ALJDEC decisions subject to certification as final

03F-2004021-ACY · State Board of Accountancy · 2004-05-17

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: January 27, 2004. APPEARANCES: The Arizona State Board of Accountancy was represented by Assistant Attorney General Seth T. Hargraves. Donald D. Bailey appeared personally. ADMINISTRATIVE LAW JUDGE: Brian Brendan Tully _____________________________________________________________________ Evidence and testimony were presented and, based upon the entire record, the following Findings of Fact, Conclusions of Law and Recommended Order are made:

FINDINGS OF FACT

1. The Arizona State Board of Accountancy (“Board”) is authorized, pursuant to A.R.S. § 32-701, et seq., to regulate the practice of public accounting by Certified Public Accountants in the State of Arizona. 2. On March 21, 1983, Respondent Donald D. Bailey was issued Certificate No. 3811-E by the Board. This certificate enabled Mr. Bailey to practice as a certified public accountant in the State of Arizona. 3. On April 20, 1998, the Board issued Mr. Bailey Firm Registration No. 5035-S for his sole practitioner firm, Don Bailey, CPA. 4. On or about December 4, 2003, the Board issued a Complaint and Notice of Public Hearing naming Mr. Bailey and Don Bailey, CPA, as respondents. The complaint alleges unprofessional conduct by Mr. Bailey. 5. In August 1997 and December 1998, a Tucson federal grand jury indicted Mr. Bailey on multiple charges of making false statements on federal tax forms concerning both his tax return and those forms pertaining to several of his clients and tax evasion. The Superseding Indictment listed 25 counts. 6. By letter dated August 18, 1998, the Board’s Tax Practice Committee requested that Mr. Bailey advise it of the current status of his federal criminal case pursuant to A.A.C. R4-1-455.03(F) 7. By letter dated August 31, 1998, Mr. Bailey responded to the Board by writing: “I am sending you some information to update the status of the above referred case. We have filed a ‘Motion to Dismiss’ the above referred case. The judge has not ruled either way as of this date. I should hear something the next several weeks and will let you know the status of the case.” 8. On August 9, 1999, the Board, meeting in open session, passed a motion “to defer taking any action on this file pending the outcome of the civil and criminal matters.” That motion also included a request that Mr. Bailey advise the Board of the disposition of his court cases. 9. By letter dated August 13, 1999, the Board’s then Executive Director informed Mr. Bailey of the Board’s August 9, 1999 action and requested that he notify the Board of the disposition of U.S. District Court Case 95-CIV-267(TUC), U.S. District Court Case 98-CV-123(TUC) and U.S. District Court Case 97-CR-676(TUC) (FRZ). 10. On or about May 1, 2000, before the United States District Court for the District of Arizona, in Case No. CR 97-676-TUC-FRZ, Mr. Bailey executed a plea agreement in which he agreed to plead guilty to one count of willfully making and subscribing a false amended U.S. Individual Tax return, in violation of Title 26, United States Code, Section 7206(1), a felony. 11. In paragraph 8 of the plea agreement, Mr. Bailey agreed to the following restriction on his accounting practice:

“In exchange for the government’s agreements herein, defendant, Donald D. Bailey, hereby agrees that beginning on the date of the entry of the guilty plea, he will no longer directly or indirectly represent any individual, corporation, business, and /or other entity involving any audit, case, matter, or controversy involving the Internal Revenue Service or U.S. Department of Treasury, provided, however, that nothing contained herein shall prohibit defendant from acting as income tax preparer as provided for paragraph 6 of this agreement.

