Findings Of Fact 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.
Recommendation 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 Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 COPIES FURNISHED: Douglas M. Thompson, Jr. Executive Director State Board of Accountancy Post Office Box 13475 Gainesville, Florida 32604 Samuel Hankin, Esquire Post Office Box 1090 Gainesville, Florida 32602 Mr. Edward J. Tooze 464 Patricia Avenue Dunedin, Florida 33528
The Issue The issue is whether the Department of Corrections' decision to select Intervenor as construction manager on Project No. VO- 04-CM was clearly erroneous, contrary to competition, arbitrary, or capricious, as alleged by Petitioner.
Findings Of Fact Based upon all of the evidence, the following findings of fact are determined: Background In September 1998, Respondent, Department of Corrections (Department), issued a Request for Qualifications and Evaluations Procedures (RFQ) to select a construction manager for Project No. VO-04-CM, which involved an $18 million expansion and renovation of the Florida Correctional Institution in Lowell, Florida. The RFQ was directed to qualified minority construction firms as a "minority set aside." The successful firm would serve as a general contractor for the job, guarantee the price, and assume responsibility for any cost overruns on the project. All firms were to submit their qualifications with the Department by 4:00 p.m., October 20, 1998. After a pre-proposal meeting held on October 6, 1998, but prior to October 15, 1998, Addendum No. 1 to the RFQ was issued and clarified that all proposals must be filed by October 15, rather than October 20, that each firm have a bonding capacity of $6,000,000.00 for each of the three phases of the project, and that each firm must submit its bonding and insurance costs. The RFQ required that each firm file a letter of interest detailing the firm's qualifications to meet the selection criteria; an experience questionnaire and contractor's financial statement; resumes of proposed staff and staff organizations; examples of project reporting manuals, schedules, past experience, and examples of similar projects completed by the firm; references from past clients; and a reproduction of the firm's current state contractor's license, corporation charter, and Minority Business Enterprise (MBE) certification. Under the selection process established by the Department pursuant to Rule 60D-5.0082, Florida Administrative Code, a five-member selection committee, including four from the Division of Design and Construction, would "review all properly submitted proposals, and determine the three (3) firms with the highest score using the selection criteria established for the project." These criteria included experience, financial, schedule and cost control, office staff, site staff, information system, and location. The highest ranked firm would then be selected to negotiate a contract for the services. On October 15, 1998, applications were filed by five construction firms: Petitioner, Rattler Construction Contractors, Inc. (Rattler or Petitioner); Intervenor, A. D. Morgan Corporation (Intervenor); Linda Newman Construction Company, Inc. (Newman); Ajax Construction Company, Inc. (Ajax); and Freeman and Freeman Construction Company (Freeman). After an evaluation was conducted by the selection team, the applicants were assigned the following scores: Intervenor (85.6), Newman (75.2), Petitioner (66.2), and Freeman (20.8). Ajax was disqualified as being non- responsive on the ground it was not certified as a MBE. At a later point in the process, Freeman was disqualified for the same reason. Accordingly, as the highest ranked applicant, Intervenor was determined to be the most qualified firm, and the Department issued a letter on November 20, 1998, advising all contractors of its decision. Claiming that its submission was the only "compliant and responsive bid received" by the Department, Petitioner filed its protest on December 2, 1998. In its Formal Written Protest filed on December 14, 1998, as later amended on January 19, 1999, and then narrowed by the parties' prehearing statement, Petitioner contended that Intervenor had failed to comply with two material requirements: that it file audited financial statements and a current MBE certification. It further alleged that the second ranked applicant, Newman, had also failed to submit audited financial statements. Finally, it claimed that one of the members on the selection team was biased against Rattler. Because of the foregoing irregularities, Petitioner asserts that the Department's actions were "clearly erroneous, arbitrary, capricious, and illegal" in proposing to select Intervenor as its construction manager. As relief, Petitioner asks that Intervenor and Newman be disqualified as non-responsive, and because Rattler filed the "only complete and responsive bid," that the Department select Petitioner as its construction manager. Each of the alleged irregularities will be discussed below. Did the Department Err in Awarding Intervenor the Contract? Audited Financial Statements The RFQ, as amended, required that each minority contractor file, no later than October 15, 1998, an application and a "Contractor's Financial Statement as referenced in Chapter 60D-05 [sic], Florida Administrative Code." More specific instructions as to this latter requirement were found on page 5 of 21 of the Request for Qualification and Experience Questionnaire, which accompanied the RFQ. That document contained general and specific instructions. There, each applicant was directed to file a Financial Statement, which was described as follows: Financial Statement. This statement will be an audited report with comments, and not older than one (1) year. If the most current report has not yet been audited, the previous audited report with comment shall accompany the most recent financial statement. The RFQ described the foregoing requirement as one of the "REQUIRED SUBMITTALS." In response to this provision, an employee of Intervenor retyped its audited financial statements to conform with the format contained in the RFQ. In doing so, rather than copying the entire set of statements, she inadvertently copied only three pages, including a cover sheet. The first page was entitled "The A.D. Morgan Corporation Financial Statements, December 31, 1997 and 1996," and it reflected that the statements were prepared by Valiente, Hernandez & Co., P.A. (Valiente), a certified public accounting (CPA) firm. Testimony at hearing established that Valiente had in fact prepared audited financial statements for Intervenor for those two years. Attached to the cover sheet were Balance Sheets for the years ending December 31, 1996 and December 31, 1997. Absent, however, were the opinion letter by the CPA firm, notes to financial statements, income statement, and statement of cash flow. All of these items normally accompany audited financial statements. Even though Intervenor had audited financial statements prepared by a CPA firm, and the three pages submitted with its proposal were drawn from those statements, it is undisputed that the incomplete statements submitted by Intervenor were not "audited financial statements" as that term is commonly understood by accounting professionals. In the case of Newman, it submitted financial statements that had been reviewed, but not audited, by a CPA firm. In a review, there is no testing; no observation of inventory; no requirement for independent verification of cash balances or investment balances; no requirement for an attorney's letter; and no requirement that the accountants review the corporate minutes and other matters. In short, reviewed financial statements are not audited financial statements as that term is defined by accounting professionals. The Department did not view this requirement as being a material requirement, and thus it determined that Intervenor's and Newman's failure to file audited financial statements was a minor irregularity. This is because the Department measures the financial capability of a firm by looking collectively at its financial statements, bonding capacity, insurance costs, bonding costs, account receivables, and assets and liabilities. In other words, the Department wants sufficient information to verify that a contractor has the financial ability to undertake and complete the job. In making the above verification, the Department viewed a contractor's ability to secure a bond as one of the most important indicators of financial stability since bonding companies typically make a thorough analysis of a firm's financial capability before issuing a bond on a particular project. This was consistent with the instructions in paragraph B on page 6 of 21 of the RFQ, which stated that, in addition to the financial statement, the "financial capability" of a firm "should also include the bonding capacity of the firm." In the case of Intervenor, it was able to secure a bond capacity in excess of $20 million for single projects and in excess of $40 million for aggregate projects. When viewing all of the financial indicators submitted by Intervenor, the selection team was satisfied that Intervenor clearly had the necessary resources, working capital, and financial stability to perform the project. The Department has not strictly enforced the requirement that audited financial statements be filed with a proposal, and there is no record evidence that a vendor has ever been disqualified on this ground. Even so, the filing of audited financial statements is a "required submittal" by the RFQ's own terms, and the failure to do so renders Intervenor's and Newman's submissions as non-responsive. MBE Certification Intervenor has been a certified MBE since 1991. In its proposal, Intervenor submitted a copy of its MBE certification for the year ending September 24, 1998. To independently verify this representation, a member of the selection committee then contacted