ALJDEC decisions subject to certification as final

10F-2007.049-ACY · State Board of Accountancy · 2010-04-20

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: April 14, 2010 at 8:00 a.m. APPEARANCES: The Arizona State Board of Accountancy appeared through Mary DeLaat Williams, Esq., Assistant Attorney General; Respondent Donald Hartman appeared on his own behalf. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

FINDINGS OF FACT Background and Procedure 1. The Arizona State Board of Accountancy (“the Board”) is the state agency authorized pursuant to A.R.S. §§ 32-701 et seq. to regulate the practice of accounting by Certified Public Accountants and Certified Public Accounting Firms in the State of Arizona. 2. The Board had issued to Donald Hartman, CPA, P.C. Certified Public Accountant Firm Registration No. 2236-C. 3. On January 30, 2006, the Board received Mr. Hartman’s biennial Firm Renewal Form for the period 1/31/2006 – 3/31/2008 (“the 2006-2008 Firm Renewal Form”). 4. On the 2006-2008 Firm Renewal Form, Mr. Hartman in the Peer Review section of the form indicated that, since the last registration, his firm had provided services consisting of “Reviews of Historical or Perspective Financial Statements” and “Compilations of Historical or Perspective Financial Statements (With disclosures on which a report was issued).“ 5. The Peer Review section of Firm Renewal Form advised Mr. Hartman that, if his registration renewal date was between January 1, 2005 and June 30, 2006, his peer review must be completed and received by the Board no later than June 30, 2006. 6. On June 28, 2006, the Board received Mr. Hartman’s request for a one-month extension to submit his firm’s peer review for the reporting period ending on December 31, 2005. Mr. Hartman also stated that “I have performed no Audits, Reviews, or Compilations with disclosure since the beginning of the new reporting period, and do not anticipate doing so in the future.” 7. On August 1, 2006, Board staff sent a letter to Mr. Hartman, informing him that the Board had granted him an extension until September 30, 2006, to submit his firm’s peer review. 8. Mr. Hartman did not submit a peer review of his firm on or before September 30, 2006. 9. On November 14, 2006, Board staff sent a certified letter to Mr. Hartman, informing him that, at the Board’s November 13, 2006 meeting, it had reviewed his firm’s failure to comply with the peer review requirements under A.A.C. R4-1-454 and had determined to offer him a Decision & Order (By Consent) to resolve the matter. A proposed Decision and Order (By Consent) was attached to the November 14, 2006 letter. 10. On December 9, 2006, Mr. Hartman signed the proposed Decision & Order (By Consent) to accept it and mailed it back to the Board. The Board’s president signed the Decision and Order (By Consent) on January 8, 2007 (“the first consent decree”). The effective date of the first consent decree was January 9, 2007. 11. In the first consent decree, Mr. Hartman admitted that cause existed under A.R.S. § 32-741(A)(15) and (9) and A.A.C. R4-1- 455.03(A) for disciplinary action against his firm registration under A.R.S. § 32-741(A) and A.A.C. R4-1-454(H). The first consent decree included the following terms: (1) Mr. Hartman’s firm was placed on probation for a period not to exceed one year, (2) Mr. Hartman was required within 30 days to contract with a peer reviewer to complete the peer review requirements and to provide a copy of the engagement letter to the Board by the thirtieth day; (3) Mr. Hartman was required to submit to the Board a schedule of peer review dates within 60 days; and (4) Mr. Hartman was required to pay a $500.00 administrative penalty within 60 days. 12. Mr. Hartman paid the $500.00 administrative penalty but did not comply with the other requirements of the first consent decree. 13. On January 17, 2008, Board staff informed Mr. Hartman that the Board would consider his compliance with the first consent decree at its next scheduled meeting on February 11, 2008 at 8:15 a.m., the meeting would be held at the Board’s office. 14. On January 31, 2008, the Board received Mr. Hartman’s biennial firm renewal for January 31, 2008 through January 31, 2010. Mr. Hartman disclosed that, within three years prior to the renewal, his firm had provided a review of historical or prospective financial statements. 15. At its February 11, 2008 meeting, the Board determined to offer Mr. Hartman another Decision and Order (By Consent) to resolve his firm’s failure to comply with peer review requirements and the first consent decree (“the second consent decree”). On March 10, 2008, Mr. Hartman signed the second consent decree to accept it and mailed it back to the Board. The Board’s president signed the second consent decree on March 17, 2008. The effective date of the second consent decree was March 18, 2008. 16. In the second consent decree, Mr. Hartman admitted that cause existed under A.R.S. § 32-741(A)(15) and (9) and A.A.C. R4-1- 455.03(A) for disciplinary action against his firm registration under A.R.S. § 32-741(A) and A.A.C. R4-1-454(H). The second consent decree included the following terms: (1) Mr. Hartman’s firm was placed on probation for a period not to exceed seven months; (2) Mr. Hartman was required to submit a completed peer review within seven months; (3) Mr. Hartman was required to submit a letter of engagement for a peer review within 30 days; and (4) Within seven months, Mr. Hartman was required to provide documentation to the Board to establish that the peer review had been completed, including a photocopy of the peer review, the final acceptance letter, letter of comment (if any), letter of response (if any), and corrective action (if applicable). Mr. Hartman agreed that his failure to comply with any of the terms of the second consent decree allowed the Board, in its sole discretion, to direct that the matter proceed to a noncompliance hearing for revocation of his firm registration. 17. Mr. Hartmann did not comply with any of the requirements of the second consent decree. 18. On October 28, 2008, Board staff notified Mr. Hartman that, at the Board’s next meeting on November 17, 2008, it would review his compliance with the second consent decree. 19. On November 24, 2008, Board staff notified Mr. Hartman that the Board had determined to offer Mr. Hartman another Decision and Order (By Consent) to resolve his firm’s failure to comply with peer review requirements and the first and second consent decrees (“the third consent decree”). Board staff informed Mr. Hartmann that, under A.A.C. R4-1-455.03(F), he was required to respond to the Board’s offer within 30 days. 20. On December 26, 2008, Board staff informed Mr. Hartman that, at the Board’s next meeting on January 5, 2009, it would review his failure to respond to the offer of the third consent decree. 21. On December 31, 2008, Mr. Hartman signed the third consent decree to accept it and delivered it back to the Board. The Board’s president signed the third consent decree on January 6, 2009. The effective date of the third consent decree was January 6, 2009. 22. In the third consent decree, Mr. Hartman admitted that cause existed under A.R.S. § 32-741(A)(15) and (9) and A.A.C. R4-1- 455.03(A) for disciplinary action against his firm registration under A.R.S. § 32-741(A) and A.A.C. R4-1-454(H). The third consent decree included the following terms: (1) Mr. Hartman’s firm registration was suspended until he complied with the Board’s peer review requirements, which meant that Mr. Hartman’s firm could not use any title, designation or abbreviation to indicate that it was authorized to practice public accounting in Arizona; (2) Mr. Hartman was required to submit peer review dates within 30 days; and (3) Mr. Hartman was required to pay an administrative penalty in the amount of $500.00 within sixty days. Mr. Hartman agreed that his failure to comply with any of the terms of the third consent decree allowed the Board, in its sole discretion, to direct that the matter proceed to a noncompliance hearing for revocation of his firm registration. 23. Mr. Hartman paid the administrative penalty imposed by the third consent decree. He did not provide peer review dates or comply with the peer review requirements set forth in A.A.C. R4-1-454. 24. On October 8, 2009, the Board received from Mr. Hartman a copy of a letter from Bitner & Collings, PLLC dated December 29, 2008 regarding its engagement review for the year ending December 31, 2005 (“the peer review report”). The peer review reported an adverse outcome in relevant part as follows: Deficiencies

