ALJDEC decisions subject to certification as final

12F-2011.123-ACY · State Board of Accountancy · 2012-05-04

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: April 16, 2012, at 1:00 p.m. APPEARANCES: The Arizona State Board of Accountancy was represented by Seth T. Hargraves, Esq., Assistant Attorney General; Respondent David E. Trapp did not appear; Respondent Forrest & Trapp, PC was represented by Richard L. Klauer, Richard L. Klauer, PC 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 profession of Certified Public Accountants (“CPAs”) in the State of Arizona. 2. The Board issued CPA Certificate No. 13263-E to David E. Trapp (“Respondent”). This certificate enables Respondent to practice as a CPA in Arizona. 3. The Board also issued Certified Public Accounting Firm Registration No. 126-C to Forrest & Trapp, PC (“Forrest & Trapp, PC” or “the firm”). 4. On February 17, 2012, the Board issued a Complaint and Notice of Public Hearing. The Complaint and Notice of Public Hearing charged Respondent with having committed acts that furnished cause for the Board to revoke, suspend, or take other disciplinary action against his CPA certificate under A.R.S. § 32-741(A)(9), specifically A.A.C. R4-1-455.03(A) and (F), and A.R.S. § 32-741(A)(15), and charged Forrest & Trapp, PC with having committed acts that furnished cause for the Board to revoke, suspend, or take other disciplinary action against its firm registration A.R.S. § 32- 742(A) and (B) and A.A.C. R4-1-455.03(D)(2). 5. The Complaint and Notice of Public Hearing set a hearing on April 16, 2012, at 1:00 p.m. before the Office of Administrative Hearings (“the OAH”), an independent agency. The Board mailed a copy of the Complaint and Notice of Public Hearing to Respondent at his address of record and at his residential address. 6. On April 16, 2012, a hearing was held in the OAH. The Board presented the testimony of Ryan Edmonson, its Compliance Manager, and submitted nine exhibits. Forrest and Trapp, PC presented the testimony of Respondent’s father, E. Edward Trapp, CPA (“Mr. Trapp”), who was one of the founding partners of Forrest & Trapp, PC, and submitted four exhibits. 7. Respondent did not request to appear telephonically at the duly noticed hearing and did not request that the hearing be continued. Although the start of the hearing was delayed fifteen minutes to allow Respondent additional travel time, he did not appear, personally or through an attorney, and did not contact the OAH to request that the start of the hearing be further delayed. Consequently, Respondent did not present any evidence to defend his CPA certificate. Hearing Evidence Charges against Respondent’s Public Accountant Certificate No. 13263-E 8. On or about April 8, 2010, the Board received Respondent’s late biennial registration renewal form for the period from October 31, 2009, to October 31, 2011. Respondent provided his business address as Forrest & Trapp, PC, 444 West Camelback Road, #307, Phoenix, Arizona 85013, and requested that his business address be his address of record with the Board. 9. On or about May 11, 2011, the Board received a consumer complaint from one of Respondent’s clients, alleging that between November 2006, and January 2008, Respondent had induced the client to invest $400,000.00 in a company called American Commercial Finance (“ACF”) by promising that the investment would pay 15% annually in interest. The client alleged that when he requested that Respondent pay the interest to him rather than reinvesting it, Respondent paid him using Forrest & Trapp, PC’s business checks. The client alleged that in January 2010, after Respondent stopped paying interest, he asked about the status of his investment and the following exchange occurred: [Respondent] confessed . . . that he had been lying to me about ACF. He admitted that the company had been closed since the Summer of 2008 and that it was insolvent. He also admitted that he knew ACF was in financial trouble in early 2007. He told me that the “interest payments” that he was giving to me were from his personal funds because ACF did not have any money to pay me. The client stated that Respondent agreed to pay $2,500.00/month but after making four payments from Forrest & Trapp, PC’s business account, Respondent stopped making payments. 10. The Board designated the client’s complaint as Case No. 2011.123 (“the complaint” or “the client’s complaint”). On May 27, 2011, the Board sent via certified mail a copy of the client’s complaint to Respondent at his address of record. The Board’s letter that accompanied the complaint stated in relevant part: Please review the enclosed complaint and allegations. A written response is required, pursuant to Arizona Administrative Code R4- 1-455.03(F), and should be received in the Board office no later than 30 days from the date of this letter. The Board requests that you include any attempts you have made to rectify this matter and any documentation you wish to be considered. If you fail to respond to this request, this failure may be considered a knowing violation of a regulation promulgated by the Board in violation of A.R.S. Section 32-741(A)(9) & (15). (Emphasis in original.) According to the certified mail receipt, Respondent’s office received the Board’s May 27, 2011 letter on May 31, 2011. 11. On or about June 22, 2011, the Board received Respondent’s written response to the client’s complaint. In the written response, Respondent stated that he did not believe that the complaint was relevant to his CPA certificate because the complaint allegations “relate solely to a business transaction with the [client], not to any issues involving public accounting or any other services provided.” The address on Respondent’s June 22, 2011 written response was his address of record. 12. On or about June 27, 2011, the Board received a more detailed written response from Respondent to the client’s complaint. In the June 27, 2011 written response, Respondent admitted having informed the client of an opportunity to invest in ACF, but denied having induced the client to invest in ACF or having ever lied to the client about ACF’s solvency or profitability. Respondent admitted having “an ambiguous personal/business relationship [with the client] that culminated in us investing in a business and subsequently losing money,” but denied any professional responsibility or wrongdoing. 13. On September 13, 2011, the Board sent via certified mail to Respondent’s address of record a letter informing him that the Board’s Accounting and Auditing Standards Committee (“the Committee”) had reviewed the file in the client’s complaint and requested that Respondent provide five categories of documents relating to ACF within 30 days. The Board’s September 13, 2011 letter concluded: You are hereby requested to respond by submitting the requested documentation within thirty days from the date of this letter. Please be advised that your failure to timely respond and/or submit the requested material may be considered a violation of A.A.C. R4-1-455.03(F), and grounds for disciplinary action against your certificate pursuant to A.R.S. § 32-741(A)(9) and (15).

