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.
Findings Of Fact The Petitioner is Barbara Clark and Company, a CPA firm. Barbara Clark owns and operates the company. The Respondent issued a Request for Proposal, RFP Number 7112, for CPA audit services. The Petitioner responded to the RFP along with four other proposers. The award for RFP Number 7112, CPA audit services, was to be made to the two (2) companies who received the highest number of points based on individual evaluations by four (4) people selected for the RFP review committee. The evaluation criteria to be used by the review committee members was specified in Section 1.16 of the RFP and involved review of the management and technical aspects of a given proposal. The committee members for the RFP were instructed by the FAMU Purchasing Director to use the criteria as outlined in Section 1.16 in the process of evaluating the management and technical plans of the respective proposals and that each member should evaluate and score each proposal independent from the other committee members. The evaluations by each member were placed in a sealed envelope. The proposals submitted in response to RFP Number 7112, CPA audit services, were reviewed by the evaluation committee members. After the members completed their review, they met as a group with the Purchasing Director. The sealed envelopes which contained the individual committee members' evaluation sheets for each proposal were opened and the points for each proposer were determined by adding the points for each respective proposal. The evaluation of RFP Number 7112, CPA audit services, occurred pursuant to the evaluation criteria in RFP Number 7112, CPA audit services. No committee member testified. There was absolutely no evidence submitted by Petitioner which demonstrated that the committee members did not follow the specifications of the RFP. Likewise, there was a lack of evidence that the evaluation process established in the RFP was arbitrary or capricious. The two (2) proposers that received the highest number of points were recommended for the award of RFP Number 7112, CPA audit services. Petitioner's proposal was not evaluated as having either of the highest point totals for RFP Number 7112, CPA audit services and therefore did not receive an award of the contract. The FAMU Purchasing Director, Oscar Martinez, sent to each proposer by certified letter, return receipt, notification of the intended award of RFP Number 7112, CPA audit services, to the two proposers with the highest number of points. The FAMU Purchasing Director, Oscar Martinez, discussed the results of RFP Number 7112, CPA audit services, with Barbara Clark after he mailed the intended award notification to the proposers. A mathematical error in the calculation of points for one of the proposers was discovered and corrected. The error had no effect on the rankings of the proposers and was therefore an immaterial discrepancy in the award of the RFP. Petitioner utterly failed to establish that the intended award pursuant to RFP Number 7112, CPA audit services, was not in good faith and not the result of a fair, full and honest exercise of the agency's discretion in making such an award. Likewise Petitioner utterly failed to establish that Respondent acted arbitrarily or capriciously in its intended award of RFP Number 7112, CPA audit services. After a review of the evidence Petitioner's protest of the intended award of RFP Number 7112, CPA audit services, was clearly without merit and lacked factual or legal support and was therefore frivolous and improper. Indeed the barest attempt was made by Petitioner to prepare or pursue evidence for the hearing in this matter. Although Respondent consulted with Petitioner and provided Petitioner information regarding RFP Number 7112, CPA audit services, Petitioner persisted in pursuing its protest of the intended award of the RFP. Petitioner continued its protest of RFP Number 7112, CPA audit services, long after it was or should have been aware that it had no factual or legal grounds for such a protest causing Respondent's attorney to spend 13 hours in preparation for this case. However, Respondent did not submit an affidavit from another attorney who reviewed the file and number of hours spent by Respondent's attorney and attested to the reasonableness of the hours spent or the fee charged. Therefore, Respondent's motion for attorney's fees is denied.
Recommendation Based upon the findings of fact and the conclusions of law, it is, RECOMMENDED: That the protest be dismissed. DONE and ENTERED this 29th day of May, 1996, in Tallahassee, Leon County, Florida. DIANNE CLEAVINGER, 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 29th day of May, 1996. APPENDIX CASE NO. 96-1371 1. The facts contained in paragraphs 1-28 of Respondent's proposed findings of fact are adopted, in substance, in so far as material. COPIES FURNISHED: George W. Butler, Esquire Florida Agricultural and Mechanical University Office of the General Counsel 300 Lee Hall Tallahassee, Florida 32307 Barbara A. Clark Barbara A. Clark and Company 270 First Avenue South, Suite 101 St. Petersburg, Florida 33701 Frank T. Brogan, Commissioner Department of Education The Capitol Tallahassee, Florida 32399-0400 Michael Olenick, Esquire Department of Education The Capitol, Plaza Level 08 Tallahassee, Florida 32399-0400 Bishop Holifield, Esquire Florida Agricultural and Mechanical University 300 Lee Hall Tallahassee, Florida 32307-3100
The Issue The issues for determination are: (1) whether Respondent violated Section 112.313(6), Florida Statutes, by manipulating fiscal practices of the City of Hialeah Gardens in an effort to afford himself a tax benefit; (2) whether the Respondent violated Section 112.313(6), Florida Statutes, by removing from the Mayor's Office furniture that had been donated to the City of Hialeah Gardens; (3) whether the Respondent violated Section 112.313(7), Florida Statutes, by having a contractual or employment relationship with a company doing business with the City of Hialeah Gardens; and (4) if so, what penalty is appropriate.
Findings Of Fact George Hameeton (Respondent) was elected Mayor of the City of Hialeah Gardens (City or Hialeah Gardens) in March 1993 and served through March 9, 1995. As Mayor of Hialeah Gardens, Respondent was subject to the requirements of Part III, Chapter 112, Florida Statutes, the Code of Ethics for Public Officers and Employees (Code of Ethics). Gilda Oliveros, formerly known as Gilda Cabrera de Corzo, was Respondent's immediate predecessor as Mayor. Oliveros served as mayor of Hialeah Gardens from 1989 until 1993, when she was defeated by Respondent. In 1995, Oliveros ran against Respondent again and was elected Mayor on March 7, 1995. Oliveros was sworn into office on March 9, 1995. The City Charter of the City of Hialeah Gardens, Florida, provides for a strong mayor form of government. According to the City Charter, "The Mayor is the executive head of the city, with all the necessary powers and authority to enforce all laws, ordinances, and resolutions of the City Council." Consistent with his role as "executive head," the mayor supervises, hires and fires, and has total supervisory powers over all departments. In addition, the Mayor has a fiduciary duty to the City. Transactions Involving Mayor's Expense Reimbursement Respondent's salary in 1994 and 1995 was $20,000 per year. In Hialeah Gardens, salary increases for the mayor must be voted on in a referendum. On November 1, 1994, the Hialeah Gardens City Council (City Council) took up the matter of an expense allowance for Respondent. Respondent was in attendance, but neither August Torres, the City's accountant; Lourdes Diez, the City's bookkeeper; nor James Warmus, the City's auditor, were in attendance. During City Council's discussion, the Acting City Attorney stated that the expense allowance would be a discretionary, nonreporting expense account. With this type of expense account, the amount paid would be static, no matter what expenses were incurred. Moreover, with this type of account, no receipts or other proof of expenses would have to be submitted. On November 1, 1994, the City Council adopted Resolution No. 1453 which authorized Respondent to receive a monthly expense allowance of $1,000 and a monthly automobile allowance of $800.00 retroactive to the date of his taking office in March 1993. No supporting documentation was required to substantiate these expense allowances. Resolution No. 1453 also provided that the City Council members and Respondent had the option to either participate in the City's health plan or to receive a sum equivalent to the City's contribution to the health plan on their behalf. Resolution No. 1453 provided that the $1,000 expense reimbursement was a nonreporting reimbursement. However, the resolution did not indicate how the automobile allowance should be categorized. Resolution No. 1453 provided in relevant part the following: Section 1. The Mayor shall receive the sum of one thousand dollars a month as reimbursement for expenses such as late meals, dry cleaning, cellular telephone, and other related expenses resulting from his fulltime employment with the City in an administrative position. Said reimbursement shall be nonreporting. Section 2. The Mayor shall receive the sum of eight hundred dollars a month for an automobile allowance which includes reimbursement for insurance, maintenance, and gasoline. The expense allowances authorized by Resolution No. 1453 totaled $1,800 per month, an amount which exceeded the Respondent's salary by $1,600 per year. "Nonreporting" or "nonaccountable" expense reimbursements as described above are treated as wages by the Internal Revenue Service. As such, the employer is responsible for withholding social security and Medicare taxes, and also for making a matching contribution. Failure of an employer to do so can result in the employer's having to pay a penalty of up to 100 percent of the amount which should have been withheld. After Resolution No. 1453 was adopted, Respondent told Diez to calculate the amount he and City Council members should receive pursuant to the terms of the Resolution No. 1453. Diez was not aware the insurance contributions and expense reimbursements were subject to taxation; neither was she familiar with the distinction between accountable or reporting expense and nonaccountable or nonreporting expenses. Therefore, she calculated the gross amount to which Respondent and City Council members were entitled. She did not withhold taxes or social security or make the employer's contribution as to any of the payments including those made to the City Council members. Respondent was Diez' immediate supervisor and usually checked her work. Consistent with this practice, Respondent, too, calculated the amounts owed to him and the City Council members and double-checked Diez' figures. Once the calculations were completed, Respondent instructed Diez to cut his expense reimbursement check and the health plan contribution checks for him and eligible City council members. In response to Diez' inquiry about where the money should come from, Respondent told her that the payments should come out of the City's general fund. Diez then called Torres to request the appropriate account number for the "expense" reimbursement. Because Diez did not mention that the expense reimbursement or any part thereof was nonreporting, Torres gave Diez the account number that allowed the funds to be paid as an operating expense. At the time Diez contacted Torres to get the account number, Torres had not seen a copy of Resolution No. 1453 and was unaware of its contents. The nonaccountable expense reimbursement check should have been issued from the City's payroll account. The payroll account or fund is set up with CompuPay, an outside third-party administrator, which is the City's payroll servicing company. Checks cut from the City's payroll fund or account, unlike