Our review disclosed the firm did not adhere to professional standards on the one engagement reviewed as to reporting. The review report does not clearly indicate that:

The review of the basic financial statements was made for the purpose of expressing limited assurance that there are no material modifications necessary for the financial statements to be in conformity with generally accepted accounting principles.

The supplementary information is presented only for supplementary analysis purposes.

The supplementary information has been subjected to inquiry and analytical procedures applied in the review of the basic financial statements.

The accountant did not become aware of any material modifications that should be made to the supplementary information.

The review engagement in the construction industry was deemed substandard.

Recommendation

We recommend that the firm refer to the Statements of Accounting and Review Services as to guidance on reporting on supplemental information in a review engagement.

Deficiencies

Our review on the one review engagement disclosed that there were several required disclosures that were not present in the basic financial statements or notes. These included maturities and rates of notes payable and other debt, maturities for the next five years, classification of debt between current and long term, operating leases and rent expenses of lessees, advertising costs, significant components of income tax expense, the amount of income taxes and interest paid, description of pension plan, and risk and uncertainties. As indicated in the previous deficiency, the construction industry review engagement was deemed substandard.

Recommendation

We recommend that the firm obtain access to a financial reporting and disclosure checklist and complete on all engagements.

Deficiencies

Our review of the one review engagement disclosed that working papers documenting the matters covered in the accountant’s inquiries of company personnel and analytical procedures were inadequate. As indicated in the previous deficiency, the construction industry review engagement was deemed substandard.

Recommendation

We recommend that the firm refer to professional standards as to required documentation and either develop or acquire programs and questionnaires which assist in preparing work papers (for example AR 100.83 and AR 100.105) which will provide adequate documentation.