(Emphasis in original.) The certified mail receipt showed that the Board’s September 13, 2011 letter was delivered to Respondent’s address of record on September 14, 2011. Respondent did not provide the requested documents to the Board. 14. Respondent failed to submit a biennial registration renewal for the period from October 31, 2011, to October 31, 2013. As a result, on November 1, 2011, Respondent’s Certified Public Accountant Certificate No. 13263-E was automatically suspended pursuant to A.R.S. § 32-741(C).[1] 15. On November 9, 2011, the Board sent via certified mail to Respondent’s address of record a letter informing him that the Committee had reviewed the file in the client’s complaint and determined to conduct an investigative interview of Respondent on January 19, 2012, at 11:00 a.m. at the Board’s office. The Board’s November 9, 2011 letter concluded: A written response is required, pursuant to Arizona Administrative Code [“A.A.C.”] R4-1-455.03(F), and should be received in the Board office no later than 30 days from the date of this letter. If you fail to respond to this request, this failure may be considered a knowing violation of a regulation promulgated by the Board in violation of A.R.S. Section 32- 741(A)(9) & (15).

(Emphasis in original.) The certified mail receipt showed that the Board’s November 9, 2011 letter was delivered to Respondent’s address of record on November 10, 2011. Respondent did not appear at the Board’s office on January 19, 2012, for the investigative interview appointment and did not file a written response to the Board’s November 9, 2011 letter. Charges against Forrest & Trapp, PC’s Certified Public Accounting Firm Registration No. 126-C 16. In November 1980, Mr. Trapp and his partner, Hugh L. Forrest, CPA, formed the professional corporation of Forrest & Trapp, PC to render accounting services to clients. On or about December 22, 1980, Mr. Trapp and Mr. Forrest filed at the Arizona Corporation Commission (“ACC”) articles of incorporation for Forrest & Trapp, PC. 17. The articles of incorporation stated at paragraph 3 that the purpose of the corporation was in relevant part as follows: The profession to be practiced through the professional corporation is accounting, and the corporation may render such professional service only through its shareholders, directors, officers, agents and employees who are themselves duly licensed in that category of professional service. . . . No person who is not a certified public accountant shall have any part in the ownership, management or control of the corporation, nor may any proxy to vote any shares of this corporation be given to a person who is not so licensed. . . .