This prohibition applies whether the defendant acts under the authority of an IRS Form 2848 in his capacity as a Certified Public Accountant, or as an enrolled agent, or in any other capacity, formal or informal, whatsoever. This prohibition against representation of clients before the IRS is permanent and shall survive the completion of any sentence, including probation or supervised release, to be served under this agreement. Should Donald Bailey violate the prohibitions set forth in paragraph 8 of this agreement, at any time, the government in its sole discretion and election can move to revoke Donald Bailey’s probation and/or supervised release and request the Court to sentence him to any lawful term of incarceration. In the event the defendant violates the prohibition set forth in paragraph 8 of this agreement after completing his sentence, term of probation, and/or term of supervised release, the government in its sole discretion and election can move to vacate the guilty plea and reinstate the prosecution of the Superseding Indictment, in which event, Donald Bailey waives any objection to the delay in the subsequent prosecution based upon speedy trial, due process, statute of limitations, laches, or any other similar grounds.”

12. In paragraph 12 of the plea agreement, Mr. Bailey agrees “that if this matter were to proceed to trial the United States could prove the following facts beyond a reasonable doubt”:

“Donald Bailey has been licensed by the Arizona State Board of Accountancy as a certified accountant since 1983. Since then he has performed tax and accounting services for various individuals, corporations, businesses and other business entities in the State of Arizona. During the calendar year 1992, Donald Bailey conducted his affairs under the name of Don Bailey, CPA, a sole proprietorship, and received at least $135,025 in the form of gross receipts from his tax and accounting clients. Donald Bailey also created a defined benefit pension plan for his business on December 1, 1992, to which he subsequently contributed $6,000 on June 14, 1993. On or about January 21, 1994, Donald Bailey willfully made, prepared and signed a 1040X, Amended U.S. Individual Income Tax Return, on behalf of he and his wife, Sandra Bailey, accompanied by a Profit or Loss From Business (Form Schedule C), for the tax year 1992, which Return was verified by a written declaration that it was made under penalties of perjury. The Return falsely stated: 1) that Don Bailey, CPA, received gross receipts or sales in the amount of $108,919, whereas in truth and fact, Donald Bailey then knew he had earned gross receipts or sales of at least $135,025, and 2) that Don Bailey, CPA, was entitled to a deduction for a contribution to the pension and profit-sharing plan in the amount of $13,000, whereas in truth and fact, Donald Bailey then knew he was entitled to claim a deduction of no more than $6,000. The willful understatement of his gross receipts and the overpayment of the pension plan contributions caused Donald and Sandra Bailey to pay less income tax than otherwise would have been due, which for the sole purpose of this guilty plea is an amount equal to $4,999.”

13. In paragraph 14 of the plea agreement, Mr. Bailey acknowledged “that no threats, promises or representations have been made, nor agreements reached other than those set forth in this agreement to cause the defendant to plead guilty.” 14. Pages 6 and 7 of the plea agreement contain a section titled “Defendant’s Approval and Acceptance.” In that section of the plea agreement, Mr. Bailey made the following assertions, among others:

• “I have read each of the provisions of the entire plea agreement with the assistance of counsel and understand its provisions.” • “I agree to enter my guilty plea as indicated above on the terms and conditions set forth in this agreement.” • “My guilty plea is not the result of force, threats, assurances or promises other than the promises contained in this agreement. I agree to the provisions of this agreement as a voluntary act on my part, rather than at the direction of or because of the recommendation of any other person, and I agree to be bound according to its provisions.” • “I am satisfied that my defense attorney has represented me in a competent manner.”

15. On or about October 31, 2001, in United States District Court for the District of Arizona, Case No. CR97-676-TUC-FRZ, Mr. Bailey was convicted, pursuant to his guilty plea, of violating Title 26, USC§ 7206(1), Making and Subscribing to a False Amended U.S. Individual Tax Return, Class E., a Felony offense, as charged in Count 4 of the Indictment. The Court placed Mr. Bailey on probation for a term of one year on Count 4. The Court dismissed the remaining counts. 16. Count 4 of the Superseding Indictment reads:

