October 2000

By Burton L. Shepard, CPA, JD

Ethics in Action is a feature that educates members on ethics issues and provides a greater understanding of the profession’s self-disciplinary process. Authored by members of the NYSSCPA Professional Ethics Committee, columns summarize actual ethics case investigations, with names and other details changed to conceal the identity of those involved.

How to Invalidate an Audit

Whether you are a longtime veteran CPA, a newly minted practitioner or anything in between, you have undoubtedly heard the term “due care,” used over and over as a sacred cornerstone of our profession. There is something called “acts discreditable,” which is a label for a catalog of professional no-nos. Funny thing is that while members of our Society are chargeable with knowing everything in our Bylaws and Code of Professional Conduct, most of the right answers turn out to be the same as those supplied by old-fashioned common sense or professional pride, as the following story will illustrate.

Not long ago, the Professional Ethics Committee (PEC) investigated a complaint lodged by an agency of New York state against a member. The committee’s investigation resulted in a finding of violations of the Code of Professional Conduct, all of which stemmed from performing services for which the member did not have adequate training, knowledge, or experience.

The member had accepted appointment as auditor of a not-for-profit organization that received government funding. The member was required to perform an audit in accordance with Government Auditing Standards, Office of Management and Budget (OMB) Circular A-133, and generally accepted auditing standards (GAAS). The member had not recently had experience with such an audit, and indeed, had no other audit clients at the time. Since the member’s previous experience, generally accepted accounting principles (GAAP) had changed significantly for not-for-profit organizations with the issuance of Statements of Financial Accounting Standards Nos. 116 and 117, and a new Circular A-133 had been issued. The member had received no training in these new requirements. The member admitted the correctness of the allegations.

The violations found by the PEC are a veritable textbook illustration of things a CPA should not do:

- Express an opinion in an audit report that the financial statements of the not-for-profit organization were prepared in accordance with GAAP when the footnotes stated that they were prepared in accordance with a different basis and did NOT conform to GAAP (violating Rule 202, Compliance with Standards, and Rule 203, Accounting Principles).

- Fail to comply with the requirements of OMB Circular A-133 and AICPA Statement of Position 92-9 “Audits of Not-for-Profit Organizations Receiving Federal Awards” (violating Rule 202, Compliance with Standards, and Rule 501, Acts Discreditable).

- Plan the audit in accordance with the wrong version of OMB Circular A-133 (violating Principles of Professional Conduct Article V, Due Care, and Rule 501, Acts Discreditable).

- Complete the audit of the financial statements of a not-for-profit organization while being unfamiliar with the accounting requirements applicable to not-for-profit organizations. (violating Principles of Professional Conduct Article V, Due Care, and Rule 501, Acts Discreditable). The member began taking relevant training only after receiving notice that the PEC was beginning an investigation.

The PEC agreed to a letter of required corrective action requiring the member to—

- Comply immediately with professional standards applicable to professional services performed by the member.

- Complete 40 hours of continuing professional education courses within one year. (The committee designated specific courses relevant to the member’s deficiencies including an eight-hour self-study professional ethics course for which the member was required to receive a grade of 90% or better.)

- Hire a PEC-approved outside party to perform a preissuance review of the reports, financial statements, and working papers on all audit, review, and compilation engagements performed by the member and agree to permit the outside party to report quarterly to the committee.

Members should be aware that Principles of Professional Conduct Article V provides that consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member’s firm. Each member is responsible for assessing his or her own competence by evaluating whether education, experience, and judgment are adequate for the responsibility to be assumed.

Words to the wise: Never undertake an engagement until qualified to do so.