(Emphasis added.) The articles of incorporation also described disqualification of shareholders, directors, officers, agents, and employees at paragraph 9, in relevant part as follows: The corporation may not do any act which is prohibited to be don[e] by persons certified as public accountants. Each shareholder, director, officer, agent and employee of the corporation shall be subject to the rules and regulations adopted by the agency of the State of Arizona having jurisdiction. If any shareholder, director, officer, agent or employee of the [corporation] becomes legally disqualified to render the category of professional service for which the corporation was organized, the corporation thereupon forthwith shall terminate his or her employment. Within ninety (90) days following the death, insanity, bankruptcy, retirement, resignation, explusion [sic] or other legal disqualification of a shareholder, all of the shares of such shareholder and the interest of his or her spouse therein shall be transferred to or acquired by persons qualified to own such shares or by the corporation. Until such transfer is effected, such shares shall not be entitled to be voted. . . .

(Emphasis added.) 18. At some point before August 2004, Mr. Forrest left Forrest & Trapp, PC. In August 2004, Respondent joined the firm and Mr. Trapp sold 95% of his ownership interest to Respondent. 19. On January 27, 2011, the Board received from Respondent a Firm Renewal Form for Forrest & Trapp, PC. The form listed the firm’s address as 444 West Camelback Road, #307, Phoenix, Arizona 85013, and the firm’s partners as Respondent and Mr. Trapp. 20. Mr. Edmonson testified that if a firm’s partners change, A.R.S. § 32-731(E)[2] requires the firm to notify the Board of the change within one month and that if a firm’s address changes, A.A.C. R4-1- 346(A)[3] requires the managing partner to notify the Board of the change within 30 days. Mr. Edmonson testified that the Board had not received a notice of change of partners or notice of change of address from Forrest & Trapp, PC before the date of the hearing in this matter. 21. Mr. Edmonson testified that although he had numerous conversations with Mr. Trapp or his attorney regarding Mr. Trapp’s efforts to save Forrest & Trapp, PC from Respondent’s destructive behavior, the Board did not send any notices regarding possible discipline against Forrest & Trapp, PC’s firm registration to Mr. Trapp because the firm’s address of record had not been changed from the address listed on the January 27, 2011 Firm Renewal Form.