“The allegations contained in the first four (4) paragraphs of Count 1 are incorporated herein by reference. On or about February 28, 1994[1], in the District of Arizona, defendant DONALD D. BAILEY, did willfully make and subscribe an Amended U.S. Individual Income Tax Return (Form 1040x), dated January 21, 1994, accompanied by a Profit or Loss From Business (Form Schedule C), by and on behalf of DONALD D. BAILEY and Sandra M. Bailey, for the tax year 1992, which was verified by a written declaration that it was made under the penalties of perjury and was filed with the Internal Revenue Service, which said Amended U.S. Individual Income Tax Return he did not believe to be true and correct as to every material matter, in that the Profit or Loss From Business (Form Schedule C) falsely stated that (1) Don Bailey, CPA, received gross receipts or sales in the amount of $108,919; and (2) Don Bailey, CPA, incurred an expense for pension and profit-sharing plans in the amount of $13,000; whereas as DONALD D. BAILEY then and there well knew and believed, Don Bailey, CPA, received gross receipts or sales in the amounts of at least $123,616 and Don Bailey, CPA, did not incur an expense in the amount of $13,000 for pension and profit-sharing plans in 1992. In violation of Title 26, United States Code, Section 7206(1).”

17. Mr. Bailey was subject to the following special condition ordered by the Court:

“5. You are restricted from engaging in the following occupation, business, or profession: You will not directly or indirectly represent any individual, corporation, business, and/or any other entity involving any audit, case, matter, or controversy involving the IRS or U.S. Department of Treasury. This applies whether you act under the authority of an IRS Form 2848, as a CPA, or an enrolled agent, either formally or informally."

18. Mr. Bailey subsequently attempted to withdraw his guilty plea, but the District Court denied his request. 19. On or about November 6, 2001, the Board issued a Complaint and Notice of Public Hearing against Mr. Bailey’s Accountant Certificate in File No. 1996.201-ACY. The Board alleged that Mr. Bailey committed acts of unprofessional conduct. 20. Mr. Bailey appealed his conviction to the U.S. Court of Appeals for the Ninth Circuit. That Court affirmed the District Court. 21. Mr. Bailey filed a petition for a writ of certiorari with the Supreme Court of the United States. 22. On May 19, 2003, the Supreme Court of the United States entered an order denying Mr. Bailey’s petition for a writ of certiorari. Mr. Bailey received a copy of the letter sent by the Clerk of the Supreme Court to Mr. Bailey’s counsel advising of the denial. 23. Mr. Bailey’s federal criminal conviction is final. 24. By letter dated September 22, 2003, the Board’s current Executive Director, Valerie M. Elliott, advised Mr. Bailey that the Board opened a preliminary investigation file, File No. 2004.021, based upon information it received from the U.S. Department of Justice that Mr. Bailey had exhausted his appeals in his criminal case. Ms. Elliott requested that Mr. Bailey submit to the Board a written response to enclosed allegations about his criminal conviction pursuant to A.A.C. R4-1-455.03(F). That letter was mailed to Mr. Bailey by certified mail to 2233 E. Broadway, Tucson, Arizona 85719, which is his address of record at the Board. 25. That mailing was returned to the Board by postal authorities as unclaimed. 26. On or about October 17, 2003, the Board re-sent a letter requesting Mr. Bailey’s written response by certified and regular mail. The letter also advised Mr. Bailey that his case would be presented to the Board for consideration at its December 1, 2003 meeting. 27. By letter dated November 20, 2003, Mr. Bailey responded to the Board’s recent letter stating that he desired to attend the December Board meeting and that he would “update the Board at that time as to pending issues in this case.” He gave no further explanation or status of his felony conviction. 28. On or about December 4, 2003, the Board issued a Complaint and Notice of Public Hearing in ASBA File No. 2004.021 seeking to discipline Mr. Bailey’s Certified Public Accountant Certificate and Certified Public Accounting Firm Registration. 29. There is no evidence that Mr. Bailey’s civil rights have been restored. 30. Mr. Bailey lacks credible remorse and rehabilitation for his felony crime. During the hearing Mr. Bailey minimized his criminal activity. His statement that his felony conviction was the result of a vendetta by the United States government because of his allegedly successful practice against the Internal Revenue Service highlights his lack of remorse. 31. Mr. Bailey’s felony conviction has a reasonable relationship to the practice of accounting. 32. Mr. Bailey’s felony conviction involved an accounting and/or tax violation committed by him. 33. Mr. Bailey’s acts or omissions resulting in his felony conviction involved dishonesty, fraud and misrepresentation by him. 34. Mr. Bailey knowingly misrepresented facts while engaged in the practice of accounting which resulted in his felony conviction. 35. Mr. Bailey’s felony conviction reflects adversely on his fitness to engage in the practice of public accounting in the State of Arizona. 36. The Board has taken prior disciplinary action against Mr. Bailey in Case No. 87.002 CO. That case was disposed by a consent agreement. In that case, Mr. Bailey acknowledged that he “failed to comply with generally accepted accounting principles and generally accepted auditing standards during an engagement.” Mr. Bailey consented to an order requiring, among other things, securities and financial audits restrictions for three years, general audit restrictions for three years, peer review for two years and professional education requirements for two years. 37. Mr. Bailey continues to engage in the practice of accounting.[2]