the Minority Business Advocacy and Assistance Office (MBAAO) of the Department of Labor and Employment Security, which issues certifications, to confirm that Intervenor was certified on a current basis. In response to that inquiry, the member received a list of all current MBE certified contractors. Intervenor was on that list. Petitioner points out, however, that the certification submitted with Intervenor's proposal expired on September 24, 1998, or before the application was filed, and thus the Department waived a material requirement. Relevant to this contention are the following facts. On September 11, 1998, or before its current certification had expired, Intervenor filed an affidavit for recertification with the MBAAO. Because of "computer glitches" and six office moves "in a very short time period," the MBAAO was unable to process all recertification applications before the date on which some certifications expired. However, it considered all businesses as being certified until a decision was made on all pending recertification applications. In Intervenor's case, the MBAAO granted its application for recertification on November 6, 1998, and issued Intervenor a new certification for the one-year period from September 24, 1998, to September 24, 1999. Given the foregoing circumstances, it is found that Intervenor had a current MBE certification when it filed its application, and the Department did not waive a material requirement in accepting Intervenor's certification which reflected an expiration date of September 24, 1998. Bias by a Selection Team Member James R. Ervin, a Department architect, was a member of the selection team. Ervin had served as project administrator on an earlier Department project in Wakulla County on which George Register, III, and his father, George Register, Jr., were involved. Because of two complaints filed against him by the younger Register, Ervin was taken off the Wakulla County project while the Department's Inspector-General conducted an investigation. George Register, III, is listed on Petitioner's application as one of its consulting engineers. Ervin discovered this mid-way through the evaluation process, and he initially considered recusing himself from the team. After mulling over the matter, he decided that he could fairly evaluate Petitioner's proposal. Contrary to Petitioner's assertion, there is no credible evidence that Ervin was biased against Petitioner during the evaluation process, or that he gave higher scores to Intervenor and Newman because of Register's complaints. Indeed, his scores were comparable to those of the other four evaluators. Even if Ervin's scores were discarded, the scores of the other four evaluators would still result in the same order of ranking. Therefore, the evidence does not support a finding that Ervin's participation on the selection committee was improper, as alleged in the Amended Formal Written Protest. The remaining allegation that certain members of the selection committee exhibited favoritism towards Intervenor and Newman, and bias against Petitioner, is without merit and has been rejected. Defects in Petitioner's Proposal Addendum No. 1 to the RFQ added Items 62 and 63, which required that each contractor provide its bonding and insurance costs. This "important information" was added to Addendum No. 1 at the specific request of the Department of Management Services (DMS), from whom many of the RFQ's provisions were drawn. As noted earlier, these items are two of the six items that the Department considers in determining the overall financial capability of a firm. In the Department's view, they are no less significant than the other items, including the financial statements. Intervenor's proposal included these costs. Petitioner, however, did not provide such costs in its proposal. In fact, Petitioner's representative was not aware of this requirement until after his proposal had been filed. Like the audited financial statements, the Department considered the failure to file this information to be a minor irregularity, and it waived Rattler's and Newman's omission. Because the Department considers these items to be as equally important as audited financial statements, and because they were so significant that the DMS specifically requested that they be placed in the RFQ, the items are found to be material, and a failure to file such information renders Petitioner's and Newman's proposals as non-responsive.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the Department of Corrections enter a final order withdrawing its proposed action, rejecting all proposals as being non-responsive, and advising that it will solicit new proposals for Project No. VO-04-CM. DONE AND ENTERED this 4th day of March, 1999, in Tallahassee, Leon County, Florida. DONALD R. ALEXANDER Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 4th day of March, 1999. COPIES FURNISHED: Michael W. Moore, Secretary Department of Corrections 2601 Blair Stone Road Tallahassee, Florida 32399-2500 H. Richard Bisbee, Esquire Theresa M. Bender, Esquire Post Office Box 11068 Tallahassee, Florida 32302-3068 Scott E. Clodfelter, Esquire Obed Dorceus, Esquire Department of Corrections 2601 Blair Stone Road Tallahassee, Florida 32399-2500 Mark K. Logan, Esquire 403 East Park Avenue Tallahassee, Florida 32301 Louis A. Vargas, General Counsel Department of Corrections 2601 Blair Stone Road Tallahassee, Florida 32399-2500
The Issue Whether petitioner should take disciplinary action against respondent for the reasons alleged in the administrative complaint?
Findings Of Fact Respondent Marc M. Harris holds a license to practice certified public accounting in Florida, No. AC 16869. Respondent compiled, permitted his name to be associated with, and issued a balance sheet or statement of financial position, including notes, for MMH Equity Fund, Inc., purporting to represent the company's position as of March 31, 1988. Petitioner's Exhibit No. 1; Petitioner's Request for Admissions Nos. 4, 5 and 6. The body of respondent's letter accompanying the balance sheet or statement of financial position reads: We have compiled the accompanying balance sheet of MMH Equity Fund, Inc., as of March 31, 1988, except as noted in the last paragraph, in accordance with the standards established by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of the individual. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any form of assurance on them. MMH Equity Fund, Inc., has elected to use the equity method to report its holdings in majority-owned subsidiaries. If the consolidated disclosures were included in the financial statements, they might influence the user's conclusions about the Fund's financial position. Accordingly, these financial statements are not intended for those who are not informed about such matters. Petitioner's Exhibit No. 1 (Emphasis supplied.) Dated April 15, 1988, the letter evinces an intention to qualify the balance sheet or statement of financial position. But the balance sheet or statement of financial position does not contain a reference to the accountant's report or to the notes. Petitioner's Request for Admissions Nos. 32 and 33; Petitioner's Exhibit No. 1; T. 26. While the letter refers to a "balance sheet," the document itself is styled a statement of financial position. Statements on Standards for Accounting and Review Services (SSARS), which have been adopted by Florida's Board of Accountancy, require that the balance sheet contain a reference to the accountant's report and notes to the financial statement, if any. Petitioner's Request for Admission No. 34; T. 26- This is particularly important when the report contains significant qualifications. Lack of Independence Undisclosed Respondent Harris was an officer and/or a director of MMH Equity Fund, Inc. Petitioner's Request for Admission No. 41. A company's officer or director is not independent of the company. In evaluating financial assets, liabilities and equity or net worth, certified public accountants offer three levels of service: audit, review and compilation. Certified public accountants are forbidden to undertake audits or reviews for entities with respect to which they are not independent. In contrast, nothing prohibits a certified public accountant's performing a compilation, despite a lack of independence. But the lack of independence must be disclosed: If the accountant is not independent, he should specifically disclose the lack of independence . . . When the accountant is not independent, he should include the following as the last paragraph of his report: I am . . . not independent with respect to XYZ Company. Statements on Standards for Accounting and Review Services, (SSARS) Section 100.22 (Jan. 1, 1987). The respondent's lack of independence was not disclosed in the accountant's report, on the statement of financial position, or in the notes. Petitioner's Exhibit No. 1; Petitioner's Request for Admission No. 42; T. 30, 31. Accepted Principles Disregarded A provision in SSARS 1 requires the accountant "to read the financial statements and make certain that there are no obvious deviations from generally accepted accounting principles." T. 29. This requirement applies specifically to compilations, to prevent disregard for generally accepted accounting principles. Petitioner's Exhibit No. 7; T. 29. Respondent did not adhere to applicable generally accepted accounting principles or exercise due professional care in compiling and issuing the March 31, 1988, statement of financial position for MMH Equity Fund, Inc. Assets should equal equity plus liabilities. T. 11. On the compiled balance sheet or statement of financial position, total liabilities and stockholders' equity do not add up to the amount stated as total assets. The document reflects a discrepancy of $100,000. Petitioner's Exhibit No. 1; T. 11. The balance sheet or statement of financial position puts total assets at $13,171,000 but, as stated individually, they add to $13,216,000. Petitioner's Exhibit No. 1; Petitioner's Request for Admissions Nos. 9 and 10. The balance sheet or statement of financial position shows investment in operating affiliates in the amount of $6,234,000. But there is no further disclosure as to who or how many those affiliates are; as to how much of the $6,234,000 is invested in any one entity; or as to what percentage of ownership MMH Equity Fund, Inc. has in any one entity. Petitioner's Exhibit No. 1; T. 18. With respect to investments accounted for by the equity method, Accounting Principles Board Statement No. 18 requires that the name of each investee and the percentage of the investor's ownership of common stock, if significant, be disclosed in the notes. Petitioner's Request for Admissions No. 25; Petitioner's Exhibit No. 4; T. 17-20. If the certificates of deposit were held by related parties, they should have been disclosed in the notes. T. 22. Financial Accounting Standards Board Statement No. 57 requires that the name and amount or amounts due to or from related parties be disclosed. Petitioner's Exhibit No. 5; T. 23. The notes do not disclose the balances of major classes of depreciable assets by nature or function. Petitioner's Requests for Admissions Nos. 15 and 16; Petitioner's Exhibit No. 1; T. 15. Accounting Principles Board Statement No. 12 requires that depreciable assets be broken down by class together with the accumulated depreciation thereon. T. 16; Petitioner's Exhibit No. 3. Neither the gross amount of assets in the balance sheet nor the accumulated amortization for the assets recorded under capital leases is disclosed in the notes. Petitioner's Requests for Admission Nos. 26 and 27; Petitioner's Exhibit No. 1; T. 24. The notes do not disclose accumulated depreciation by class nor do the notes disclose total accumulated depreciation. Petitioner's Requests for Admissions Nos. 18 and 19; Petitioner's Exhibit No. 1; T. 15 and 16. Neither the aggregate cost nor the market value of marketable securities is disclosed on the balance sheet or statement of financial position or in the notes. Petitioner's Requests for Admissions Nos. 29 and 30; Petitioner's Exhibit No. 1; T. 25. The requirement is that both the original cost and market value be disclosed. Petitioner's Request for Admissions No. 31; T. 25. No allowance for doubtful accounts is disclosed on the balance sheet or statement of financial position or in the notes, and no explanation is offered why such an allowance might be unnecessary. Petitioner's Request for Admissions No. 21; Petitioner's Exhibit No. 1; T. 16. Accounting Principles Board Statement No. 12 requires either that allowance for doubtful accounts be made or that an explanation as to why one is not needed be included in the notes. Petitioner's Request for Admissions No. 22; Petitioner's Exhibit No. 3; T. 16, 17. Neither the March 31, 1988, compiled balance sheet or statement of financial position for MMH Equity Fund, Inc. nor the notes disclose any maturity schedule for long term notes. But these long term notes represent indebtedness of $11,000, or less than one thousandth of total assets, and the omission of a maturity schedule is immaterial.
Recommendation It is, accordingly, recommended that the Board of Accountancy reprimand respondent; and place him on probation, on condition that he not practice in Florida without supervision by another certified public acountant licensed in Florida, until he has practiced in Florida under the supervision of another certified public accountant licensed in Florida satisfactorily for a year; and completed 24 hours of continuing education in generally accepted accounting principles. RECOMMENDED this 12th day of September, 1990, in Tallahassee, Florida. ROBERT T. BENTON, II Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 12th day of September, 1990. COPIES FURNISHED: Charles F. Tunnicliff, Esquire Tobi C. Pam, Senior Attorney Department of Professional Regulation 1940 North Monroe Street Tallahassee, FL 32399-0792 Marc M. Harris Apartado 6-1097 Estafeta El Dorado Panama, Republica de Panama Kenneth E. Easley, General Counsel Department of Professional Regulation 1940 North Monroe Street Tallahassee, FL 32399-0792 Martha Willis Executive Director Department of Professional Regulation Suite 16 4001 Northwest 43rd Street Gainesville, FL 32606 =================================================================
The Issue Whether the proposed decision of the Department of Children and Family Services to award the contract for Florida Assertive Community Treatment (FACT) Programs for District 11, as set forth in RFP No. 01H02FP5, to Psychotherapeutic Services of Florida, Inc., was contrary to the Agency's governing statutes, the Agency's rules or policies, or the specifications of the RFP?
Findings Of Fact On or about February 18, 2002, DCF issued RFP No. 01H02FP5 for the implementation of Florida Assertive Community Treatment (FACT) Programs for persons with severe and persistent mental illnesses in DCF Districts 4, 7, and 11. The review in this case is limited to DCF's proposal to award a FACT contract in District 11. Three vendors submitted proposals for District 11, including Petitioner and Intervenor. Section 5.2 of the RFP requires that each proposal include a title page as page two of the proposal and include the RFP number; title of proposal; prospective offeror's name; organization to which the proposal is submitted; name, title, phone number and address of person who can respond to inquiries regarding the proposal; and name of project director, if known. The proposal submitted by Intervenor contained a title page identifying the offeror as Psychotherapeutic Services of Florida, Inc., (PSFI) with a mailing address in Chesterfield, Maryland. Further, every page of Intervenor's proposal had the name Psychotherapeutic Services of Florida, Inc. printed on the bottom left corner of every page. Section 6.1 of the RFP describes two phases of DCF's review of the proposals. The first is an initial screening of all proposals for what the RFP describes as "Fatal Criteria." The second is the qualitative review by an evaluation team of each proposal using criteria set out in the RFP. Fatal Criteria Section 5.4 of the RFP reads as follows: 5.4 RESPONSE TO INITIAL SCREENING REQUIREMENTS The initial screening requirements are described as FATAL CRITERIA on the RFP Rating Sheet (see section 6.1). Failure to comply with all initial screening requirements will render a proposal non-responsive and ineligible for further evaluations. The fatal criteria are: Was the proposal received by the date, time and location as specified in the Request for Proposal (section 2.4)? Was one (1) original and eight (8) copies of the proposal submitted and sealed separately? (section 5.12)? Did the provider include a Proposal Guarantee payable to the department in the amount of $1,000.00 (section 2.11)? Did the application include the signed State of Florida Request for Proposal Contractual Services Acknowledgement Form, PUR 7033 for each proposal submitted? Did the provider submit the Notice of Intent to Submit form contained in Appendix 2 by the required due date? Did the provider register and attend the offeror's conference? Did the proposal include the signed Certification Regarding Debarment, Suspension, Ineligibility and Voluntary Exclusion Contracts/Subcontracts (Appendix 6)? Did the proposal include the signed Statement of No Involvement(Appendix 7)? Did the proposal include the signed Acceptance of Contract Terms and Conditions indicating that the offeror agrees to all department requirements, terms and conditions in the Request for Proposal and in the Department's Standard Contract (Appendix 8)? Did the proposal include a signed lobbying form (Appendix 9)? Did the proposal include an audited financial statement for fiscal years 1999- 2000 and 2000-2001? Did the proposal include a certification of the offeror's good standing (Appendix 1)? Did the proposal contain evidence the minimum staffing levels in section 3.11 will be hired and employed? Did the proposal contain a signed Certification of a Drug-Free Workplace program (Appendix 10)? Did the proposal contain a certification regarding electronic mailing capability as referenced in section 3.20 (Appendix 5)? (emphasis in original) Section 6.1 of the RFP includes a Fatal Criteria rating sheet requiring "yes" or "no" responses by the reviewer, which included, among other provisions, the following: 4. Did the proposal include a signed Form PUR 7033? * * * 11. Did the proposal include independent audited financial statement from a CPA firm for fiscal years 1999-2000 and 2000-2001? Form PUR 7033 Section 5.1 of the RFP, entitled, STATE OF FLORIDA REQUEST FOR PROPOSAL CONTRACTUAL SERVICES ACKNOWLEDGMENT FORM, PUR 7033, requires proposers to manually sign an original Form 7033 on the appropriate signature line. The signed form 7033 must appear as the first page of the proposal. Form PUR 7033 is not a form generated by DCF but is generated by the Department of Management Services. The RFP did not set forth any fatal criteria in connection with this form other than it be signed. The proposal of Intervenor, PSFI, contained form PUR 7033 with the signature of PSFI's Chief Executive Officer, D. Cherry Jones, within the signature block designated as "authorized signature." The name Psychotherapeutice [sic] Services appears on Intervenor's form 7033 in the block entitled "vendor name." The address which appears in the block designated as "vendor's mailing address" on Intervenor's form PUR 7033 is the same mailing address in Chesterfield, Maryland, that appears on the title page of Intervenor's proposal. In completing the RFP forms designated as Appendix 1, Offeror Certification of Good Standing; Appendix 5, Certification of Electronic Mail Capability; Appendix 7, Statement of No Involvement; Appendix 8, Acceptance of Contract Terms and Conditions; and Appendix 10, Certification of a Drug-Free Workplace