25. The Board also received Mr. Hartman’s response to the peer review report, which was dated December 30, 2008 and provided in relevant part as follows: Our firm has not performed any attest engagements since that time. This is the firm’s first peer review, and it has been an [sic] learning experience. Now that we know what is expected, we may elect to resume these engagements after extensive continuing education on the requirements.

To prevent the recurrence of the deficiencies noted by the reviewer and to prevent other such deficiencies from occurring, we will review the professional standards related to the deficiencies and ensure that the professional standards will be complied with on all future engagements.

Specifically, we have ordered an updated Guide to Compilations and Review by PPC, and will be implementing the procedures outlined therein.

All professional staff who work on accounting engagements will be participating in continuing professional education in disclosures and reporting to correct the disclosure and reporting deficiencies noted by the reviewer. In addition, we will be using a third-party reporting and disclosure checklist to ensure all reporting and disclosure matters are appropriately addressed.

We believe these actions are responsive to the deficiencies noted on the review.

26. On October 8, 2009, the Board also received from Mr. Hartman a letter from the Peer Review Committee of the California Society of Certified Public Accountants (“the California Society”) dated April 1, 2009, in relevant part as follows: On March 25, 2009, the California Peer Review Committee considered the report on the most recent peer review of your firm, the related letter of comments and your firm’s response thereto.

The Committee accepted the aforementioned documents with the understanding that the firm will take the actions outlined in its response to the report and letter of comments. Compliance with these actions will be monitored during your firm’s next review. The due date for your next review is June 30, 2009. This is the date by which all review documents should be completed and submitted to the administering entity.

27. On October 29, 2009, Board staff informed Mr. Hartman that, on October 21, 2009, the Board’s Peer Review Oversight Advisory Committee (“the Committee”) had reviewed his firm’s recent submission. Before the Committee could recommend that Mr. Hartman’s firm had complied with peer review requirements, it would need either documentation supporting compliance with corrective action or a copy of the California Society’s letter absolving the firm from undergoing the 6/30/09 follow-up peer review. 28. On November 16, 2009, the Board received Mr. Hartman’s response to the October 29, 2009 letter, in relevant part as follows: The [California Society] has verbally agreed to absolve the firm for the 06/30/2009 follow-up Peer Review. However, they needed the formal request in writing, and the letter to them is enclosed. They are aware that it is needed by the Arizona Board, and as soon as it arrives, I will forward it.

Even after inquiring, I am still unsure as to what the other requirement in the above referenced letter is. As I indicated to [the California Society] in my letter, I did order and receive PPC’s Guide to Compilations and Review, in order to decipher what I had omitted or not reported properly on the 2005 Review Engagement. However, as I also indicated to them, I have not performed an engagement since that time, and currently have no plans to do so, even though I believe I could do one correctly at this time after studying the Guide.

29. Mr. Hartman attached to his response a copy of his November 4, 2009 letter to the California Society, in relevant part as follows: The above referenced Peer Review was for the period ending December 31, 2005. I have not performed a SSARS engagement since that time.

The acceptance letter by the [California Society] dated April 1, 2009 indicated that I must have an additional Peer Review by June 30, 2009. However, by that time my license had been suspended by the Arizona Board of Accountancy for the delinquency in getting the December 31, 2005 peer review finished.

As per my response to the Report, I have purchased the updated Guide to Compilations and Reviews by PPC, in the event that I would resume doing engagements.

I am currently in the process of getting my license reinstated, but the Arizona Board of Accountancy [Committee] either needs the results of a Peer Review as of June 30, 2009, or an updated letter from the [California Society] stating that a Peer Review was not required.