CONCLUSIONS OF LAW

1. The Board has jurisdiction over the subject matter in this case and over Mr. Bailey and his certificate and registration. 2. The conduct and circumstances described in the above Findings of Fact support the conclusion that Mr. Bailey violated the provisions of A.R.S. § 32-741(A)(1) (Conviction of a felony under the laws of any state or of the United States if civil rights have not been restored pursuant to title 13, chapter 9 or other applicable recognized judicial or gubernatorial order). 3. The conduct and circumstances described in the above Findings of Fact support the conclusion that Mr. Bailey violated the provisions of A.R.S. § 32-741(A)(4) (Dishonesty in the practice of accounting). 4. Mr. Bailey’s permanent prohibition from practicing before the Internal Revenue Service constitutes a violation of A.R.S. § 32- 741(A)(10) (Suspension or revocation for cause of the right to practice before the federal securities exchange commission or any other governmental body or agency). 5. The conduct and circumstances described in the above Findings of Fact constitute a failure by Mr. Bailey to comply with the professional standards set forth in A.A.C. R4-1-456(A)(1) and (5), which states:

A. All registrants, individuals and firms shall report to the Board: 1. Any suspension or revocation of the right to practice accounting before the federal Securities and Exchange Commission, the Internal Revenue Service, or any other state or federal agency.

5. All convictions of the registrant of any felony, or any crime involving accounting or tax violations, dishonesty, fraud, misrepresentation, embezzlement, theft, forgery, perjury or breach of fiduciary duty.

6. The conduct and circumstances described in the above Findings of Fact constitute a failure by Mr. Bailey to comply with the professional standards set forth in A.A.C. R4-1-456(B), which states:

B. The report required under this rule must be in the form of written letter and received by the Board within 30 days of the entry of any judgment or suspension or revocation of the registrant’s right to practice before any agency.

7. The conduct and circumstances described above support the conclusion that Mr. Bailey violated the provisions of A.R.S. § 32-741(A)(2) (Conviction of any crime that has a reasonable relationship to the practice of accounting by a certified public accountant or by a public accountant, including crimes involving accounting or tax violations, dishonesty, fraud, misrepresentation, embezzlement, theft, forgery, perjury or breach of fiduciary duty, regardless of whether civil rights have been restored). 8. The conduct and circumstances described in the above Findings of Fact constitute a failure by Mr. Bailey to comply with the professional standards set forth in A.A.C. R4-1-455(B) (Integrity and objectivity: Certified public accountants, public accountants, or firms shall not knowingly or recklessly misrepresent facts when engaged in the practice of public accounting, including the rendering of tax and management advisory services). 9. The conduct and circumstances described in the above Findings of Fact constitute a failure by Mr. Bailey to comply with the professional standards set forth in A.A.C. R4-1-455.03(A) (Discreditable acts: Certified public accountants or public accountants shall not commit any act that reflects adversely on their fitness to engage in the practice of public accounting) and American Institute of Certified Public Accountants (“AICPA”) Rule 501 regarding discreditable acts, which is incorporated in the Board’s rules at A.A.C. R4-1-455.04:

AICPA Rule 501 states, “Acts discreditable. A member shall not commit an act discreditable to the profession.”