those cut from the City's general operating fund, have payroll taxes and the employee's contribution automatically calculated and withheld by CompuPay. On the other hand, payments coming from the City's general fund are not normally subject to withholding. While it is possible to manually do the calculations on payments made from the City's general fund, because Diez was not aware the money was subject to taxes, it never occurred to her to do so. The transaction involving Respondent's expense reimbursement was a non-routine transaction and one that Diez had not previously seen or processed. On December 23, 1994, Respondent was issued a check for $43,685.93, which represented the total retroactive payment for the car allowance, the expense allowance, and the health plan contribution. No social security or Medicare taxes were withheld from this check and no employer's contribution was made. Respondent deposited the $43,685.93 check into his bank account on December 23, 1994, the day it was issued. Respondent's personal bank account was at the same bank as the City's account and the $43,685.93 was posted to Respondent's account the day the check was deposited. Shortly after the $43,685.93 check was issued to Respondent, Torres became aware that the check was for a nonaccountable or nonreporting expense reimbursement and that no social security or Medicare taxes had been withheld. While it is unclear who initiated the call, within one week after Respondent's $43,685.93 check was deposited into his bank account, Respondent and Torres had a telephone conversation regarding the check. Torres explained to Respondent that the expense reimbursement check "was of a nonreporting nature" and, therefore, payroll taxes had to be withheld. Respondent then told Torres that the check had already been deposited into Respondent's bank account. During the aforementioned telephone conversation, Respondent expressed concern about the tax consequences of receiving such a large sum at the end of 1994. Because Respondent believed the lump sum payment of $43,685.93 would adversely affect his income tax obligation for 1994, he asked Torres if he could defer taking the check until 1995. In response to Respondent's inquiry concerning whether he could defer taking the check until 1995, Torres told Respondent that taxes must be paid for the year in which the money is received. Nevertheless, Torres advised Respondent that if he redeposited funds to correct an error and if the reissued check did not get to him until 1995, he arguably would not have "received" the money until 1995. Based on his familiarity with the City's payroll processing schedule, Torres knew that the subject expense reimbursement check would not be reissued until 1995. Respondent and Torres never discussed whether it was permissible to make a deferred compensation contribution from the expense reimbursement funds. On December 30, 1994, Respondent contacted the bank and had the December 23, 1994, deposit of the $43,685.93 reversed. As a result of this action, the funds were deducted from Respondent's account and redeposited in the City's account. Respondent notified Diez that the $43,685.93 had been returned to the City's account and asked that a new expense reimbursement check be issued, minus a $9,624.00 contribution to Respondent's deferred compensation plan. However, Respondent did not tell Diez to withhold any social security or Medicare taxes or to make any employer's contributions. Diez took the funds from the City's general fund as she had done for the check issued December 23, 1994. It did not occur to Diez to withhold taxes from Respondent's reissued expense reimbursement check and she did not. When Respondent directed Diez to cut and reissue the expense reimbursement check, he knew that social security and Medicare taxes were to be withheld from the check. Nevertheless, he deliberately did not tell Diez to withhold these taxes. During the aforementioned telephone conversation, Torres explained to Respondent that the only way the expense reimbursement could be attributable to Respondent as income to Respondent in 1995 instead of 1994 was if the December 23, 1994, deposit were reversed to correct a "mistake" and the check was then reissued in 1995. The "mistake" to which Torres referred was the error in not withholding payroll taxes from the $43,685.93 reimbursement check. As a result of Torres' explanation, Respondent clearly understood that social security and Medicare taxes should have been withheld from the check. Moreover, Respondent understood that reversal of the December 23, 1994, deposit could be done only to correct the mistake involving withholding of social security and Medicare taxes. A new check was issued to Respondent on January 10, 1995. The original $43.685.93 had been reduced by $9,624.00, the deferred compensation contribution, and the check issued to Respondent was for $34,061.93. No social security or Medicare taxes were withheld and no employer's contribution was made. When Mayor Oliveros was elected and took office in March 1995, she asked the City auditor to conduct a complete audit. Ultimately, the auditor instead conducted an "agreed-upon procedure" which addressed Mayor's Oliveros' concerns without the scope and expense of a complete audit. The procedure covered the period October 1, 1994, to March 9, 1995, and the auditor's findings were summarized in a report dated May 1995. The agreed-upon procedure identified the handling of Respondent's reimbursement check as problematic. Specifically, the auditor discovered that no social security, or Medicare, or other taxes had been withheld from either of Respondent's expense reimbursement checks. Furthermore, the auditor found that the employer's contribution was never made by the City with regard to Respondent's expense reimbursement. In an effort to protect the City from exposure to IRS penalties, Torres suggested that the City pay Respondent's share of the taxes, as well as its own employer's contribution. To calculate the amount of taxes due and for purposes of calculating Respondent's salary for his 1995 W-2, Torres engaged in a calculation known as "grossing up." "Grossing up" is used when an employee mistakenly or otherwise improperly receives as net an amount he should have received as gross. Respondent should have received $43,685.93 gross, had taxes withheld, and then taken home some lesser "net" amount. Instead he took home $43,685.93. To "gross up," one would have to calculate what gross income would have resulted in a net income of $43,685.93. Respondent's "grossed up" income was $47,304.74. The City paid the Respondent's share and employer's matching contribution. In fact, due to an error in calculating the amounts, it overpaid taxes that should have been deducted from Respondent's check. Based on Respondent's "grossed up" income, the correct amount of social security and Medicare taxes was $3,618.81. As of the date of the hearing, Respondent had not reimbursed the City for his share of the social security and Medicare taxes. Removal and Replacement of Furniture in Mayor's Office In April 1994, during Respondent's term as Mayor, a sofa and loveseat were donated to the City. Respondent accepted the donated sofa and loveseat to replace the old stain-covered furniture in the Mayor's office. Respondent directed City workers to move the old furniture from the Mayor's office to the City's storage warehouse. Between March 7, 1995, the day Mayor Oliveros was elected, and March 9, 1995, the day she took the oath of office, Respondent had City employees remove the donated sofa and loveseat from the Mayor's Office and take it to the City's storage warehouse. Respondent then had the City workers to retrieve the old furniture from the City's storage warehouse and put it in the Mayor's office. Respondent returned the old furniture to the Mayor's office in retaliation against Mayor Oliveros. Respondent admitted that his action was "childish" and was done because he wanted to "gig" Mayor Oliveros, that is to get back at her, for leaving the old stain-covered furniture in the Mayor's office when he defeated her in 1993. Respondent never took personal possession of the "donated" furniture. Since taking office, Mayor Oliveros has been unsuccessful in her efforts to locate the "donated" furniture. Mayor's Relationship With Company Doing Business work for City In August 1992, Hurricane Andrew struck South Florida. As a result of this hurricane, Hialeah Gardens sustained some damage. However, the damage was not extensive and consisted primarily of fallen trees and debris from damage to some smaller structures. Oliveros was Mayor of Hialeah Gardens during Hurricane Andrew. During the period after Hurricane Andrew, at Mayor Oliveros' direction, City maintenance personnel removed debris that may have created a dangerous situation caused by the storm. Immediately after Hurricane Andrew, Mayor Oliveros had fallen debris removed from various sites in Hialeah Gardens. Among the sites where debris had fallen was Bernie Wilson Park. A gazebo in the park had been damaged by the hurricane and debris from that structure was picked up by a City maintenance crew. After the storm, a portion of the gazebo including its roof remained standing. However, the remaining portion of the gazebo was not structurally sound. Mayor Oliveros applied for funds from the Federal Emergency Management Agency (FEMA) before leaving office. FEMA funds were requested to cover overtime payments for the trash removal and a significant amount of the funds were specifically earmarked for removal of debris. Mayor Oliveros' understanding of the expenditures of FEMA funds was that bids were not necessary in emergency cleanup situations. According to Mayor Oliveros, because of the emergency situation, the County authorized the City to use contractors who had been approved by the County. However, once the debris was cleaned up and the emergency situation no longer existed, any further services were to be purchased in accordance with the City's purchasing procedures. A few weeks after Respondent was elected, he received complaints that Bernie Wilson Park was in disrepair. In response to these complaints, Respondent went out to the park to inspect the damage. Based on his assessment, in March 1993, Respondent had a fence built around the park and had the gate padlocked. Respondent also had signs posted indicating that the park was closed. In September 1993, Respondent hired Perfect Building, Inc., to repair the gazebo in Bernie Wilson Park that had been damaged as a result of Hurricane Andrew. Respondent took this action more than one year after Hurricane Andrew struck South Florida and approximately six months after he first inspected and assessed the damage at Bernie Wilson Park. The City paid Perfect Builders $13,000 for this work. Respondent's justification for using Perfect Builders was that repair or reconstruction of the gazebo was necessary because the damaged gazebo constituted an emergency situation. According to Respondent the cost of the project could be covered by FEMA only if the project were completed by a certain date. In an effort to meet this deadline, Respondent used Perfect Builders only after other contractors he telephoned indicated they were too busy to work on the project. The gazebo at Bernie Wilson Park did not constitute an emergency situation that would preclude Respondent's adhering to the City's prescribed purchasing procedures. In December 1993, Respondent again hired Perfect Builders to renovate the dispatch office in the Police Department at a cost of $1,900. Because the cost of this project did not exceed $4,000.00, Respondent was not required to follow bid requirements specified in the City's purchasing procedures. At the times Respondent hired Perfect Builders to perform work for the City, he had a contractual relationship with the company to serve as its qualifier. As qualifier for Perfect Builders, Respondent contractor's license was used to pull permits for the firm. For serving as its qualifier, Respondent was paid a monthly fee of $350 by Perfect Builders. Respondent had a contractual relationship with Perfect Builders which violated Section 112.313(7), Florida Statutes.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is hereby, RECOMMENDED that a final order and public report be entered finding that Respondent, George Hameetman, violated Sections 112.313(6) and 112.313(7)(a), Florida Statutes; imposing a civil penalty of $3,000.00 and restitution of $3,618.81; and issuing a public censure and reprimand. DONE AND ENTERED this 20th day of January, 2000, in Tallahassee, Leon County, Florida. CAROLYN S. HOLIFIELD 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 20th day of January, 2000. COPIES FURNISHED: Virlindia Doss, Esquire Office of the Attorney General The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050 Charles Toledo, Esquire 8201 Peters Road, Suite 400 Fort Lauderdale, Florida 33324 Sheri L. Gerety, Complaint Coordinator Florida Commission on Ethics Post Office Drawer 15709 Tallahassee, Florida 32317-5709 Phil Claypool, General Counsel Florida Commission on Ethics Post Office Drawer 15709 Tallahassee, Florida 32317-5709