30. The Board subsequently referred the matter to the Office of Administrative Hearings, an independent agency, to schedule and to conduct a fair hearing. 31. A hearing was held on April 14, 2010. The Board presented the testimony of its Deputy Director Jim Dubé and submitted thirteen exhibits. Mr. Hartman testified on his firm’s behalf. Additional Hearing Evidence 32. Mr. Dubé testified that peer review is overseen by the American Institute of Certified Public Accountants (“AICPA”). Peer review reports must be submitted to an administering body approved by the AICPA. In Arizona, most firms submit peer review reports to the California Society, which the AICPA has approved as an administering body. 33. Mr. Dubé testified that peer review reports result in one of three possible outcomes: (1) Unmodified (pass); (2) Modified (pass with deficiencies); and (3) Adverse (fail). The California Society had approved Bitner & Collings, PLLC, which had reviewed Mr. Hartman’s firm’s 2005 limited engagement and, based on that review, had issued an adverse report. 34. Mr. Dubé testified that the adverse outcome set into motion certain requirements by the administering authority that the recommendations in the peer review report have been implemented. For Mr. Hartman’s firm, the peer review report required that the deficiencies noted be corrected by the June 30, 2009 peer review. The Board sees the peer review process as complete only when the firm has met the requirements of the administering entity. Evidence of the firm having met the administering entity’s requirements must be in writing. 35. As of the date of the hearing, Mr. Hartman had not provided documentary evidence that the California Society had absolved his firm from implementing the corrective actions that it had required to be implemented before June 30, 2009. Without that evidence, Mr. Dubé testified that the Board was at “a stalemate.” The Board could not lift the suspension of Mr. Hartman’s firm registration without evidence of compliance or absolution from the California Society. 36. Mr. Hartman testified that he earned a certificate as a Certified Public Accountant in March 1993. He has been a sole practitioner since 1999 and incorporated in January 2000. 37. Mr. Hartman testified that the peer review requirement under A.A.C. R4-1-454 “snuck up” on him. In June 2005, he divested himself of the last restricted engagement, which at that time had comprised less than 1% of his firm’s accountancy practice. For the most part Mr. Hartman’s firm does work involving taxation or information technology. 38. Mr. Hartman testified that he was required to report the June 2005 restricted engagement on his 2006-2008 and 2008-2010 firm renewals because, although firms must submit biennial renewal applications, they must report limited engagements performed in the three years before the renewal. 39. Mr. Hartman testified that his firm has not undertaken any limited engagements since June 2005. He did not obtain a peer review of the firm before June 30, 2009, because there were no restricted engagements for the reviewing firm to review. 40. Mr. Hartman admitted that he had been “seriously remiss” in responding to the Board’s requirements for peer review. The Board has provided “ample opportunity” for him to comply with peer review requirements for the 2006-2008 renewal periods. He initially did not understand that he needed to provide a letter from the California Society absolving him of performing the corrective action in the peer review report. CONCLUSIONS OF LAW The Board has personal and subject matter jurisdiction over Mr. Hartman’s firm pursuant to A.R.S. §§ 32-701 et seq. and A.A.C. R4-1-101 et seq. The Board has the authority to discipline Mr. Hartman’s firm registration pursuant to A.R.S. § 32-741. The Board bears the burden of proof and must establish cause to penalize Mr. Hartman’s firm registration by a preponderance of the evidence.[1] “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”[2] A preponderance of the evidence is “evidence which is of greater weight or more convincing than evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.”[3] Mr. Hartman is deemed to have knowledge of the Board’s rules.[4] The Board’s administrative regulation requires that, “[e]ffective for registrations on or after January 1, 2005, each firm as defined in A.R.S. § 32-701(8), that performs restricted financial services or full disclosure compilation service shall complete a peer review within the three years immediately preceding the firm’s registration date.”[5] For firms whose registration date fell between January 1, 2005 and June 30, 2006, like Mr. Hartman’s firm, the peer report was due June 30, 2006. Mr. Hartman did not provide a peer review report for his firm before June 30, 2006. The peer review report he provided to the Board in October 2008 had an adverse outcome. Under such circumstances, the Board must determine whether the firm has corrected identified deficiencies.[6] Mr. Hartman has not provided any document from the California Society that his firm has corrected identified deficiencies or that the California Society has absolved Mr. Hartman’s firm from the requirement that it correct the deficiencies. Grounds for revocation of the firm’s license therefore exist under A.A.C. R4-1-454(H). Mr. Hartman’s proven violation of the Board’s regulation also constitutes a discreditable act and provides cause for the Board to penalize his firm’s registration.[7] At this time, despite the three consent decrees and the lapse of time since Mr. Hartman’s initial failure to obtain a timely peer review, it appears that Mr. Hartman’s firm is capable of being regulated. The firm should only be given one last chance to comply with A.A.C. R4-1-454. RECOMMENDED ORDER Based on the foregoing, it is recommended that the Board revoke Certified Public Accountant Firm Registration 2236-C previously issued to Donald Hartman, CPA, P.C. It is further recommended that the Board stay the revocation for a period of 60 days. If Mr. Hartman provides documentary proof that is satisfactory to the Board that the California Society has either absolved his firm from undergoing another peer review or has determined to accept Mr. Hartman’s evidence that the firm has corrected the deficiencies noted in the 2008 peer review report, the Board should not revoke Mr. Hartman’s firm license but, instead, should dismiss this matter. Done this day, April 20, 2010.

/s/ Diane Mihalsky Administrative Law Judge

Transmitted electronically to:

Monica L. Petersen, Executive Director Arizona State Board of Accountancy ----------------------- [1] See A.R.S. § 41-1092.07(G)(2); A.A.C. R2-19-119; see also Vazanno v. Superior Court, 74 Ariz. 369, 372, 249 P.2d 837 (1952). [2] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [3] Black’s Law Dictionary at page 1064 (6th ed. 1990). [4] A.A.C. R4-1-102(A). [5] A.A.C. R4-1-454(A). [6] See A.A.C. R4-1-454(F)(1) and (2). [7] See A.R.S. § 32-741(A)(9) and (15).

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