10. The conduct and circumstances described in the above Findings of Fact constitute violations by Mr. Bailey of A.R.S. § 32-741(A)(9) (Knowing violation of any decision, order or rule issued or adopted by the board). 11. The Administrative Law Judge concludes that the evidence of record supports the revocation of Certified Public Accountant Certificate No. 3811-E pursuant to A.R.S. § 32-741. 12. The disciplinary options against Mr. Bailey’s Certificate No. 3811-E are grounds for revocation or suspension of his Firm Registration No. 5035-S, pursuant to A.R.S. § 32-742. The Administrative Law Judge concludes that the evidence of record supports the revocation of Firm Registration No. 5035-S. 13. The Administrative Law Judge concludes, based upon the totality of the evidence of record, that Mr. Bailey should also be required to reimburse the Board for its costs of the investigation and the administrative hearing in this matter. A.R.S. § 32-741 (A) provides that “the board may revoke or suspend any certificate granted by this chapter and may take disciplinary action concerning the holder of any certificate” for a statutory violation. A.R.S. § 32-701(6) defines disciplinary action as “any other regulatory sanctions imposed by the board in combination with, alternative to, revocation or suspension of a certificate or registration.” A.R.S. § 32- 701(6)(f) provides for the disciplinary action of reimbursement. The Board would not have incurred the costs of investigation and the administrative hearing in this matter but for Mr. Bailey’s criminal activity that resulted in his federal felony conviction, his repeated failure to properly self-report the status of his criminal case to the Board, his repeated failure to properly report the status of his criminal case after being requested to do so by the Board’s staff and his failure to advise the Board that he had exhausted his criminal appeal rights thereby resulting in his federal felony conviction being final.

RECOMMENDED ORDER

In view of the foregoing, it is recommended that Certified Public Accountant Certificate No. 3811-E issued to Donald D. Bailey be revoked on the effective date of the entered Order in this matter. It is further recommended, in combination with the above provided certificate revocation, that Donald D. Bailey, holder of Certified Public Accountant Certificate No. 3811-E, be ordered to reimburse the Board’s costs of its investigation and the administrative hearing in this matter. It is further recommended, in addition to the above provided certificate revocation and reimbursement requirement, that Certified Public Accounting Firm Registration No. 5035-S issued to Don Bailey, CPA, a sole proprietorship of Donald D. Bailey, be revoked on the effective date of the entered Order in this matter.

Done this day, February 13, 2004

______________________________________ Brian Brendan Tully Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2004, to:

Valerie Elliott, Executive Director State Board of Accountancy 100 N. 15th Ave Suite 165 Phoenix, Arizona 85007

By ___________________________ ----------------------- [1] Count 4 appears on page 5 of the Superseding Indictment, which was admitted into evidence as Exhibit 7. This date is crossed out and a handwritten notation reading “January 31, 1994” inserted. There is no indication who made the alteration. [2] The Board has not exercised its discretion to summarily suspend Mr. Bailey’s Certified Public Accountant Certificate pending proceedings for revocation or other disciplinary action as authorized by A.R.S. § 32- 741(B)(1). A conviction is defined in A.R.S. § 32-701(5) as “a judgment of conviction by any state or federal jurisdiction in a criminal cause, regardless of whether an appeal is pending, or could be taken, and includes any judgment or order based on a plea of no contest.”

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Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826