Program, Psychotherapeutic Services appears in the blank designated for the name of the vendor or offeror. These appendices were all signed by D. Cherry Jones. No required appendix was omitted or unsigned in Intervenor's proposal. Petitioner contends that the use by Intervenor of Psychotherapeutic Services or a shortened version of its full name instead of Psychotherapeutic Services of Florida, Inc., on Form PUR 7033 and the required appendices renders Intervenor's proposal non-responsive to fatal criteria and caused confusion within DCF as to the corporate status of the actual offeror. In Appendix 8 to Intervenor's proposal, the corporate documents from the Florida Department of State were for Psychotherapeutic Services of Florida, Inc. Timothy Griffith is Deputy Executive Director of Psychotherapeutic Services of Florida, Inc. According to Mr. Griffith, the use of the term Psychotherapeutic Services refers to a group of companies that make up the Psychotherapeutic Services Group. The parent company of all Psychotherapeutic Services affiliates, including Psychotherapeutic Services of Florida, Inc., is Associated Service Specialists, Inc. The relationship between Psychotherapeutic Services of Florida, Inc., and Associated Service Specialists, Inc., was set forth in sufficient detail in Intervenor's proposal. There is no evidence that anyone in DCF or its evaluators were confused as to what entity was identified in the proposal submitted by Intervenor. Stephen Poole is a Senior Management Analyst II with DCF, and is the procurement manager for the RFP. There was never any confusion in his mind as to what entity was making the offer to DCF. He understood Psychotherapeutic Services to refer to Psychotherapeutic Services of Florida, Inc., and had a "common sense" understanding of who the offeror was. Consistent with his testimony, Mr. Poole's reference to Psychotherapeutic Services, Inc., on the bid tabulation sheet was simply shorthand for Psychotherapeutic Services of Florida, Inc. Similarly, the bid tabulation sheet references Petitioner as Bayview Center for Mental Health even though its full name is Bayview Center for Mental Health, Inc. Likewise, his reference to "PSI" on the fatal criteria evaluation sheet "stood for and stands for, in our language, Psychotherapeutic Services of Florida, Inc." Petitioner's assertion that Intervenor's proposal was non-responsive as a result to the use of an abbreviated form of Intervenor's name is not supported by the above findings. Financial Statements Petitioner asserts that Intervenor failed to meet the requirement set forth in Section 5.4k of the RFP and referenced in paragraph 11 of the fatal criteria RFP rating sheet, that proposers include independent audited financial statements for fiscal years 1999-2000 and 2000-2001. The RFP did not provide any definition, standard, guideline, or mandatory requirement for the format or content of financial statements, audits, or audited statements. The RFP simply required that they be included. Intervenor's proposal contained audited financial statements for fiscal years 1999-2000 and 2000-2001. Intervenor's 2000-2001 audited financial statements consisted of an independent auditor's report from Nardone, Pridgeon & Company, P.A., Certified Public Accountants, dated August 10, 2001; balance sheets; statements of cash flow; statements of operations and retained earnings (deficit); and personnel and operating expenses. However, four pages, consisting of the Notes to Financial Statements, were omitted. There is no dispute regarding the contents of the audited financial statements for 1999-2000 submitted by Intervenor. The independent auditor's report stated in pertinent part: We have audited the accompanying balance sheets of Psychotherapeutic Services of Florida, Inc. as of June 30, 2001 and 2000, and their related statements of operations and retained earnings (deficit) and cash flows for the years then ended. . . . In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Psychotherapeutic Services of Florida, Inc. as of June 30, 2001 and 2000 We conducted our audits to form an opinion on the 2001 and 2000 basic financial statements taken as a whole. Luther Cox is a certified public accountant and has expertise in accounting and financial statements. It is Mr. Cox's opinion that the notes to financial statements are a required element of an audited financial statement. Mr. Cox's opinion was based in part on the Florida Board of Accountancy Rules in defining the term, "financial statement." Mr. Cox acknowledged, however, that based upon the representation that the auditors provided in the first paragraph of their letter, the auditors reviewed all of the financial statements. Additionally, Mr. Cox acknowledged that based upon his review of the notes to the financial statements, there was no negative information which should have been disclosed in the subject auditor's opinion letter and that the letter was a "clean opinion", meaning that no adverse financial information was known to the auditors which otherwise would have been required to be reported. Martin Kurtz is also a certified public accountant. He acknowledged that that the omission of the notes is not consistent with the standards of the practice of accountancy in Florida. However, he was of the opinion that, based upon the way the independent auditor's opinion letter is written, the letter relates to a full set of financial statements. "They may not have all been presented in the proposal. But there was a full set of audited financial statements." Thus, the auditor's clean opinion letter included a review of the notes. According to Mr. Kurtz, the text of Intervenor's proposal contains more information about the relationship between the parent company and Psychotherapeutic Services of Florida, Inc., than the notes to the financial statements. With the above competing opinions by certified public accountants, it is appropriate to examine the agency's use of the audited financial statements in their review of the proposals. According to Mr. Poole, the requirement to have the proposals contain independently audited financial statements was to assure DCF that the offeror possessed sufficient financial sophistication and organizational capacity to perform a FACT contract. In reviewing compliance with the requirement for an audited financial statement, DCF reviewed the submission to determine whether or not it had a letterhead from an independent auditor and whether there were financial statements. The submitted financial statements were not reviewed by a certified public accountant of DCF. According to Mr. Poole, DCF was looking generally for the "strength, administratively of the offeror. If it had the level of management expertise to be able to perform a contract in that amount of money of a million dollars." The independent auditor's letter represents that Intervenor's financial statements for fiscal years 2000-2001 were in fact audited. Petitioner's assertion that Intervenor's proposal is non-responsive because of the omission of the notes to the financial statements is not supported by the above findings. In further support for its assertion that Intervenor's omission of the notes to the financial statements renders Intervenor's proposal non-responsive for failure to meet fatal criteria, Petitioner asserts that the requirement for the inclusion of audited financial statements was not only considered within the fatal criteria of the RFP, but also was a "key consideration" for scoring criterion 36 of the RFP. Organizational capacity is set forth in section 5.5(4) of the RFP and states in pertinent part: To assist in the determination of the offeror's organizational capacity, please provide, as part of this section, the following: 4. A copy of the financial statements or audits for state fiscal years 1999-2000 and 2000-2001. 6. Evidence that the offeror has met its financial obligations in a timely and consistent manner without the need to incur loans or a line of credit to routinely meet its expenses. (emphasis in original) Section 6.3.6 of the RFP contains certain criteria for the evaluators to score with regard to organizational capacity of the proposers. Criterion 36 reads as follows: 36. What evidence did the proposal provide that the offeror has not had to obtain loans or a line of credit to routinely meet its financial obligations and expenses in a timely and consistent manner as referenced in section 5.5(4)? Key considerations for scoring: Its independently audited financial statements for fiscal years 1999-2000 and 2000-2001 support response. Offeror's independently audited financial statements for the last two years give evidence of ability to start a new program without benefit of start-up funds. Each of the evaluation criteria contained references to key considerations for scoring. The key considerations were to assist the evaluators in assessing the merits of the proposals. In evaluating criterion 36 pertaining to lines of credit, it was the role of the individual evaluators to interpret the degree of routine reliance and assign, accordingly, a particular score from zero to three. Intervenor directly addressed loans and lines of credit in the text of its proposal in response to criterion 36. As with the other criteria, evaluators could score this criterion from zero to three. The Department deferred to the evaluators regarding how they interpreted offerors' responses to the requirements of 5.5(4). Thus, the omission of the auditor's notes in regard to criterion 36 goes to the weight of the information in the proposal, not as to whether or not fatal criteria were met. Evaluation Committee Process Members of the Evaluation Committee were given instructions by Mr. Poole prior to commencing the qualitative review of each proposal. Each Evaluation Committee member signed a conflict of interest statement indicating they had no conflicts. The members were specifically instructed that the proposals were