Findings Of Fact The Respondent, Leo Y. Lewis, from 1969 to date had been employed by the State of Florida as Internal Audit Coordinator for the Department of Health and Rehabilitative Services. Respondent applied for and was issued a reciprocal certificate by the State Board of Accountancy on January 28, 1972. The reciprocal certificate was issued under the provisions of Florida Statutes, Section 473.201. 473.201 Certificates granted to holders from other states Upon application, the board shall issue a reciprocal certificate to the holder of a valid, unrevoked certificate issued by, or under the authority of, another state or political subdivision of the United States only if: The original certificate was secured as the result of a written examination which in the judgment of the board was the equivalent of the examination given by the board at the time the applicant passed such written examination; provided, however, that if such written exami- nation did not include the subject of ethics the application shall not be denied for that reason. In any event, the board shall require all applicants to take and pass the same current open book examination in ethics given to applicants for the written examination in the state before issuance of a reciprocal certificate; The applicant meets all the requirements in effect, at the time of the application, for applicants to take the Florida examination; The applicant is a resident of and domiciled in the state; The applicant intends to enter into the full-time, year-round practice of public accounting in the state; and The board is otherwise fully satisifed as to the moral and technical fitness of applicant." The Board now seeks to revoke the reciprocal certificate issued to Respondent for failure to comply with Section 473.201(2), Florida Statutes, "(2) Failure of the holder of a certificate issued under this section to be domiciled in and practice public accounting on a substantially full-time basis in the state for a continuous period of three years immediately after issuance of much certificate shall be prima facie evidence of the lack of the requisite intent and sufficient grounds for revocation of the reciprocal certificate issued by the board.", contending that Respondent has not been practicing public accounting for the three years immediately subsequent to the issuance of his certificate. There was no contention by the Board in its original revocation procedures that the Respondent has failed to meet all of the requirements of Section 473.201(1) and (2), Florida Statute, with the exception of the contention that Respondent has not practiced "public accountancy". At the hearing and in the Memorandum of Law there is an argument by the Petitioner that the Respondent did not actually intend to practice public accounting at the time that he received a reciprocal certificate. There is no showing that any fraud was involved and the grounds upon which the motion for revocation of Respondent's license is on the ground that Mr. Lewis did not engage in the practice of public accounting on substantially full-time basis for a period of three years after issuance of his reciprocal certificate. His intent at the time he received his reciprocal certificate is not necessary to the determination of the issue at hand. Petitioner contends: That Respondent is not in the practice of public accounting; That Section 473.08(2)(c) applies only to the Auditor General and tlie Chief Auditor of the Public Service Commission and that Section 473.08(2)(c), infra, is an exception to the general requirement that persons who have taken and passed an examination and become CPA's must have one year of public accounting experience or equivalent education in order to obtain their CPA certificates; and That the exception is not a recognition that either the Auditor General or the Chief Auditor of the Public Service Cotmission is engaged in the practice of public accounting. Respondent contends: That he is in fact a Florida practitioner engaged in the practice of public accounting; That the legislature and the Board have recognized that works similar to that which the Respondent performs constitutes the practice of public accounting. Said statute as passed by the legislature is Section 473.08, Florida Statutes. "473.08 Qualifications of applicant for examination; certificates to successful examinees; standards A person who qualifies to take such examination pursuant to provisions of subsection (1) and who takes and passes such examination shall receive a certificate as a certified public accountant issued by the board and shall be permitted to practice public accounting in this state if he:... Shall have completed one year of employment in the office of a Florida practitioner or an out-of-state practitioner or shall have successfully completed an additional one year accounting course at an accredited college or university. However: Any person employed as an accountant in the accounting department of the Florida public service commission who is qualified to take an examination for the purpose of determining whether or not such person shall be permitted to practice in this state as a certified public accountant, and who takes and passes such examination, shall be entitled to receive a certificate under the provisions of authorizing practice in this state as a certified public accountant upon completion of one year of accounting work for said commission under the supervision and direction of a certified public accountant serving as director of commission's accounting department. Any person employed as an accountant or post auditor on the staff of the auditor general who is qualified to take an examination for the purpose of determining whether or not such person shall be permitted to practice in this state as a certified public accountant, and who takes and passes such examination, shall be entitled to receive a certificate, under the provisions of this authorizing such person to practice in this state as a certified public accountant upon the completion of one year of experience as an accountant or post auditor under the supervision and direction of a certified public accountant serving as auditor general. Proof of compliance with the provisions of this introductory paragraph of this subsection shall be established in such form as is prescribed by the board;. The Florida Statutes do not clearly define the term "public accounting", but the definitions in Section 473.011 are helpful. "473.011 Definitions of terms used in chapter whenever the terms `certified public or public accountant are used in this chapter, except as used in subsection (3), they shall be deemed and construed to mean a person holding a certificate to practice as such, issued by the state under this chapter, or any law of the state heretofore in force and effect. [(3) not applicable] whenever the term `Florida practitioner' is used in this chapter it shall be deemed and construed to mean a certified public accountant or public accountant, as defined in subsection (1), engaged in the practice of public accounting in Florida, whether as an individual, a partner or employee of a partner- ship, or a stockholder, officer, or employee of a professional corporation. It shall also be deemed and construed to mean a partnership or professional corporation of Florida practitioners. (5) Thenever the term `public accounting is used in this chapter, it shall be deemed and construed to mean: All services offered to or performed for the public by a Florida practitioner or an out of state practitioner involving the use of accounting skills, specifically including, but not limited to, management services, and All services offered to or performed for the public by any other person, acting as an individual, as a partner or employee of a partnership, as a stockholder, officer or employee of a professional corporation, or as an officer or employee of any other corporation, involving the use of accounting skills, except as follows: (not applicable) Under the definition section of Rule 21A-1.10 of the Florida Administrative Code, practice of or practicing public accounting is defined as: "Practice of, or practicing public accounting. 'Practice of, or practicing public accounting' shall be deemed and construed to mean offering to perform, performing, or holding oneself out as being qualified to perform, those services described in Section 473.011(5), F.S." [supra] as: Rule 21A-1.11 of the Florida Administrative Code defines practitioner "'Practitioner' shall be defined as either a Florida practitioner (as defined in Section 473.011(2), F.S.), or an out of-state practitioner (as defined in Section 473.011(3), F.S.), engaged in the practice of public accounting in Florida under a special permit." Black's Law Dictionary, Revised Fourth Edition, defines public as: "PUBLIC, adj. Pertaining to a state, nation, or community; proceeding from, relating to, or affecting the whole body of people or an entire community. Open to all; notorious. Common to all or many; general; open to common use. Morgan v. Cree, 46 Vt. 786, 14 Am.Rep. 640; Crane v. Waters, C.C.Mass., 10 F. 621. Belonging to the people at large; relating to or affecting the whole people of a state, nation, or community; not limited or restricted to any particular class of the community. People v. Powell, 280 Mich. 699, 274 N.W. 372, 373, 111 A.L.R. 721." Black's Law Dictionary, Revised Fourth Edition, defines accounting as: "ACCOUNTING. An act or system of making up or settling accounts; a statement of account, or a debit and credit in financial transactions. Kansas City v. Burns, 137 Kan. 905, 22 P.2d 444." The Hearing Officer finds: That the work the Respondent does in his position as Internal Audit Coordinator for the Department of Health and Rehabilitative Services involves the use of accounting skills and includes management services and that he is a Florida practitioner as defined in Chapter 473, Florida Statutes, and in Chapter 21A-I, Florida Administrative Code. Petitioner contends that the Respondent is a state employee and therefore cannot be independent of his client However, the evidence shows that much of the work performed by Respondent and his staff are for agencies and organizations outside the Department of Health and Rehabilitative Services which employs Respondent. There is no employee-employer relationship between Respondent and these organizations. Further, no showing has been made that the employer, the Department of Health and Rehabilitative Services, attempts to or has ever directed the work of Respondent or in any way exercised control over the audits of Respondent. Respondent is in the practice of public accounting in his capacity as Internal Audit Coordinator.
