in FOF 1.
Covered in FOF 2; what is rejected is rejected as subordinate and unnecessary.
Covered in FOF 3; what is rejected is rejected as subordinate and unnecessary.
Rejected in part and accepted in part for the reasons stated in FOF 14.
Rejected as an argument and not supported by the evidence. Covered in FOF 14.
Covered in part in FOF 14. Otherwise rejected as immaterial, subordinate and unnecessary in parts.
Covered in part in FOF 14. Otherwise rejected as contrary to the direct, credible record evidence as a whole.
Rejected in part and accepted in part as covered in FOF 14.
9-13. Covered in FOF 14 and that which is rejected is rejected as not supported by the record in part and in part as subordinated unnecessary, and cumulative.
Accepted in part and rejected in part as covered by FOF 5-6.
This proposal is a little hard to follow. The 1981 audit is largely irrelevant but if at all relevant, the proposal is rejected for the same reasons as set out regarding Harper's and Steinberg's testimony discussed in rejecting Respondent Etue's proposal 28 below and materiality of Respondent's breach is discussed generally in FOF 8 with regard to Etue's 1981 audit. Further, the first sentence of proposal 15 is rejected upon the testimony of Mr. and Mrs. Lenner that they did not audit Respondents' judgment(s) re accounting methods not attempt to provide an opinion on Respondent's compliance with generally
accepted accounting principles. The second sentence is rejected for the same reasons and also irrelevant, subordinate and unnecessary to the 1979 and 1980 financial statements which are those at bar.
Rejected as not supported by the greater weight of the direct credible expert witness testimony. The best that any expert would say was stated by Mr. Levy who opined that an accountant more familiar with the entire audit could "get comfortable" based on various isolated publications but compliance with generally accepted auditing principles could not be found from the work papers. Because of the impact of all these elements they are discussed in several FOF within the R.O. Further specifically rejected as set out in FOF 6, 7, 8 and 10.
Rejected as not supported by the greater weight of the direct credible expert witness testimony. The best that any expert would say was stated by Mr. Levy who opined that any accountant more familiar with the entire audit could "get comfortable" based on various isolated publications but compliance with generally accepted auditing principles could not be found from the work papers. Because of the impact of all these elements they are discussed in several FOF within the R.O. Further specifically rejected as set out in FOF 6, 7, 8 and 10.
Except as it refers to SAS 41, this proposal is rejected. It is rejected as not supported by the greater weight of the direct credible expert witness testimony. The best that any expert would say was stated by Mr. Levy who opined that an accountant more familiar with the entire audit could "get comfortable" based on various isolated publications but compliance with generally accepted auditing principles could not be found from the work papers. Because of the impact of all these elements they are discussed in several FOF within the R.O. SAS 41 is extraneous under the circumstances. Further, the proposal is specifically rejected as set out in FOF 6-13.
Accepted in principle but not adopted because it is misleading as to the true nature of Mr. Karp's testimony as a whole. Mr. Karp expressed a number of concerns over the Bliss account including his belief in the existence of a string of paper companies or related interests. Although nominally an independent contractor, he acted as an employee of Respondents and was drawn up in the SEC prosecution and as such could only be expected to characterize these matters as a "judgment call." That Karp's opinion rubber-stamped that of Respondents on this issue does not mean it is supported by the greater weight of the impartial direct credible expert C.P.A. witness testimony and this proposal is accordingly rejected. Also see FOF 14.
Accepted in part and rejected in part as not supported by the record as a whole, particularly the financial statements, accountants' reports, and work papers do not demonstrate documentation as covered in FOF 6-13.
21-22. Rejected as set out in FOF 7 and further rejected upon the greater weight of the direct, credible expert witness testimony as covered in FOF 5-13. As to proposal 22, also particularly see FOF 14 concerning who prepared the audit checklist or program.
Rejected in part as not supported by the record as a whole particularly the financial statements, accountants' reports, and work papers do not demonstrate documentation as covered in FOF 5-13; particularly FOF 6.
Covered in FOF 5-13, particularly FOF 12.
Largely irrelevant so as to the 1981 audit but covered and deemed material in FOF 5-13, particularly FOF 8-11.
Covered and deemed material in FOF 5-13, particularly FOF 8-11.
Largely irrelevant as to the 1981 audit but covered and deemed material in FOF 5-13, particularly 8-11.
Up to the last sentence this proposal is covered in FOF 2. The last sentence is immaterial and misleading as stated. The evidence as a whole, particularly the deposition testimony of Reva Steinberg and Charles C. Harper is to the effect that two methods, at least one of which was cost recovery, were recommended by the new accounting firm to the SEC for the required restatement
of the 1979-1981 financial statements, and those recommendations were made because of or in part because of Bliss' change of operations to selling partnerships. There is insufficient evidence to indicate the new accountants approved in retrospect Respondents' use of the accrual method of cost recovery in the 1979 and 1980 audits. On materiality and the 1981 audit, also see FOF 8 in particular.
COPIES FURNISHED:
Joseph W. Lawrence, II Chief Attorney
130 North Monroe Street Tallahassee, Florida 32301
Joseph W. Lawrence, II, Esquire Cummings & Lawrence, P.A.
Post Office Box 589 Tallahassee, Florida 32302
Russell Forkey, Esquire
400 S. E. 12th Street
Ft. Lauderdale, Florida 33316
Pamela Burdick, Esquire Post Office Box 22828
Ft. Lauderdale, Florida 33315
Michael S. Shannon, Esquire
318 S. E. 8th Street
Ft. Lauderdale, Florida 33316
| Issue Date | Proceedings |
|---|---|
| May 28, 1986 | Recommended Order (hearing held , 2013). CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| May 28, 1986 | Recommended Order | Resps deviated from generally accepted accounting principles and auditing standards in audit of a company's long-term notes. |