to be reviewed independently from one another and from each other; that any problem an evaluator may have with a proposer was not to be considered as part of their score; that the universe began and ended within the confines of the proposal; and that they were to use a scoring protocol to affix their score and to report back the following week to give that score, but not to share their results with anyone until the briefing meetings that followed the qualitative review. The Evaluation Committee consisted of employees of DCF, except for Barbara Johanningsmeier, who is a National Alliance for the Mentally Ill (NAMI) representative. Mr. Poole spoke to the executive director of NAMI explaining that the NAMI evaluator should be a person who is knowledgeable either through life experience or work of Florida's community mental health system; who has an understanding of the system of care that is publicly funded; and who has an interest and some knowledge and expertise in the area of programs either through employment or through other factors. NAMI provided Ms. Johanningsmeier as the evaluator requested by DCF. Mr. Poole explained DCF's unquestioned acceptance of Ms. Johanningsmeier as an evaluator: We accepted Mrs. Johanningsmeier as the representative of NAMI because of our relationship with NAMI and our shared vision and mission of a community mental health system of Florida that is responsive to the individual needs with persons with severe and persistent illness and that our goals in some ways are the same, that we want a responsive system to people with a very serious disability . . . . [T]here would be no reason to question the validity or expertise of a representative of NAMI because NAMI has an interest in Florida's publically funded community mental health system. According to Celeste Putman, DCF's Director of Mental Health, the evaluation team included a NAMI representative to make sure that the team had a strong representative who really understood the needs of people with very severe, persistent mental illness, and who has worked closely with that population. Ms. Putnam explained that DCF has always felt that it is important to have a family member, someone who is close, from a personal standpoint, to the service delivery involved. Ms. Johanningsmeier had experience evaluating at least three other similar procurements. Further, Ms. Johanningsmeier was a member of the Board of Directors of NAMI, Florida, at the time she served on the Evaluation Committee and was a member of a local Board of Directors of NAMI. She was familiar with the NAMI PACT manual. Ms. Johanningsmeier gave an extensive description of her personal experiences with the public and private mental health systems in Florida, from her child's experience in those systems. Ms. Johanningsmeier's purpose on the evaluation team was to represent NAMI and not to promote the NAMI viewpoint in the evaluation. She denied scoring any of the criteria out of bias toward or against any of the participants using criteria outside of those that were given to her in the RFP, or attempting to skew the score in any way. Petitioner alleges that many of its responses to subjective questions were better than those of Intervenor and therefore should have been scored higher. Robert Ward, President and chief executive officer of Bayview, believed that Ms. Johanningsmeier scored Petitioner low, and as a result he felt there was either a bias of some kind or that the evaluator did not know what she was doing. Mr. Ward felt that something was wrong, but did know what it was. Petitioner's expert witness, Dr. Susan Kelly, is a senior research consultant with a private company. She works with data analysis and research and has expertise in statistics with a Ph.D. in sociology. She conducted a statistical test of the scoring by all evaluators for the purpose of determining the existence of patterns or any kind of irregularities or differences in scoring. The statistical significance test performed by Dr. Kelly showed variations between the scores of Ms. Johanningsmeier and two of the other reviewers. Dr. Kelly characterized Ms. Johanningsmeier's scores as an "outlier," but did not know the reason why there was a difference in scores between Ms. Johanningsmeier and the other evaluators. Dr. Kelly's analysis did not involve any review of the RFP, the proposals or information regarding Ms. Johanningsmeier's background or position to the Evaluation Committee. There was no substantial or material evidence presented by Petitioner to show that Ms. Johanningsmeier's scoring of the proposals was inconsistent with the scoring methodology in the RFP, clearly erroneous, contrary to competition, arbitrary or capricious.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law set forth herein, it is RECOMMENDED: That the Department of Children and Families enter a final order dismissing the bid protest filed by Bayview Center for Mental Health, Inc. DONE AND ENTERED this 27th day of September, 2002, in Tallahassee, Leon County, Florida. BARBARA J. STAROS Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 27th day of September, 2002. COPIES FURNISHED: Gary J. Clark, Esquire Frank P. Rainer, Esquire Sternstein, Rainer & Clark, P.A. 101 North Gadsden Street Tallahassee, Florida 32301 William A. Frieder, Esquire Department of Children and Family Services 1317 Winewood Boulevard Building Two, Room 204 Tallahassee, Florida 32399-0700 Thomas R. Tatum, Esquire Brinkley, McNerney, Morgan, Soloman & Tatum, LLP. Post Office Box 522 Fort Lauderdale, Florida 33302-0522 Paul F. Flounlacker, Jr., Agency Clerk Department of Children and Family Services 1317 Winewood Boulevard Building 2, Room 204B Tallahassee, Florida 32399-0700 Josie Tomayo, General Counsel Department of Children and Family Services 1317 Winewood Boulevard Building 2, Room 204 Tallahassee, Florida 32399-0700
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent be found guilty of violating Chapter 473 and rules promulgated thereunder as set forth in the Conclusions of Law portion of this Order. His license should be suspended for one year with probation thereafter for a period of two years. He should also be required to take such additional continuing education courses as the Board deems appropriate. DONE and ORDERED this 15th day of April, 1986, in Tallahassee, Florida. DONALD R. ALEXANDER, Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 15th day of April, 1986.
The Issue Whether proposed Rule 69O-186.013 is an invalid exercise of legislatively delegated authority as defined in Section 120.52(8), Florida Statutes.
Findings Of Fact Pursuant to Section 20.121(3), Florida Statutes, the Financial Services Commission (the Commission) serves as the agency head for the Office of Insurance Regulation for the purpose of rulemaking. On May 26, 2006, the Office of Insurance Regulation issued a Notice of Development of Rulemaking to amend existing Florida Administrative Code Rule 69O-186.013. A workshop was held pursuant to this notice on June 15, 2006. On August 15, 2006, the Commission approved for publication a notice of proposed rule amendments to Rule 69O- 186.013. A Notice of Proposed Rulemaking was published in the Florida Administrative Weekly on October 6, 2006. A public hearing was held October 31, 2006. On November 22, 2006, a second notice of hearing was published in the "Notices of Meetings, Workshops and Public Hearings" section of the Florida Administrative Weekly, advising of "an additional public hearing on the proposed amendments to Rule 69O-186.013, Title Insurance Statistical Gathering, published on October 6, 2006, in Vol. 32, No. 40, of the F.A.W." A public hearing was conducted as noticed December 5, 2006. Petitioners filed their Petition to Determine Invalidity of Proposed Rule December 21, 2006. On June 7, 2007, the Respondent filed its Motion to Dismiss for Lack of Subject Matter Jurisdiction. Included in its Motion are several statements relevant to the Petitioners' position regarding dismissal of these proceedings: [The December 5, 2006, hearing] of course, was not the "final public hearing," was not noticed as a hearing at which any action would be taken and never intended to be the "final public hearing" as that term is used in Section 120.56(2)(a), Florida Statutes. In fact, the "final public hearing" would have been held before the FSC as the collegial body responsible for rulemaking for the Office. When it is appropriate, the FSC will hold such a "final public hearing" prior to adoption of a proposed rule. As in every other instance in which the FSC intends to adopt a rule, notice will be provided in the Florida Administrative Weekly (sample attached as Exhibit E). In this instance, the final hearing has not yet been held, or even scheduled. * * * 11. Therefore, this case must be dismissed as the Petition to Determine Invalidity of Proposed Rule was untimely filed. The Petitioners may, if they desire, challenge the proposed rule after the final public hearing. Nevertheless, they may not maintain this action at this time. Petitioners have responded to the Motion to Dismiss by consenting to dismissal of these proceedings, "in reliance on representations made by the State of Florida, Financial Services Commission/Office of Insurance Regulation (the Respondent) in paragraphs 5, 6, and 11 of Respondent's Motion to Dismiss for Lack of Subject Matter Jurisdiction (the Motion to Dismiss) filed on June 7, 2007, that no 'final public hearing' within the meaning of Section 120.54 . . . has been held . . . and that no 'final public hearing' shall be held unless Respondent has first provided to Petitioners proper notice and an opportunity to contest the validity of the Proposed Rule." Petitioners assert, however, that the Petition should be dismissed without prejudice, and that should Respondent attempt to promulgate the Proposed Rule without first holding a "final public hearing" with proper notice, they reserve the right to reinstate this proceeding.