Recommendation Dismiss the petition of the State Board of Accountancy. DONE and ORDERED this 24th day of May, 1976. DELPHENE C. STRICKLAND Hearing Officer Division of Administrative Hearings The Carlton Building, Room 530 Tallahassee, Florida 32304 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 24th day of May, 1976.
The Issue The issue in this case is whether Petitioner's application for self-insurance for workers' compensation should be approved.
Findings Of Fact Based upon the observation of the witnesses' testimony and the documentary evidence received into evidence, the following relevant and material facts that follow are determined. The Florida Self-Insurers Guaranty Association, Inc. (Association), is established by Section 440.385, Florida Statutes (2003), and is an organization that provides a guarantee for workers' compensation benefits for companies that are self-insured. The Association pays injured workers their benefits, if the self-insurer becomes insolvent. An insolvency fund is established and managed by the Association, which funds the workers' compensation benefits for insolvent members. The insolvency fund is funded by assessments from members of the Association. Pursuant to Florida Administrative Code Rule 69L-5.102 (formerly Florida Administrative Code Rule 4L-5.102), in order for an employer to qualify for self-insurance under the relevant provisions of law, the applicant must meet the following requirements: (1) have and maintain a minimum net worth of $1,000,000; (2) have at least three years of financial statements or summaries; (3) if the name of the business has changed in the last three years, provide a copy of the Amended Articles of Incorporation; and (4) have the financial strength to ensure the payment of current and estimated future compensation claims when due, as determined through review of their financial statement or summary by the Department. Of the general requirements noted in paragraph 3, above, the only issue in this proceeding regards N.C.M.'s financial strength. An applicant for self-insurance is required to submit in its application audited financial statements for its three most recent years. All financial statements, audits, and other financial information must be prepared in accordance with Generally Accepted Accounting Principles. The Association is required to review each application and the financial documents which are submitted as part of that application to determine if the applicant has the financial strength to ensure the timely payment of all current and future workers' compensation claims. After the Association reviews the application, it makes a recommendation to the Department as to whether the application for self-insurance should be approved or denied. The Department is required by law to accept the Association's recommendations unless it finds that the recommendations are clearly and convincingly erroneous. N.C.M. submitted its application for self-insurance on or about May 6, 2003, and included in its application audited financial statements for its three most recent fiscal years. The statement contained an unqualified opinion from N.C.M.'s accountant. N.C.M. provided information in its application regarding the number of employees, the worker classifications of these employees, and a payroll classification rating that has been established by the National Council on Compensation Insurance. The application made it clear that the Department could use this information to calculate a manual annual rate premium for each worker classification to determine an overall workers' compensation premium based on statewide manual rates. The Association calculated a standard premium of $507,088.75 for N.C.M., after giving credit for its experience modification of .71. N.C.M. confirmed in its application that it was a corporation duly organized and existing in the State of Florida. N.C.M. also supplied information on its corporate officers and copies of its Articles of Incorporation confirming its corporate existence. In its application and at the hearing, N.C.M. agreed that, if accepted for membership, it will maintain security deposits and excess insurance as required by the Department's administrative rules. Upon receipt of N.C.M.'s application, the Association thoroughly reviewed the application and financial statements for the three most recent years. The Association examined the balance sheets to analyze the Company's assets, liabilities, working capital, and equity structure. Additionally, the Association examined N.C.M.'s income statements to analyze the Company's revenues, profits and/or losses, and expenses. The Company's cash flows were examined. The Association calculated various financial ratios for N.C.M. in order to examine, among other things, the company's asset structure, liquidity, total debt to equity structure, and net income or loss as it relates to the company's equity. The analysis and review performed by the Association, as described in paragraph 12, is the same type of analysis the Association performs on every applicant for self-insurance. Because applicants for self-insurance come from various types of industries, it is not useful to establish specific threshold values for various financial ratios in determining financial strength. However, the Association reviews and analyzes the financial statements of each applicant to determine the financial condition of that applicant. The Association's review of N.C.M.'s audited financial statements revealed that the Company had a net loss of $60,937 in the year ending December 31, 2002. The Company also had a loss from operations in its most recent year in the amount of $74,897, or negative .62 of its revenues. This was a significant factor to the Association because it revealed N.C.M.'s lack of profitability for its most recent year. Petitioner's tax return of 2002 showed a profit for the Company. However, the tax returns are not meant to reflect the economic profit of a business and are not prepared in accordance with Generally Accepted Accounting Principles. Rather, the audited financial statements provide more accurate information about the Company’s financial health. N.C.M.'s 2002 net worth was $1,218,895, which exceeded the $1,000,000 minimum net worth requirement established in the applicable rule cited in paragraph 3 above. However, the Association was concerned about N.C.M.'s net worth when taken as a percentage of its workers' compensation premiums, calculated by using the payroll classification information in N.C.M.'s application. The analysis of N.C.M.'s net worth as a percentage of workers' compensation premiums is important because workers' compensation claims can accrue each year and be paid out over a long period of time by the self-insurer. A company with equity that is relatively low in comparison to its workers' compensation exposure might, over time, owe its injured workers as much as, or more than, the equity in the company. This would increase the risk for the injured worker. Upon completing its financial analysis, the Association recommended that N.C.M.'s application for self- insurance be denied. Brian Gee, the executive director of the Association, conveyed the recommendation of denial to the Department in two letters, one dated May 12, 2003, and the other one dated June 19, 2003. The letters were virtually identical, except that the June 19, 2003, letter referred to the specific statute at issue and statutory language that N.C.M. did not have the financial strength necessary to ensure timely payment of all current and future claims. Attached to both the May 12, 2003, and June 19, 2003, letters was a copy of the Association's summary of N.C.M.'s audited financial statements for the years ended December 31, 2002, 2001, and 2000. Based on the review of the financial data, the Association made the following four findings, which it listed in both letters: The Company received unqualified audit opinions on its December 31, 2002, 2001, and 2000 financial statements from Rust & Christopher, P.A. Liquidity - The current ratio has decreased from 1.34 at December 31, 2000 to 1.13 at December 31, 2002. Capital Structure - The total liabilities to book equity ratio has increased since December 31, 2000 from 1.39 to 1.99 at December 31, 2002. Results of Operations - The Company's gross profit margin has negative 0.62 for the year ended December 31, 2002. The Company reported a net loss of $60,937 for the year ended December 31, 2002. Although the above-referenced letters listed findings relative to the Company's liquidity and capital structure, Mr. Gee did not believe that those findings were of "major significance." The Association's letters and accompanying financial data were submitted to the Department for a final decision to be made by the Department. The Department received and reviewed the Association's letters of recommendation and the accompanying documentation. Based on its review of the letter, the Department noted that the Association appeared to have concerns about the Company's liquidity, liabilities, and profitability. However, there was nothing in the letters which indicated that the Association did not consider the findings related to the Company's liquidity and liabilities (capital structure) to be of major significance. The Department sent N.C.M.'s application, which included the financial statements, to an outside CPA firm for review. The outside CPA performed a financial analysis, calculated various financial ratios on N.C.M., and provided a report to the Department. The outside CPA correctly noted in her report that N.C.M.'s gross profit margin for the year ended December 31, 2002, was 15.4 percent. In Finding No. 4 of its letters of recommendation to the Department, the Association had mistakenly mislabeled the Company's net profit margin as the gross profit margin. As a result of that mislabeling in the letters, the finding incorrectly stated that N.C.M.'s gross profit margin was a negative 0.62 percent for the year ending December 31, 2002. In fact, it was the Company's net profit margin for the year ending December 31, 2001, that was negative 0.62 percent. Notwithstanding the incorrect mislabeling of this item in the letters, the financial summary attached to the letters accurately reflected the Company's gross profits and revenue. The financial statement of N.C.M. also reflected that for the year ending 2002, the Company had a gross profit of $1,877,076, and for that same period had a loss from operations of $74,897, or negative .62 percent. The outside CPA also compared various financial information on N.C.M. to an industry average and concluded that "some of the Company's ratios are below the industry ratios." In making these comparisons, the outside CPA researched two companies she believed were in a business similar to N.C.M. The research on these companies provided an industry average for various financial information on companies in the same industry as the two reference companies. In this case, the two reference companies were primarily producers or sellers of concrete products, as opposed to construction companies like N.C.M. Accordingly, the industry ratios contained in the outside CPA's report may be different than the construction industry and not an appropriate basis with which to compare N.C.M. The report of the outside CPA stated that N.C.M. pays approximately $1,000,000 a year in workers' compensation insurance. That figure is higher than the premiums calculated by the Association using statewide manual rates. Instead of using those rates, the outside CPA based her figure on a newspaper article, which stated that Mr. DelDuca, president of N.C.M., pays $1,000,000 for workers' compensation insurance. In her report, the outside CPA cited N.C.M.'s lack of profitability for the year ending 2002 and correctly noted that for that year, the Company reported a net loss of $60,937. The outside CPA notified the Department that she concurred with the Association's recommendation to deny N.C.M.'s application to become self-insured because the Company had not demonstrated it has the financial strength to ensure timely payment of workers' compensation claims. The Department reviewed the outside CPA's report and noted the concerns about the company's debt equity and lack of profitability. Based on the outside CPA's report, the Department correctly determined that the report contained no information that the Association's recommendation was clearly and convincingly erroneous. As a result of its determination that the Association's recommendation to deny N.C.M.'s application for self-insurance was not clearly or convincingly erroneous, the Department denied the application.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department issue a final order denying N.C.M. of Collier County, Inc.'s application for self-insurance. DONE AND ENTERED this 26th day of February, 2004, in Tallahassee, Leon County, Florida. S CAROLYN S. HOLIFIELD 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 26th day of February, 2004. COPIES FURNISHED: John M. Alford, Esquire 542 East Park Avenue Tallahassee, Florida 32301 Cynthia A. Shaw, Esquire Department of Financial Services 200 East Gaines Street Tallahassee, Florida 32399-4229 Mark B. Cohn, Esquire McCarthy, Lebit, Crystal & Liffman Co., L.P.A. 1800 Midland Building 101 West Prospect Avenue Cleveland, Ohio 44115-1088 Honorable Tom Gallagher Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Mark Casteel, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
The Issue The central issue in this case is whether the Petitioner owes sales, use, intangible taxes, penalties and interest; and, if so, the amount.
