As Expectations and Responsibilities Increase, CPAs Must Play It Safer
Former NYSSCPA Board Member Pleads Guilty to Federal Charge

By Jay Dismukes

In an age of increasing regulatory scrutiny and heightened expectations for the CPA profession, accountants should trust their instincts and exercise a healthy dose of skepticism toward their clients, some believe. The story of G. William Hatfield is a case in point.

On July 3 former New York State Society of CPAs board member Hatfield pled guilty in U.S. District Court, Northern District of New York, to a felony count of aiding and assisting the filing of a false tax form (Form 1023), “Application for Recognition of Exemption,” which falsely asserted that a charity did not have a predecessor organization, when the organization had operated since at least 1995.

“Now, more than ever, accountants have to be mindful of clients and their financial affairs,” says attorney James P. Constantino. “We have a changing landscape here, and accountants are going to be in the line of fire.”

While CPAs have a right to rely on the information that is provided to them by their clients, they also have certain professional standards and responsibilities that they are expected to satisfy. The time constraints and pressures of a day-to-day practice cannot be counted on to excuse a CPA from being held accountable when it comes to criminal activity by a client.

According to Hatfield’s written plea agreement, the government maintains that from at least 1995, Hatfield, a CPA and CFE, prepared a client’s personal tax return, in which the client claimed deductions that exceeded $1 million for charitable contributions made to an unincorporated association. Unbeknownst to Hatfield at the time, the association was not a tax-exempt organization, and further, it had used the Employer Identification Number of another organization to open bank accounts and advise donors of the tax-exempt status that it falsely claimed.

The plea agreement states that in November 2001, the client and an associate tried to incorporate the association, which was never a formal legal entity, and upon discovering the name was unavailable, attempted to incorporate the organization using a similar name. In the winter of 2001 and the spring of 2002, the client and his associate met with a tax return preparer, seeking tax-exempt status for the newly incorporated charity.

The agreement says that in June 2002, the client met with Hatfield, who took over responsibility for the charity’s application for tax-exempt status. Work materials forwarded to Hatfield by the tax return preparer indicated that information necessary to prepare the tax-exempt status application was too inconsistent or incomplete. The worksheets included a “large star and question mark” by the Form 1023 question: “Is the organization the outgrowth of (or successor to) another organization…?” The tax return preparer had left the question blank.

In August 2002, Hatfield submitted to the Internal Revenue Service a Form 1023 that maintained that the charity did not have a predecessor organization. According to the plea agreement, failing to identify the predecessor organization disguised the fact that the client improperly deducted donations to the predecessor organization; disguised the fact that the association provided financial assistance to individuals in Iraq during a period of U.S. sanctions against Iraq; and helped disguise the fact that the charity had nearly $400,000 in deposits on the date the Form 1023 was signed.

Perception vs. Reality

“There is a perception that CPAs have an intimate relationship with their clients and an exhaustive knowledge of their financial affairs. In reality, that is not always the case,” said Constantino, a partner with Teahan and Constantino in Poughkeepsie, N.Y. “CPAs often have infrequent or irregular contact with clients and it becomes difficult for them to put pieces together and see a problematic pattern.”

Further complicating this relationship is the absence of “privilege” between a CPA and his or her client. Unlike attorneys’ clients, who have the privilege of keeping communications with their attorneys confidential, CPAs and their clients can be compelled to disclose their confidential communications. Knowing this, Constantino believes some clients are less than forthcoming, making the CPA’s job especially difficult, particularly at a time when regulators expect accountants to have detailed knowledge of their clients’ financial activities.

Covering All Bases

Though accountants cannot be expected to verify every item in a filing, there are a number of steps and procedures that Constantino says they can and should take to fulfill their responsibilities to clients and regulators. Chief among these is the constant and careful exercise of due diligence and the close consideration of materiality. He encourages CPAs to take special interest in unusual items in tax returns, such as an inordinate amount of deductions or an unrecognized charity. They should note that materiality standards for financial accounting purposes are usually more flexible than the rigid standards of criminal investigations.

When considering the successor question in a Form 1023, Constantino, a CPA and treasurer of the NYSSCPA’s Mid-Hudson Chapter, says that enterprise and interested parties should be among a CPA’s principal concerns. Accountants should focus on whether the organization in question has the same owner, is alike in purpose, conducts similar activities and has the same customers or deals with the same individuals as some prior organization.

When working with a new client, Constantino urges practitioners and firms to ask the following questions:

If a CPA has any misgivings about a client, he or she shouldn’t hesitate to seek advice. Constantino recommends that they talk to colleagues, an attorney or the Society.

He also recommends that CPAs become more mindful of the federal Patriot Act that was designed to streamline the government’s information-gathering process and could “increase the accountant’s responsibilities.”

Ultimately, however, Constantino believes that a CPA’s common sense and judgment may be the best means for ensuring that all responsibilities and expectations have been met.

“You have to trust your experience and instincts. If you see something that looks out of the ordinary, don’t look the other way; you have to make the inquiries,” he said.