The Issue The issue is whether respondent's certified public accountant's license should be disciplined for the alleged violations set forth in the administrative complaint.
Findings Of Fact Based upon all of the evidence, the following findings of fact are determined: Respondent, Flanagan & Baker, P. A. (respondent or firm), was a certified public accounting firm having been issued license number AD 0006179 by petitioner, Department of Professional Regulation, Board of Accountancy (Board). When the events herein occurred, the firm's offices were located at 2831 Ringling Boulevard, Suite E-118, Sarasota, Florida, and John R. Flanagan and Michael L. Baker, both certified public accountants (CPA), were partners in the firm. In addition, Thomas A. Menchinger, also a CPA, was a junior partner. The firm has since been dissolved, and Flanagan and Menchinger have now formed a new firm known as Flanagan & Menchinger, P. A., at the same address. It is noted that Flanagan, Baker and Menchinger are not named as individual respondents in this proceeding, and at hearing respondent's representative assumed that only the firm's license was at risk. Whether license number AD 0006179 is still active or valid is not of record. In 1987, respondent, through its partner, Flanagan, accepted an engagement to prepare the 1986 calendar year financial statements for Ballantroe Condominium Association, Inc. (BCA or association), an owners' association for a fifty unit condominium in Sarasota. Financial statements are a historical accounting of what transpired for an entity during a particular period of time as well as the status of its assets, liabilities and equity on a given date. They are prepared for a variety of persons who rely upon them to see what transpired during that time period. If the statements are not properly prepared, the possibility exists that harm or other problems may accrue to the users of the statements. After the statements were prepared and issued, a unit owner made inquiry with respondent in August 1987 concerning two items in the statements. When he did not receive the desired response, the owner wrote the Department in September 1987 and asked for assistance in obtaining an opinion regarding the two items. Eventually, the matter was turned over to a Board consultant, Marlyn D. Felsing, and he reviewed the statements in question. Although Felsing found no problems with the two items raised by the owner, he noted what he perceived to be other errors or irregularities in the statements. This led to the issuance of an administrative complaint on September 29, 1988 charging the firm of Flanagan & Baker, P. A., with negligence in the preparation of the statements and the violation of three Board rules. That precipitated the instant controversy. The engagement in question represented the first occasion that the firm had performed work for BCA. The association's annual financial statements from its inception in 1980 through calendar year 1983 had been prepared by Touche Ross & Company, a national accounting firm, and for the years 1984 and 1985 by Mercurio and Bridgford, P. A., a Sarasota accounting firm. Some of these statements have been received in evidence. As a part of the Board investigation which culminated in the issuance of a complaint, Felsing visited respondent's firm, interviewed its principals, and reviewed the work papers and financial statements. A formal report reflecting the results of his investigation was prepared in June 1988 and has been received in evidence as petitioner's exhibit 1. In preparing his report, Felsing relied upon a number of authoritative pronouncements in the accounting profession which underlie the concept of generally accepted accounting principles (GAAP). These included various opinions issued by the Accounting Principles Board (APB), Statements on Auditing Standards (SAS) issued by the Auditing Standards Board, and Accounting Research Bulletins (ARB) issued by the Committee on Accounting Procedure. The three organizations are a part of the American Institute of Certified Public Accountants (AICPA). With regard to the concept of materiality, which requires an accountant to consider the relative importance of any event, accounting procedure or change in procedure that affects items on the statements, Felsing did not exclude any matters on the ground they were immaterial. Rather, he included all possible irregularities, regardless of their materiality, on the theory that the probable cause panel (for which the report was initially prepared) should consider all items in the aggregate. According to Felsing, a number of irregularities or errors were found in the financial statements prepared by respondent. These are discussed separately in the findings below. The first alleged deficiency noted by Felsing concerned a change by the association from accelerated to the straight-line method of depreciation. According to APB 20, such a change is considered to be significant, and "the cumulative effect of changing to a new accounting principle on the amount of retained earnings at the beginning of the period in which the change is made should be included in net income of the period of the change." In other words, APB 20 requires the cumulative effect of the change to be reported in the net income of the current year. However, respondent accounted for the change as a prior period adjustment on the statement of members' equity. Respondent justified its treatment of the item on the ground the prior year's statements prepared by Mercurio and Bridgford, P. A., did not show any accumulated depreciation. Thus, respondent asserted it was merely correcting an error because the other firm had not reported depreciation on the balance sheet. In addition, respondent noted that the effect on the balance sheet was only $721, deemed the item to be immaterial, and concluded its treatment of the item was appropriate. However, APB 20 requires the auditor to address the cumulative effect of the change ($2,072) rather than the effect of only the current year ($721), and therefore the cumulative effect should have been reported in current income. By failing to do so, respondent deviated from GAAP. The association had designated several cash accounts as being reserve accounts for deferred maintenance and replacements. Under ARB 43, such accounts must be segregated in the balance sheet from other cash accounts that are available for current operations. This would normally be done in a separate classification called "other assets" so that the user of the statements would be aware of the fact that the reserves were not available for current operations. However, the statements reflect that three such reserve accounts were placed under the classification of current assets. It is noted that these accounts totaled $25,514, $18,550 and $30,927, respectively. While respondent recognized the difference between cash available for current operations and reserves for future use, and the requirements of ARB 43, it noted that the association's minute book reflected the association regularly withdrew funds from the accounts throughout the year to cover current operations. Also, the prior year's statements prepared by Mercurio and Bridgford, P. A., had classified the item in the same fashion. Even so, if respondent was justified in classifying the accounts as current assets, it erred by identifying those accounts as "reserves" under the current assets portion of the balance sheet. Therefore, a deviation from GAAP occurred. One of the most important items in a condominium association's financial statements is how it accounts for the accumulation and expenditure of reserves, an item that is typically significant in terms of amount. The accounting profession does not recommend any one methodology but permits an association to choose from a number of alternative methods. In this regard, APB 22 requires that an entity disclose all significant accounting policies, including the choice made for this item. This disclosure is normally made in the footnotes to the financial statements. In this case, no such disclosure was made. Respondent conceded that it failed to include a footnote but pointed out that when the statements were prepared by Touche Ross & Company, one of the world's largest accounting firms, that firm had made no disclosure on the basis of immateriality. However, reliance on a prior year's statements is not justification for a deviation from GAAP. It is accordingly found that APB 22 is controlling, and footnote disclosure should have been made. The financial statements contain a schedule of sources and uses of cash for the current fiscal year. According to APB 19, all transactions in this schedule should be reported at gross amounts irrespective of whether they utilize cash. However, respondent reported all transactions in the schedule at their net amount. In justifying its action, respondent again relied upon the prior years' statements of Touche Ross & Company and Mercurio and Bridgford, P. A., who reported the transactions in the same manner. It also contended the item was immaterial and that a detailed explanation of the item is