Findings Of Fact Petitioner, Allor, Inc., performs accounting services through the individual, Allan Steinberg. Subsequent to an audit of one of Mr. Steinberg's clients, the Department directed Curt Horton, a tax auditor, to perform an audit of Allor, Inc. In furtherance of the audit, Mr. Horton requested records necessary to complete the review. He discussed the audit with Mr. Steinberg and advised him of all records needed. When Mr. Steinberg produced no records the audit was estimated based on the federal tax return. Later, Mr. Horton adjusted the estimate based on actual deposits for sales. For purchases, a one year period was selected and, again, the federal tax return was reviewed. The audit was performed in this manner as the records offered by the taxpayer were insufficient to perform the audit in the more conventional format. Mr. Horton made numerous requests to the taxpayer for documentation. Mr. Horton extended the time to provide records so that the taxpayer had additional opportunity to document the audit. Credit was given for invoices that the taxpayer was able to produce and, for the remainder of the period, the amounts were averaged to determine the tax amount owed. The sales and use tax audit covered the period December 1, 1985, through November 30, 1990. The amount of the tax owed was calculated at $4,933.35. The amount of the penalty was $1,099.92. The interest owed through October 11, 1991, was $2,026.61. Based upon the foregoing, the total assessment for this audit was $8,059.88 with interest continuing to accrue at the rate of $1.62 per day. With regard to the intangible tax assessment for the period 1984 through 1991, Mr. Horton computed the accounts receivable and estimated that $2,000.00 per year would be the amount for this category. Since this taxpayer filed no intangible tax returns at all, the penalty owed was high relative to the tax amount owed. Based upon the foregoing computation, the intangible tax owed calculated to be $33.33 whereas the penalty for not filing was $2,763.55. The interest through September 20, 1991, was $14.76. Based upon the foregoing, the total assessment for the intangible tax owed was $2,811.64 with interest continuing to accrue at the rate of $.01 per day. Following the audit, the results of which were made available to the taxpayer on or about March 20, 1992, the Department issued a notice of decision on April 23, 1993, which responded to a protest letter filed by Petitioner on May 15, 1992. In substance, that notice sustained the results of the audit and noted that the taxpayer had not presented any additional documentation to support a conclusion to the contrary. Thereafter, the Petitioner filed another letter of protest and the Department issued a notice of reconsideration on February 7, 1994. That notice provided that upon further review, the proposed sustained amount for the sales and use tax was $6,945.63 and the amount owed for the intangible audit assessment was $48.09. This latter amount was reduced because the Department proposed to compromise the penalty in full. All of the acts of the auditor in this case were in keeping with the standard audit practices of the Department. None of the documents marked for identification as Petitioner's composite 2, which have not been received into evidence, were made available to the Department at any time during the audit. The Department afforded the Petitioner approximately three years after the audit to produce relevant documentation.
Recommendation Based on the foregoing, it is, hereby, RECOMMENDED: That the Department of Revenue enter a final order sustaining the proposed sustained amounts set forth in the notice of reconsideration dated February 7, 1994. DONE AND RECOMMENDED this 28th day of September, 1995, in Tallahassee, Leon County, Florida. JOYOUS D. PARRISH 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 28th day of September, 1995. APPENDIX TO RECOMMENDED ORDER, CASE NO. 94-1892 Rulings on the proposed findings of fact submitted by the Petitioner: 1. None submitted. Rulings on the proposed findings of fact submitted by the Respondent: 1. Paragraphs 1 through 11 are accepted. COPIES FURNISHED: Allan D. Steinberg Tax Accountant Allor, Inc. Suite 14-B 4953 North University Drive Lauderhill, Florida 33351 Mark T. Aliff Assistant Attorney General Office of the Attorney General The Capitol-Tax Section Tallahassee, Florida 32399-1050 Linda Lettera General Counsel Department of Revenue 204 Carlton Building Tallahassee, Florida 32399-0100 Larry Fuchs Executive Director 104 Carlton Building Tallahassee, Florida 32399-0100
Findings Of Fact Respondent is the state agency charged with the duty of regulating general contractors in the State of Florida. An applicant for certification as a plumbing contractor must pass the examination administered by Respondent as a prerequisite to certification. Section 489.113(1), Florida Statutes. Petitioner sat for Part I of the plumbing contractor's examination on February 19, 1990. Petitioner did not pass Part I of the examination. Following notification that he had not passed Part I of the examination, Petitioner filed a timely challenge to Question 7. Petitioner scored the highest score one can score on Part I without passing that part of the examination. Had Petitioner been awarded any credit for his answer to Question 7 or if question 7 were thrown out, he would have passed Part I of the examination. Question 7 is an objective, multiple choice question. The candidate is required to choose the correct response from among four possible answers. Prior to taking the examination, Petitioner was told by Respondent that certain approved reference materials were used in formulating the examination questions and that certain reference materials could be used during the examination. Among those reference materials was Circular E prepared by the Internal Revenue Service. Question 7 provided certain information in the stem of the question and offered four different dates as possible answers to the question. Based on the factual information stated in the stem of the question, the candidate was to determine the latest date a certain tax form must be filed. The information contained in the stem of the question and the information available to all candidates in IRS Circular E were sufficient to enable the candidate to correctly answer the problem. The evidence does not support Petitioner's contention that this question is unfairly deceptive or otherwise defective. Respondent gave Petitioner no credit for his answer to Question 7 because Petitioner gave the wrong answer to the question.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is: RECOMMENDED that Respondent, State of Florida, Department of Professional Regulation, enter a final order which denies Petitioner's challenge to Question It is further recommended that Respondent's Exhibit 1 be sealed. DONE AND ENTERED in Tallahassee, Leon County, Florida, this 20th day of February, 1991. CLAUDE B. ARRINGTON Hearing Officer The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 20th day of February, 1991. APPENDIX TO RECOMMENDED ORDER, IN CASE NO. 90-4407 The following rulings are made on the proposed findings of fact submitted on behalf of Respondent. The proposed findings of fact in paragraph 1 are rejected as being unnecessary to the findings made and to the conclusions reached. The proposed findings of fact in paragraphs 2-10 are rejected as being subordinate to the findings made and because Section 455.230, Florida Statutes, discourage such detailed findings about a confidential examination question. Copies furnished: Thomas Tighe 8581 N.W. 3rd Street Pembroke Pines, Florida 33024 Roberta L. Fenner, Esquire Department of Professional Regulation 1940 North Monroe Street, Suite 60 Tallahassee, Florida 32399-0792 Jack McRay, General Counsel Department of Professional Regulation 1940 North Monroe Street, Suite 60 Tallahassee, Florida 32399-0792 Fred Seely, Executive Director Department of Professional Regulation Construction Industry Licensing Board Post Office Box 2 Jacksonville, Florida 32202
The Issue The issue in this case is whether SNS Lakeland, Inc. (Petitioner), collected and remitted the correct amount of sales and use tax on its operations for the audit period.