found in the statement of members' equity. Despite these mitigating factors, it is found that the schedule was inconsistent with APB 19, and a deviation from GAAP occurred. Felsing's next concern involved the language used by respondent in footnote 6 to the statements. That footnote pertained to the unfunded reserve and read as follows: NOTE VI - UNFUNDED RESERVE As of December 31, 1986, the Association reserves amounted to $103,953 consisting of $18,931 as a reserve for depreciation and statutory reserves of $85,022. The amount funded was $95,422 leaving an unfunded balance of $8,531 due to the reserves from the operating funds. Felsing characterized the footnote as "confusing" because it referred to depreciation as a part of a future reserve for replacements. Felsing maintained the footnote contained inappropriate wording since depreciation relates to assets already placed in service and not to their replacements. Respondent agreed that the footnote, taken by itself, might be confusing. However, it contended that if the user read the preceding footnote, which he should, there would be no possible confusion. That footnote read as follows: NOTE V - RESERVE FOR DEPRECIATION The Association funds the reserves for depreciation through its operating budget. These funds are to be used for the replacement of property and equipment as the need arises. As previously noted, the Association changed its method of computing depreciation to conform with generally accepted accounting principles. As of December 31, 1986, the reserve for depreciation totaled $18,931. According to respondent, the above footnote made clear to the user that the firm was not referring to depreciation as a reserve but rather was setting aside funds equal to depreciation in an effort to have sufficient cash to purchase assets in the future. While the deficiency here is highly technical and minute in nature, it is found that the footnote is not sufficiently clear and that the user might be confused. Felsing next observed that the footnotes did not disclose how the association accounted for lawn equipment or other capital assets. According to APB 22, such a choice is considered a significant accounting policy and, whatever policy is utilized, the same must be disclosed in the footnotes to the statements. In response, Flanagan pointed to a footnote in Note I of the statements which read in part as follows: Property and Equipment and Depreciation Property and equipment capitalized by the Association is stated at cost. During 1986, the Association changed its method of depreciation from the accelerated cost recovery method to a straight line method in which property and equipment is depreciated over its estimated useful life in accordance with generally accepted accounting principles. According to respondent, this footnote was adequate in terms of explaining the method of depreciation. Also, a number of other statements were introduced into evidence to show that other entities routinely used a corresponding footnote. Flanagan's testimony is accepted as being the most credible and persuasive evidence on this issue, and the footnote is accordingly deemed to be adequate disclosure on this policy. In the statement of members' equity, there is an item in the amount of $1,730 described as "capitalization of lawn equipment expensed in previous year." Although Felsing did not question the amount shown, he faulted respondent for not properly describing whether the item was a change in accounting principle or an error correction. According to APB 20, the disclosure of an error correction is required in the period in which the error was discovered and corrected. Although respondent considered the footnote described in finding of fact 11 to constitute adequate disclosure, it is found that such disclosure falls short of the requirements of APB 20. Work papers are records and documentary evidence kept by the accountant of the procedures applied, tests performed, information obtained and pertinent conclusions reached in the engagement. They serve the purpose of documenting the work performed and provide verification for the accountant. In addition, another important, required tool is the audit program, a written plan for how the auditor intends to perform the audit. The plan serves the purpose of documenting the accountant's mental process of deciding what procedures are necessary to perform the audit and to communicate those procedures to the persons actually conducting the audit. The audit plan should include in reasonable detail all of the audit procedures necessary for the accountant to perform the audit and express an opinion on the financial statements. Although a variety of checklists have been prepared by the AICPA and other organizations, each audit program must be tailored to fit the needs of a particular client. Felsing noted what he believed to be a number of deficiencies with respect to respondent's work papers, audit program, and engagement planning. In reaching that conclusion, Felsing relied upon various SAS pronouncements which govern that phase of an auditor's work. Those pronouncements have been received in evidence as petitioner's exhibits 7-14. Although the work papers themselves were not introduced into evidence, Felsing stated that his review of them reflected they were "deficient" in several respects. For example, he did not find a planning memorandum, time budget, checklist or other evidence that planning procedures were performed as required by SAS 22. In this regard, Flanagan corroborated the fact that no formal planning memorandum to the file was prepared. Although respondent's audit program was written for a condominium association, Felsing found it "extremely brief" and was not tailored to this particular client. He opined that such a program should have included reasonable detail of all audit procedures necessary to accomplish the audit and to express an opinion on the financial statements. In particular, it was noted that some required procedures were not on the list while some procedures actually used by respondent were not included. Through conversations with respondent's members, Felsing learned that much of the audit work was performed by Menchinger, the junior partner in the firm. In addition, "a few" other work papers were prepared by an unknown assistant. Although Menchinger reviewed all work performed by the assistant, Felsing found no evidence that the papers were reviewed by the supervising partner, Flanagan. Such review, which is a required step in the audit process, is generally evidenced by the supervising partner placing check marks or initials on the individual work papers. Felsing noted further that the decision to rely on the testing of internal controls was not documented in the work papers by respondent. He added that the amount of time budgeted by respondent for this engagement (around thirty hours) was inadequate given the fact that it was the first year the firm had prepared this client's statements. Finally, Felsing concluded that the violations were not peculiar to a condominium association but were applicable to all enterprises. Respondent pointed out that the association was a small client with less than five hundred line items, and the audit program and engagement planning were planned within that context. Respondent introduced into evidence its audit program which contained the steps taken by the firm in planning for the engagement. Testimony that all steps contained therein were followed was not contradicted. Similarly, Flanagan testified without contradiction that he reviewed all work performed by Menchinger but did not evidence his review with tick marks on each page. According to Flanagan, on a small audit such as this, he considered the signing of the tax return and opinion letter evidence that he had reviewed the work papers. However, Flanagan acknowledged that someone examining the papers would not know they had been reviewed by the supervising partner. Based upon the above findings, and after reconciling the conflicting testimony, it is found that respondent violated GAAP by failing to have a planning memorandum, time budget, and evidence of testing of internal controls within its work papers. All other alleged violations are found to without merit. Respondent has continued to represent the association since the Board issued its complaint. Indeed, Flanagan noted that the association is pleased with the firm's work, and this was corroborated by a letter from the association's board of directors attesting to its satisfaction with the firm. There was no evidence that the association or any other third party user of the statements was injured or misled by relying on the statements.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent be found guilty of the violations discussed in the conclusions of law portion of this Recommended Order, and that license number AD 0006179 be given a reprimand. All other charges should be dismissed. DONE and ENTERED this 30th day of October 1989, in Tallahassee, Leon County, Florida. DONALD R. ALEXANDER Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 30th day of October 1989.
Findings Of Fact The Petitioner is University General Hospital, Inc. (hereinafter "UGHI"), the present license holder of University General Hospital (hereinafter "University Hospital"), a 140-bed general acute-care hospital located in Seminole, Florida. During calendar years 1989 and 1990 and until July 30, 1991, University Hospital operated as a division of Community Health Investment Corporation f/k/a/ CHS Management Corporation (hereinafter "CHIC"). On July 30, 1991, UGHI was incorporated as a wholly-owned subsidiary of CHIC and became the license holder of University Hospital. University Hospital's change in licensure on that date did not change its ownership, control, management, reporting, or operation. On or about December 2, 1991, UGHI timely filed Certificate of Need (hereinafter "CON") Application No. 6851 to convert 12 general acute-care beds to hospital-based skilled nursing beds. In a letter dated December 19, 1991, the Department (hereinafter "HRS") identified certain items of information omitted from UGHI's initial application (commonly referred to as an "Omissions Letter"), including, among other items, audited financial statements of the applicant. On or about January 15, 1992, UGHI timely filed its response to the Omissions Letter and included a document entitled "UNIVERSITY GENERAL HOSPITAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF COMMUNITY HEALTH INVESTMENT CORPORATION) FINANCIAL STATEMENTS AS OF DECEMBER 31, 1990 AND 1989 TOGETHER WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS." In a letter dated January 28, 1992, HRS notified UGHI that its CON application was being administratively withdrawn from consideration for the sole reason that it did not contain audited financial statements of the applicant, University General Hospital, Inc. The purpose of audited financial statements from the standpoint of HRS' review of CON applications is that they provide HRS with a basis to determine the overall financial strength and financial position of the applicant and the applicant's ability to carry out the project being proposed. HRS requires that the financial statements be "of the applicant" because it looks to the source of funding and financial strength of the entity responsible for funding the project--the party submitting the CON application. The audited financial statements submitted by UGHI reflect the resources available to it for the CON project proposed in CON Application No. 6851 and are appropriate to demonstrate the financial strength of UGHI. The audited financial statements filed by UGHI contain financial documentation for years ending December 31, 1990 and 1989, as well as information through November 13, 1991. The issuance of audited financial statements for an entity incorporating a period of time before that entity's corporate existence (known as "reissuance") is a common practice in the accounting profession and, subject to the entity's ability to satisfy the specified prerequisites, is consistent with pronouncements and standards under generally accepted auditing standards (hereinafter "GAAS") and generally accepted accounting principles (hereinafter "GAAP"). The prerequisites for reissuance of an audited financial statement are adequate disclosure made in the notes of the financial statement and continuance of common ownership, control, management, reporting, and operation of the entity's activities. Prior to issuance of the audited financial statements for UGHI, Arthur Andersen & Co. conducted an extensive post-audit review of UGHI and concluded that the financial statements previously issued to University Hospital could be reissued as audited financial statements of UGHI. Had Arthur Andersen & Co. found that the previously-issued audited financial statements were misleading or that the requirements set forth in GAAS and GAAP were not satisfied, it would not have reissued the audited financial statements on behalf of UGHI. The audited financial statements submitted by UGHI to HRS constitute a valid document prepared in accordance with the pronouncements and standards under GAAS and GAAP. It is the policy of HRS that, if an entity has been in existence for less than one year, HRS will accept only a balance sheet audit as of the date of incorporation, or a short period audit from the date of incorporation through an undefined period of time. HRS' policy is not reflected in any of the statutes, rules, or HRS Manual provisions regarding audited financial statements, and HRS is not in the process of promulgating a rule regarding this policy. HRS' policy applies to all entities submitting CON applications that have been in existence for less than one year. Balance sheet and short period audits are not appropriate documents to assess an entity's financial condition. In many cases, HRS would prefer a reissued audited financial statement to a balance sheet audit in analyzing a CON application. In determining whether an applicant complies with Section 381.707(3), Florida Statutes, HRS will, with certain exceptions, look at whether the definition of "Audited Financial Statement" set forth in Rule 10-5.002(5), Florida Administrative Code, is met. HRS does not apply the definition of "Audited Financial Statement" set forth in Section 10-5.002(5), Florida Administrative Code, to applicants in existence for less than one year. The definition it applies to these entities is not set forth in any rule, statute, or HRS Manual provision. A balance sheet audit does not comply with the definition of "Audited Financial Statement" set forth in Rule 10-5.002(5), Florida Administrative Code. The audited financial statements filed by UGHI comply with the definition of "Audited Financial Statement" set forth in Rule 10-5.002(5), Florida Administrative Code. Rule 10-5.008(5)(g), Florida Administrative Code, identifies those audited financial statements satisfying the rule definition of "Audited Financial Statement" that HRS will not accept. HRS explains the exceptions set forth within Rule 10-5.008(5)(g), Florida Administrative Code, on the basis that these audited financial statements reflect financial documentation of an affiliate entity. The audited financial statements submitted by UGHI are not a combined audit, a consolidated audit, or an audit of a division, as prohibited under Rule 10-5.008(5)(g). From an accounting standpoint, the audited financial statements submitted by UGHI are those of UGHI. An accounting firm typically identifies the entity being audited on the title page of the audited financial statements and in the audit report and financial statements contained therein. The title page of, and audit report and financial statements in, the audited financial statements prepared by Arthur Andersen & Co. for UGHI all reflect that the entity being audited is UGHI. An accounting firm faces significant liability if the audited financial statements it prepares are found to be inaccurate or misleading. HRS does not dispute, and in fact agrees, that the audited financial statements prepared by Arthur Andersen & Co. for UGHI were correctly issued and are consistent with GAAS and GAAP.
The Issue Whether respondent's proposed amendment to Rule 59C-1.008(5)(g), Florida Administrative Code, constitutes an invalid exercise of delegated legislative authority?
Findings Of Fact 1. The proposed amendment under challenge would repeal or delete the fourth numbered paragraph of a provision in one of the respondent's rules, entitled "Certificate of Need Application Contents," Rule 59C-1.008(5)(g), Florida Administrative Code. Respondent has succeeded the Department of Health and Rehabilitative Services as administrator of the certificate of need program. The provision now reads: (g) With respect to paragraph 408.037(3), F.S., which requires an audited financial statement of the applicant the following provisions apply: The audited financial statement of the applicant must be for the most current fiscal year. If the most recent fiscal year ended within 120 days prior to the application filing deadline and the audited financial statements are not yet available, then the prior fiscal year will be considered the most recent. Existing health care facilities must provide audited financial statements for the two most recent consecutive fiscal years in accordance with subparagraph 1. above. Only audited financial statements of the applicant will be accepted. Audited financial statements of any part of the applicant, including but not limited to subsidiaries, divisions, specific facilities or cost centers, will not qualify as an audit of the applicant. Nor shall the audited financial statements of the applicant's parent corporation qualify as an audit of the applicant. Audited financial statements that are a combination of legal entities shall not qualify as an audit of the applicant. As construed by respondent, the sentence proposed for deletion prohibits combining information from separate legal entities in financial statements used to support certificate of need applications (in any circumstances other than those in which generally accepted accounting principles dictate the use of an applicant's consolidated financial statements.) The repeal proposed by the amendment would permit the use, in appropriate circumstances, of combined, as well as of consolidated, financial statements. Testimony at hearing identified situations in which a flat prohibition against combined financial statements may inhibit fair and meaningful statements concerning an applicant's financial position, and meaningful comparison with competing applicants. In the case of a partnership subject to financial control by a corporation, generally accepted accounting principles do not permit consolidated statement of the corporation's revenues, costs, income, expenses, assets, liabilities or cash flows with the partnership's. Generally accepted accounting principles do require that a corporation exercising financial control over (an)other corporation(s) present financial information on a consolidated basis, however. The consolidation requirement prevents shifting assets or other items among parent and subsidiary corporations in a way that might mislead. Of course, separate financial statements for a corporation and a partnership over which it exercises financial control create similar possibilities for misleading shifts of assets and other items. To preclude this, generally accepted accounting principles require combined statements, in certain circumstances. Forbidding combined statements, as respondent's rules now do, creates the possibility that corporations in economically identical postures will appear otherwise depending solely on technicalities concerning the legal form in which entities they control are organized. If two corporations are competing for certificates of need, one may receive an unfair advantage, unless combined statements are permitted to put the parent of a corporate joint venturer on the same footing as the parent of a corporate subsidiary with minority stock ownership equivalent to the unaffiliated partners' share in the joint venture. A joint venture might itself be an applicant for a certificate of need. In that event, according to petitioners' expert, combined financial statements would be appropriate, in support of the application. Deleting the language proposed for repeal by the amendment under challenge would have no bearing on "combined financial statements" in the sense of a combination of governmental funds required by law to be maintained in separate accounts, although belonging to a single governmental entity, since the provision at issue concerns only "a combination of legal entities." For the same reason, a combination of one legal entity's assets, liabilities, revenues, costs or the like with only selected assets, liabilities, revenues, costs or the like of another entity would not be condoned by the proposed amendment. As the notice published in the Florida Administrative Weekly and Rule 59C-1.002(5), Florida Administrative Code, make clear, the proposed amendment is not a retreat from respondent's insistence on audited financial statements, prepared in accordance with generally accepted accounting principles. Respondent does not propose to repeal the fundamental requirement that "[o]nly audited financial statements of the applicant will be accepted." Rule 59C-1.008(5)(g) 3., Florida Administrative Code. (Emphasis supplied.) The proposed amendment cannot be construed to countenance combining an applicant's assets or revenues with the assets or revenues of an unrelated entity, not legally responsible for complying with conditions that may be placed on a certificate of need.