Findings Of Fact DOR is the state agency charged with the responsibility of administering and enforcing the tax laws of the state of Florida. In conjunction with that duty, DOR performs audits of business entities conducting sales and use transactions. At all times material to the issue of this case, Petitioner conducted business as a convenience store located at 811 East Palmetto Street, Lakeland, Florida. Petitioner was obligated to collect and remit sales and use tax in connection with the activities of its business enterprise. Petitioner’s Federal Identification Number is 26-0412370. Petitioner is authorized to conduct business within the state and its certificate of registration number is 63-8013863272-3. In order to properly perform its audit responsibilities, DOR requires that businesses maintain and present business records to support the collection of sales and use taxes. In this case, DOR notified Petitioner that it intended to audit the business operations for the audit period, June 1, 2007, through September 30, 2009. After the appropriate pre-audit notice and exchange of information, DOR examined Petitioner’s financial records. Since Petitioner did not maintain register tapes (that would track sales information most accurately), the Department examined all records that were available: financial statements, federal and state tax returns, purchase invoices/receipts, bank records, and register tapes that were available from outside the audit period. Petitioner’s reported tax payments with the amounts and types of taxes that it remitted should have been supported by the records it maintained. Theoretically, the sums remitted to the Department should match the records of the business entity. In this case, the amount remitted by Petitioner could not be reconciled with the business records maintained by the business entity. As a result, the auditor determined the sales tax due based upon the best information available. First, the auditor looked at the actual register tapes for the period November 10, 2010, through November 29, 2010 (sample tapes). Had Petitioner kept its sales receipts, the actual receipts for the audit period would have been used. Nevertheless, the sample tapes were used to estimate (based upon the actual business history of the company) the types and volumes of sales typically made at the store. Secondly, in order to determine the mark-up on the sales, the auditor used Petitioner’s purchase invoices, worksheets, profit and loss statements, and federal and state tax returns. In this regard, the auditor could compare the inventory coming in to the store with the reported results of the sales. Third, the auditor determined what percentage of the sales typically would be considered exempt from tax at the time of acquisition, but then re-sold at a marked-up price for a taxable event. Petitioner argued that 70 percent of its gross sales were taxable, but had no documentary evidence to support that conclusion. In contrast, after sampling records from four consecutive months, the Department calculated that the items purchased for sale at retail were approximately 78 percent taxable. By multiplying the effective tax rate (calculated at 7.0816) by the amount of taxable sales, the Department computed the gross sales tax that Petitioner should have remitted to the state. That gross amount was then reduced by the taxes actually paid by Petitioner. Petitioner argued that the mark-up on beer and cigarettes used by the Department was too high (thereby yielding a higher tax). DOR specifically considered information of similar convenience stores to determine an appropriate mark-up. Nevertheless, when contested by Petitioner, DOR adjusted the beer and cigarette mark-up and revised the audit findings. Petitioner presented no evidence of what the mark-up actually was during the audit period, it simply claimed the mark-up assumed by DOR was too high. On March 30, 2011, DOR issued the Notice of Proposed Assessment for sales and use tax, penalty, and interest totaling $27,645.79. Interest on that amount accrues at the rate of $4.20, per day. In reaching these figures, DOR abated the penalty by 80 percent. The assessment was rendered on sales tax for sales of food, drink, beer, cigarettes, and tangible personal property. Petitioner continues to contest the assessment. Throughout the audit process and, subsequently, Petitioner never presented documentation to dispute the Department’s audit findings. DOR gave Petitioner every opportunity to present records that would establish that the correct amounts of sales taxes were collected and remitted. Simply stated, Petitioner did not maintain the records that might have supported its position. In the absence of such records, the Department is entitled to use the best accounting and audit methods available to it to reconcile the monies owed the state.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order sustaining the audit findings, and require Petitioner to remit the unpaid sales and use taxes, penalty, and interest as stated in the Department’s audit findings. DONE AND ENTERED this 9th day of November, 2011, in Tallahassee, Leon County, Florida. S J. D. PARRISH Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 9th day of November, 2011. COPIES FURNISHED: Marshall Stranburg, General Counsel Department of Revenue The Carlton Building, Room 204 501 South Calhoun Street Tallahassee, Florida 32314-6668 Ashraf Barakat SNS Lakeland, Inc 811 East Palmetto Street Lakeland, Florida 33801 Carrol Y. Cherry, Esquire Office of the Attorney General The Capitol, PL-01 Revenue Litigation Bureau Tallahassee, Florida 32399 Brent Hanson B and M Business Services, Inc. 6735 Conroy Road, Suite 210 Orlando, Florida 32835 Lisa Vickers, Executive Director Department of Revenue The Carlton Building, Room 104 501 South Calhoun Street Post Office Box 6668 Tallahassee, Florida 32314-6668
Findings Of Fact Pabrey holds certificate number R-0211 as a Certified Public Accountant practicing in the State of Florida and held such certificate in good standing on January 1, 1974. At that time, Pabrey was subject to professional certification require- ments set forth in Chapter 473, Florida Statutes. The records of the Board reflect that Pabrey provided no evidence of the completion of any courses or studies that would give him credit towards the reestablishment of his professional competency in the period between January 1, 1974, and April 2, 1977. On October 15, 1976, Pabrey sat for an examination which was approved by the Board and given to practicing Certified Public Accountants pursuant to applicable law requiring reestablishment of professional competency. Pabrey received a score of 57 out of a possible score of 100. The established passing grade for the examination is 75. On December 31, 1976, Pabrey tendered his check to the Board in the amount of forty dollars ($40.00) as the required license fee. On May 13, 1977, the Board suspended Pabrey's certificate R-0211 as a Certified Public Accountant for failing to comply with requirements for the reestablishment of his professional knowledge and competency to practice public accounting. The check was returned to Pabrey by the Board on May 18, 1977, along with a copy of the Administrative Complaint and Order of Suspension. The questions to be answered in the uniform written professional examination administered to Pabrey on October 15, 1976, were based upon "Current Authoritative Literature' which included Accounting principles Board's Opinions, Accounting Research Bulletins, Statements and Interpretations of the Financial Accounting Standards Board, Statements on Auditing standards, and the Laws and Rules of the Florida State Board of Accountancy. Pabrey challenges thirty-six of these one hundred questions on the grounds that the approved answers are incorrect and that the answer selected by Pabrey is the proper choice. The questions attacked by Pabrey are numbers 5, 7, 11, 15, 18, 19, 22, 28, 29, 30, 31, 35, 36, 37, 42, 45, 53, 54, 55, 57, 59, 62, 63, 65, 66, 70, 72, 74, 76, 78, 86, 87, 88, 91, 92, and 98. The title of the uniform written professional examination is "Examination of Current Authoritative Accounting and Auditing Literature and Rules of the Florida State Board of Accountancy. The approved answer to each of the questions on the examination is that which is mandated by the "Current Authoritative Literature." The examination does not purport to seek answers outside of the requirements of the Current Authoritative Literature. Each of the approved answers in the thirty-six questions listed above are consistent with the demands of the Current Authoritative Literature. None are vague, misleading, unfair or improper. Each of Pabrey's answers is contrary to the provisions of the Current Authoritative Literature. Accordingly, the answers selected by Pabrey are not the best answers and were properly graded incorrect on his examination answer sheet.
The Issue Whether Commercial Carrier Corporation (Petitioner), has the financial strength necessary to ensure the timely payment of all current and future workers' compensation claims in the State of Florida; Whether Petitioner has maintained a net worth of at least $1 million during the period 1999 to 2004; and Whether Petitioner shall post an additional qualifying security deposit to remain qualified to self-insure and the amount of the additional security deposit to be posted.
Findings Of Fact Upon careful consideration, it is found and determined as follows: Petitioner, Commercial Carrier Corporation, is a privately-owned trucking company headquartered in Auburndale, Florida, which has been in business for over 50 years. Petitioner is one of five operating subsidiaries of Comcar Industries, Inc. (Comcar), whose primary business is truckload transportation of general and specialized commodities in the continental United States. Comcar routinely prepares consolidated financial statements reflecting the operations of all five subsidiary companies. Although Petitioner is the nominal Petitioner, Comcar is the de facto Petitioner in this proceeding. All of Comcar’s subsidiaries operate as self- insured in Florida. Petitioner has been self-insured for workers’ compensation in Florida since January 1, 1973. Pursuant to Florida law, Respondent has jurisdiction over Petitioner as a self-insured employer for purposes of workers’ compensation. Under Florida law, the general requirement is that employers must obtain and maintain workers’ compensation insurance coverage. The exception of this general requirement is found in Subsection 440.38(1)(b), Florida Statutes (2004), whereby an employer can seek to qualify to self-insure by "furnishing satisfactory proof to the Florida Self-Insurers Guaranty Association, Inc., . . . that it has the financial strength necessary to ensure the timely payment of all current and future claims[.]" FSIGA is a not-for-profit corporation established by Section 440.385, Florida Statutes (2004), to guarantee payment of the covered workers’ compensation claims by employees of self-insurers that become insolvent. Other than governmental entities and public utilities, all self-insurers, including Petitioner, must be members of FSIGA. FSIGA pays the covered claims of current and former insolvent self-insurer members to the extent an insolvent self-insurer’s security deposit is insufficient. An insolvency fund is established and managed by FSIGA for the purpose of meeting the obligations of insolvent members after exhaustion of any security deposit. The insolvency fund is funded by assessments from members of FSIGA. Accordingly, FSIGA and all of its members share an interest in ensuring adherence to the legislative standard that only financially strong employers are granted the privilege to self- insure. To maintain self-insurer status, an employer must submit annual financial statements no later than four months following the end of the self-insured’s fiscal year and furnish satisfactory proof to FSIGA that it has the financial strength necessary to ensure timely payment of all current and future claims. The financial statements that must be submitted to FSIGA for financial analysis must be prepared in accordance with the United States Generally Accepted Accounting Principles (GAAP). GAAP-prepared financial statements must show, at all times, a net worth of $1 million. The requirements of furnishing proof of the requisite financial strength and maintaining a net worth of at least $1 million, as shown on the employer’s financial statements, are continuing annual requirements to become and remain qualified to self-insure, and those requirements are applied equally to applicants and current members. FSIGA is required to review the financial strength of its current members. It makes recommendations to Respondent regarding the members’ continuing qualification to self-insure and the amount of security deposit that should be required of each member. If FSIGA determines that a current member does not have the financial strength necessary to ensure the timely payment of all current and estimated future claims, it may recommend that Respondent require an increase in the member’s security deposit. FSIGA operates under a statutorily-approved plan of operations. FSIGA’s plan of operation provides that its executive director has the responsibility to make FSIGA’s recommendations to Respondent. FSIGA’s recommendations are based upon a review of the financial information collected from member employers. It may include recommendations regarding the appropriate security deposit amount necessary for a self-insured employer to demonstrate that it has the financial strength to ensure timely payment of all current and future claims. Respondent is required to accept FSIGA’s recommendations unless it finds, by clear and convincing evidence, that the recommendations are erroneous. 2002 Financial Review of Petitioner Petitioner is currently a member of FSIGA and has posted a qualifying security deposit of $2,500,000.00. On October 2, 2002, Brian D. Gee, C.P.A., who is now FSIGA’s executive director, completed a review of Petitioner’s audited financial statements for 1999, 2000, and 2001. Gee was FSIGA's financial analyst, responsible for conducting financial reviews and developing information for FSIGA's executive director, to determine the financial strength of self-insured members and make recommendations to Respondent. Gee’s review of Petitioner’s financial statement consisted of an assessment of Petitioner’s liquidity, profitability, degree of leverage, liabilities compared to net worth, and cash flow generated by operations. He also reviewed the financial statements to determine if Petitioner was maintaining a net worth of at least $1 million. Gee concluded that Petitioner did not have the financial strength necessary to ensure the timely payment of current and estimated future workers’ compensation claims. On October 8, 2002, FSIGA's executive director forwarded a letter to the Division of Workers’ Compensation, Department of Insurance (now Respondent). He recommended to Respondent that Petitioner be ordered to increase its security deposit to 150 percent of actuarially determined loss reserves. FSIGA’s recommendations were reviewed by Cynthia Shaw, assistant general counsel for the Division of Workers’ Compensation. Shaw drafted a letter for signature by Mark Casteel, General Counsel for Respondent, which adopted FSIGA's recommendations. Casteel signed that letter dated October 28, 2002, without revision or discussion. Shaw, an attorney, has no financial background or expertise. Shaw did not perform any additional financial analysis. Additionally, since Respondent did not have a CPA firm under contract, FSIGA’s recommendation was not reviewed by anyone with financial background before being transmitted to Petitioner. Petitioner responded to the October 28, 2002, directive from Respondent by filing a petition requesting a formal administrative hearing. Petitioner failed to file financial statements with FSIGA within four months following the end of its 2000 and 2001 fiscal years. Petitioner’s failure to timely file financial reports for 2000 and 2001 was due to the fact that it was in default on certain loan covenants and was engaged in negotiations with its lenders. In 1999 and 2000, Petitioner incurred additional long-term debt to finance the purchase of a new fleet of trucks. Petitioner’s creditors had exercised their right for accelerated payment of the outstanding loan balances, which by the end of 2001, was approximately $205 million. In 2001 and 2002, Petitioner entered into negotiations with its creditors to amend and restate its loan agreements. In 2002, Petitioner implemented a business plan calling for the sale of non-core assets, reduction of long-term debt, and transition from purchasing to leasing truck tractors. In July 2002, Petitioner entered into amended and restated loan agreements with its creditors. In order to secure the amended and restated loan agreements, Petitioner was required to pay increased interest, pledge substantially all of its property to secure the loans, pay the lenders $3.3 million, provide certain lenders with warrants to acquire an equity interest in Petitioner under certain conditions and agree to restrictions on how it could use cash generated by its operations and asset sales. Petitioner timely made all principal and interest payments due pursuant to the restated credit agreement and maintained compliance with all required financial ratios and standards. Furthermore, Petitioner continued to timely pay all claims for current and estimated future claims under its workers’ compensation system. Following execution of the amended and restated loan agreements, Petitioner’s auditors prepared the financial statements of 2001, which Petitioner then filed with FSIGA. Separate audited financial statements for 2000 were never filed with FSIGA, although prior-year financial results were shown (without footnotes) on the audited 2001 financial statements. With respect to liquidity, Petitioner’s financial statements showed a current ratio (current assets divided by current liabilities) of 1.41 at December 28, 2001. It did not disclose that Petitioner had any available funds under its revolving credit line as of December 28, 2001. Although Petitioner’s current ratio was acceptable, further analysis raised serious concern regarding Petitioner’s financial strength. With respect to Petitioner’s capital structure, the financial statement review showed that Petitioner’s total liabilities-to-book-equity ratio deteriorated from 4.91 at December 1999 to 30.46 at December 28, 2001. This deterioration reasonably raised concern because Petitioner became much more heavily leveraged from 1999 to 2001, relying much more heavily on debt to fund its operations. FSIGA concluded, Petitioner’s financial statement showed a "very weak capital structure." The impact of the increasing reliance on debt was marked by the end of 2001, when the financial statements showed that Petitioner was in default of its debt covenants at December 28, 2001. To address its defaults, Petitioner entered into an agreement to restructure its debt by which the creditors waived the defaults in return for imposing additional restrictions on Petitioner as described in paragraph 20 above. Although Petitioner maintained a net worth of $11.1 million at the end of 2001, Petitioner’s net worth at the end of 2001 was significantly lower than its net worth of $74.8 million at the end of 2000. In addition, the financial statement review showed that Petitioner had incurred net losses of $24.2 million, $39.5 million, and $5.7 million for the years 2001, 2000, and 1999, respectively. These losses were substantial and raised significant concerns about Petitioner’s financial strength. The 2002 financial review of Petitioner also showed a substantial decline in Petitioner’s cash flow from operations, from positive $32.6 million for 1999 to negative $2.1 million for 2001. This meant that in 2001, Petitioner was spending more cash in its operating activities than it was collecting. At the time FSIGA made its recommendation to Respondent, neither FSIGA nor Respondent had current information from Petitioner regarding the amount of Petitioner’s net outstanding liability for workers’ compensation claims in Florida. This is because Petitioner failed to file the Form SI-20 report that had been due on August 31, 2002. From October 2002 until December 14, 2004, FSIGA and Respondent did not have accurate information in regard to the amount of Petitioner’s outstanding liability for workers’ compensation claims in Florida, because Petitioner did not file its required Forms SI-17 and SI-20 reports or provide an actuarial study. At the final hearing, Petitioner did not present evidence disputing the reasonableness of FSIGA’s 2002 assessment of Petitioner’s financial statements or of FSIGA’s conclusions based thereon regarding Petitioner’s lack of financial strength in 2002. Based on FSIGA’s analysis of Petitioner’s 2001 financial statements and the financial statements for the two preceding years, FSIGA reasonably concluded that Petitioner had not demonstrated that it had the financial strength to ensure payment of current and future workers’ compensation claims. Based on the information then available to it, FSIGA made the correct recommendation to Respondent. There was no clear and convincing evidence available to Respondent that demonstrates FSIGA's recommendation was erroneous, instead, the available evidence supports FSIGA’s recommendation. Accordingly, Respondent’s direction to Petitioner to provide an actuarial report and post additional security was reasonable and appropriate. Continuing Financial Review of Petitioner After 2002. In November 2002, Petitioner challenged Respondent’s determination and requested a formal administrative hearing. Petitioner requested that Respondent hold the petition in abeyance. The request was granted, and the petition was not filed with DOAH until July 9, 2004. During this period, Respondent re-examined Petitioner’s financial strength. Following its business plan, on January 16, 2004, Petitioner refinanced its debt. While there was conflicting testimony regarding whether the actual interest on the refinanced debt was lower than on the debt it replaced, it was undisputed that $30 million of the refinanced debt was carrying an interest rate of 19 percent. This is a higher rate than the nine-percent and 11-percent interest applicable to the earlier debt. It is undisputed that substantially all of Petitioner’s property is pledged to secure the 2004 refinanced indebtedness, and there continues to be restrictions on Petitioner’s use of cash generated by its operations. However, the 19-percent interest on a portion of the January 2004 refinancing has now caused Petitioner to go into the lending market to attempt to refinance its debt once again. Nevertheless, the refinancing of its long-term debt has reduced its financing costs. Since Respondent’s 2002 request that Petitioner provide an actuarial report and post an additional security deposit, FSIGA has reviewed Petitioner’s audited financial statements for the years ended December 27, 2002, and December 26, 2003, as well as Petitioner’s unaudited financial statements for the year ended December 31, 2004. The financial information received from Petitioner since the 2002 review has not resulted in FSIGA changing its 2002 recommendations. Petitioner’s 2002, 2003, and 2004 financial statements revealed that Petitioner’s net worth had fallen below the required $1 million in each of those three years. The 2002 and 2003 financial statements also show that Petitioner continued to experience net losses. Petitioner sustained a net loss of $12.1 million for the year ended December 27, 2002, and a net loss of $9.9 million for the year ended December 26, 2003. Petitioner’s cash flow statement shows a $4.8 million decrease in cash in 2002 and a $2 million decrease in cash in 2003. Petitioner’s 2004 unaudited financial statements indicate net income of $4.1 million for 2004. However, because the 2004 financial statements are unaudited, whether adjustments may be necessary following the audit are unknown at this time. Financial statements prepared without footnotes are not prepared in accordance with GAAP. Even if the unaudited results are confirmed in audited financial statements, 2004 would be the first year that Petitioner has recognized net income since 1998, following a five-year string of annual losses totaling $90 million. Petitioner’s Financial Status Evidenced at Final Hearing At the final hearing, to demonstrate that it had the financial strength necessary to ensure the timely payment of current and future workers’ compensation claims, Petitioner presented testimony of its expert witness, Lawrence Hirsh, C.P.A. He posited that Petitioner's financial strength should be measured by determining its ability to generate cash flow through a calculation of its earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA is a measure commonly used by financial institutions to evaluate the ability of a company to generate cash flows and in determining whether to extend credit or to make investments. Petitioner’s lenders evaluated its EBITDA before deciding to refinance its credit facility in 2002 and to refinance its long-term debt in 2004. However, EBITDA is not a calculation provided for under GAAP. GAAP provides a method for determining cash flows and that method is used in preparing the portion of a GAAP- compliant financial statement called the "Statement of Cash Flows." Evidence presented by Respondent demonstrated that EBITDA has many limitations and is not a good proxy for cash flow. Application of EBITDA to Petitioner’s known financial performance in the past consistently overstates Petitioner’s ability to generate cash flow from operations. In every year from 1999 through 2003, Petitioner’s cash flow from operations, as shown on Petitioner’s cash flow statement that was prepared in accordance with GAAP, was significantly lower than the amount calculated for EBITDA by Hirsh: Year Petitioner's Cash Flow From Operations as Shown on GAAP-Compliant Cash Flow Statement EBITDA 1999 $32.6 million $61.1 million 2000 $344,000 $21.2 million 2001 ($2.1 million) $40.3 million 2002 $11.9 million $54.8 million 2003 $12.3 million $42.3 million Petitioner's unaudited 2004 cash flow statement showed $18.1 million in cash flow from operations. This is significantly lower than the $52.9 million in EBITDA calculated for 2004. Similarly, each year from 1999 to 2003, Hirsh's EBITDA's calculation grossly exceeds Petitioner's net loss as shown on its financial statements that were prepared in accordance with GAAP: Petitioner's Cash Flow From Operations as Year Shown on GAAP-Compliant Cash Flow Statement EBITDA 1999 (5.7 million) $61.1 million 2000 ($39.5 million) $21.2 million 2001 ($24.2 million) $40.3 million 2002 ($12.1 million) $54.8 million 2003 ($9.9 million) $42.3 million EBITDA is also misleading because it includes gain from the sale of assets. To the extent that Petitioner is selling its operating assets, such as trucks, Petitioner will have to expend cash to replace the assets, either by lease or purchase. To the extent that Petitioner is selling non-core assets, such as its unused real property, Petitioner cannot continue this practice indefinitely. Petitioner will soon run out of assets to sell. Therefore, cash generated from the sale of operating assets and non-core assets should not be considered in determining Petitioner's ability to generate cash from operating activities. Petitioner sought to bolster its evidence of its financial strength through testimony that it had received a credit rating in November 2003 from Standard & Poor's of B-plus. However, a B-rating is not an investment grade rating. It means that while a company currently has the capacity to meet its debt obligations, adverse business, financial, or economic conditions likely will impair the obligor's capacity or willingness to meet its financial commitment on the obligations in the future. In addition, Petitioner received a lower credit rating of B-3 from Moody's Investment Services. A B-3 rating from Moody's Investment Services is equivalent to a B minus rating from Standard & Poor's. The Standard & Poor's and Moody's credit ratings do not effectively demonstrate that Petitioner has the financial strength necessary to ensure the payment of current and future workers' compensation claims. Respondent's expert witness, Dr. Sondhi, disputed Petitioner's calculation of its EBITDA interest coverage ratio because Petitioner's calculation was based on interest paid as opposed to interest expense, and it failed to adjust for non-recurring items. Petitioner's interest expense is greater than the interest paid partly because Petitioner's loan agreement provides that a portion of the interest payments will accrue monthly with payments deferred until the final prepayment date or other principal payment milestone dates. Petitioner's calculation of the EBITDA interest coverage ratio was not performed in accordance with Standard & Poor's formula for determining the EBITDA interest coverage ratio. Even if the calculation of EBITDA interest coverage ratio was an appropriate measure of Petitioner's financial strength, the formula used by Petitioner to calculate the ratio overstates the results and shows greater financial strength than would be shown if the Standard & Poor's formula had been used. For the reasons noted above, Petitioner's EBITDA calculations are rejected as an inappropriate, overstated method to assess whether a company has the financial strength necessary to ensure the payment of current and future workers' compensation claims. Petitioner also argued that it had the required financial strength because it has paid all workers' compensation claims to-date and because, at the end of 2004, it had a cash balance of $26.6 million in the bank. The ability to currently pay workers' compensation claims does not demonstrate the financial strength to ensure the payment of workers' compensation claims in the future. Current capacity to pay is only part of the statutory standard, which is a risk-based standard requiring a company to ensure payment into the future because of the long period of time that workers' compensation claim payments continue. Likewise, having cash in the bank in the amount of $26.6 million at the end of 2004, does not demonstrate the required financial strength. Current cash balance is not an indicator, by itself, of financial strength to ensure payment in the future. Given Petitioner's extensive operating expenses, $26.6 million represents a very small amount of operating expenses. Petitioner’s consolidated balance sheets list its assets at historical or book cost, the cost at which those assets were purchased, and not at their current fair market value. Petitioner argues that adjusting the book values of assets to current market value would provide the most accurate assessment of Petitioner's net worth. To demonstrate that it has maintained a net worth of $1 million, Petitioner presented testimony that when determining net worth, the fair market value of its assets should be considered in place of the book value of its assets that is reflected on its balance sheet. However, GAAP does not permit the value of assets to be shown at fair market value and instead, requires that assets be shown at book value. Even if GAAP permitted the use of fair market value of assets to be used on a balance sheet, Petitioner did not offer any admissible evidence to prove the current fair market value of its assets for 2002, 2003, and 2004. Consequently, it cannot be determined whether the use of the current fair market value of assets would result in Petitioner's financial statements showing a net worth at all times of at least $1 million. Respondent has interpreted the term "net worth," as it is used in Florida Administrative Code Rule 69L-5.106, to mean the total assets of a company as reflected on the balance sheet, minus the total liabilities of the company as reflected on the balance sheet. Respondent's interpretation of the term "net worth" is a reasonable interpretation, consistent with the interpretation given to the term by accountants and financial analysts. The more credible expert testimony is that net worth appears on the balance sheet as stockholders' or shareholders' equity. Based on the above interpretation of Florida Administrative Code Rule 69L-5.106, for each year from 2002 through 2004, Petitioner has failed to maintain a net worth of at least $1 million. The preponderance of evidence demonstrates Petitioner's net worth was negative $976,000, and negative $10.8 million for the years ended December 27, 2002, and December 26, 2003, respectively. In addition, Petitioner's unaudited financial statements for 2004 show that Petitioner maintained a negative net worth of $6.7 million as of December 31, 2004. Although Petitioner's financial condition has strengthened significantly from year end 2001 to year end 2004, based on the evidence, Petitioner does not now have the financial strength necessary to ensure payment of current and future workers' compensation claims, nor has Petitioner maintained a net worth of at least $1 million. Therefore, an additional security deposit is required for Petitioner to remain qualified as a self-insurer. In May 2002, Thomas Lowe was employed by Petitioner as its vice-president in charge of Risk Management. Lowe instituted a number of risk management practices which have significantly reduced the number and costs of Petitioner's workers' compensation claims. In 2001, Petitioner's workers' compensation claims were adjusted by three separate third-party administrators (TPAs), resulting in three overlapping data bases of claims information. Petitioner was unable to reconcile this overlapping claims information and, consequently, was unable to accurately determine the amount of its workers' compensation reserves for 2001. As a result of its inability to determine its workers' compensation reserves in 2001, Petitioner did not submit the required SI-17 and SI-20 forms to FSIGA in 2002 and 2003. Petitioner informed FSIGA of the difficulty it was having in reconciling its claims data for 2001 and paid the required penalties for its inability to timely submit Forms SI-17 and SI-20 in 2002 and 2003. Failure to submit these forms did not affect Petitioner's ability to make timely payments of all current and estimated future workers' compensation claims. In 2004, Petitioner submitted Forms SI-17 to FSIGA reflecting incurred workers' compensation losses for calendar years 2002 and 2003. On December 14, 2004, Petitioner submitted Form SI-20 to FSIGA, reflecting that the present value of its estimated loss reserves was $6,894,776.00. Anthony Gripps, Sr., an independent actuary who is a member of the American Academy of Actuaries, reviewed Petitioner's workers' compensation claims data pursuant to Respondent's October 28, 2002, directive. Grippa issued two reports, one dated December 1, 2004, and the other dated December 15, 2004. Grippa concluded that the present value of Petitioner's workers' compensation loss reserves as of September 30, 2004, was $6,831,175.00. The parties stipulated to Grippa's finding that the amount of Petitioner's workers' compensation loss reserves as of September 20, 2004, was $6,831,175.00. Petitioner's financial statements for 2004 had not been audited as of the final hearing, but were received into evidence in unaudited form. There was no evidence presented that Petitioner's 2004 financial statements do not accurately represent its financial performance in 2004 and its financial condition as of December 31, 2004. Florida Administrative Code Rule 69L-5.101(4) does not require Petitioner to submit audited financial statements as it has been self-insured since prior to January 1, 1997. Petitioner timely supplied Respondent with unaudited financial statements at least annually as required by Florida Administrative Code Rule 69L-5.101(4). Petitioner currently has a qualified security deposit of $2,500,000.00 deposited with FSIGA. In 2002, FSIGA recommended that in light of Petitioner's "significant net losses and very weak capital structure," Petitioner's security deposit should be increased to 150 percent of the actuarially determined loss reserves. Upon consideration of all of Petitioner's financial statements from 1999 through 2004, FSIGA's recommendation should be followed. Petitioner's actuarially determined loss reserves for all current and estimated future workers' compensation claims are $6,831,175.00. One hundred and fifty percent of the actuarially determined loss reserves of $6,831,175 equals $10,246,762.50. Petitioner presented no evidence of a different amount of security deposit increase that would be sufficient assuming one were to find that Petitioner lacks the financial strength to ensure payment of future workers' compensation claims or that Petitioner has failed to maintain a net worth of at least $1 million.
Recommendation Based on the foregoing Findings of Facts and Conclusions of Law, it is RECOMMENDED that The chief financial officer issue a final order determining that: (i) Petitioner does not have the financial strength to ensure the timely payment of all current and future workers' compensation claims; and (ii) Petitioner has failed to maintain a net worth of at least $1 million; and Because Petitioner has failed to meet the requirements to continue self-insuring, the final order should require Petitioner to post an additional security deposit in the amount of $7,746,762.50. DONE AND ENTERED this 1st day of June, 2005, in Tallahassee, Leon County, Florida. S DANIEL M. KILBRIDE 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 1st day of June, 2005.