22. According to a printout from the ACC’s public website, on October 25, 2011, Respondent filed an Annual Report and Certificate of Disclosure that showed Respondent as Forrest & Trapp, PC’s president, secretary, treasurer, and the only director. The firm’s domestic address was listed as 444 West Camelback Road, #307, Phoenix, Arizona 85013. According to the printout, the firm’s officers and address on the ACC’s records were unchanged as of April 16, 2012. 23. According to the ACC printout, on February 17, 2012, Respondent filed Articles of Amendment to the ACC, stating that on February 16, 2012, the firm’s Board of Directors had voted to change the firm’s name from Forrest & Trapp, PC to Forrest & Trapp, Inc. 24. Mr. Edmonson testified that A.R.S. § 32-747(D)[4] prohibits any corporation or professional limited liability company from practicing public accounting in Arizona, but exempts professional corporations from the prohibition. 25. Mr. Trapp testified that in early November 2011, someone told him that Respondent’s CPA certificate had been suspended. 26. Mr. Trapp argued that prior to the name change, when Respondent’s CPA certificate was suspended on November 1, 2011, Respondent was legally disqualified under paragraph 9 of Forrest & Trapp, PC’s articles of incorporation from acting as the firm’s officer or director and that his shares were transferred to the corporation. Mr. Trapp argued that at that point, under paragraph 3 of the firm’s articles of incorporation, he became the only shareholder who was qualified to act on the firm’s behalf. 27. Mr. Trapp submitted a Corporate Notice of Forrest & Trapp, PC’s intent to transfer Respondent’s shares to the corporation under paragraph 9 of the articles of incorporation, dated January 18, 2012, signed by himself, and effective immediately. Mr. Trapp testified that only he and his attorney were present at the board meeting at which the corporation’s shares were transferred. Mr. Trapp did not provide the Corporate Notice to the Board until the hearing. 28. Mr. Edmonson testified that Mr. Trapp needed to change the ownership of Forrest & Trapp, PC through the ACC, not through the Board. Until ACC’s records reflected a change in ownership, the Board would consider Respondent to be the majority owner of the firm. 29. Mr. Trapp testified that although Respondent was no longer returning his calls, he was attempting to gain access to the client files located at 444 West Camelback Road, #307, Phoenix, Arizona 85013, so that he could protect Forrest & Trapp, PC’s clients. Mr. Trapp testified that at the time of the hearing, Respondent had denied access to the files to both Mr. Trapp and the clients. 30. On the date of the hearing, April 16, 2012, Mr. Trapp filed a Change of Address Form to the Board for Forrest & Trapp, PC, changing the firm’s address to 3509 East Shea Boulevard, #117F, Phoenix, Arizona 85028. CONCLUSIONS OF LAW The Complaint and Notice of Public Hearing that the Board mailed to Respondent at his address of record and at his residential address was reasonable and Respondent is deemed to have received notice of the hearing.[5] The Board has been created and authorized to regulate and control the profession of Certified Public Accountancy in Arizona.[6] This matter lies within its jurisdiction. The Board bears the burden of proof to establish cause to discipline Respondent’s CPA certificate and Forrest & Trapp, PC’s firm registration by a preponderance of the evidence.[7] Mr. Trapp bears the burden to establish affirmative defenses or factors in mitigation of any penalty by the same evidentiary standard.[8] “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”[9] Respondent and Forrest & Trapp, PC are both deemed to have knowledge of the Board’s rules.[10] Respondent’s failures to file timely written responses to the Board’s September 13, 2011 letter and November 9, 2011 letter provides grounds under A.R.S. § 32-741(A)(15)[11] and (9),[12] specifically A.A.C. R4-1- 455.03(F),[13] for the Board to discipline his CPA certificate. Respondent’s failure to respond to the Board’s letters and failure to cooperate with the Committee’s investigation also constitute a failure to comply with the professional standards set forth in A.A.C. R4-1- 455.03(A).[14] Respondent’s failures to respond to the Board’s letters, to appear at the duly noticed hearing, or to present any evidence in his defense indicate that at this time, he cannot be regulated. The evidence at hearing established that the Board’s proposed disciplinary revocation was reasonable, considering the potential harm to the public and Respondent’s inability or unwillingness to make his professional practices conform to applicable statutory and regulatory requirements. A.R.S. § 32-734 requires professional corporations composed of certified public accountants to meet “the requirements of title 10, chapter 20 and any additional nonconflicting requirements contained in sections 32-731 and 32-732 . . . .” Although ownership of Forrest & Trapp, PC is disputed, the Board did not establish that the firm’s name was used in a misleading way in violation of A.A.C. R-1-45.03(D)(2).[15] A.R.S. § 32-731(A)(2) requires that “[a]t least fifty-one per cent of the ownership of the partnership, in terms of direct and indirect financial interests and voting rights, must belong to holders in good standing of certificates or licenses to practice accounting as certified public accountants . . . .” If the Board revokes Respondent’s license as a result of the violations proven at hearing and if Respondent currently owns more than fifty-one per cent interest in Forrest & Trapp, PC, A.R.S. § 32- 742(A)[16] requires the Board to revoke the firm’s registration. A.R.S. § 32-731(G) allows the Board some latitude if a firm is undergoing a change in ownership or a conflict between partners over control of the firm, providing as follows: A partnership that fails to comply with this section due to changes in the ownership of the firm or personnel after receiving or renewing the registration must take corrective action to comply with this section as quickly as possible. The board may grant a reasonable period of time for the firm to take these corrective actions. A failure to comply with these requirements is grounds for suspension or revocation of the partnership registration.

(Emphasis added.) Mr. Trapp presented evidence at the hearing that ownership and control of Forrest and Trapp, PC is contested and that, under the articles of incorporation, Respondent lost his ownership interest in the firm. The Board may grant Mr. Trapp a reasonable period of time to establish that Respondent no longer owns a majority of the firm and that Mr. Trapp is the only partner who is qualified to act on the firm’s behalf under the articles of incorporation. If Respondent does not own the majority interest in Forrest & Trapp, PC, A.R.S. § 32-742(B)[17] allows the Board some discretion whether to revoke or impose a lesser penalty on the firm’s registration. Although Mr. Trapp did not notify the Board in writing of the change in ownership in Forrest & Trapp, PC within 30 days of November 1, 2011, and as of the date of the hearing had not corrected ACC records to show his control of the firm or restoration of the firm’s corporate firm, as a factor in mitigation, it did not appear that Mr. Trapp knew the extent of Respondent’s misconduct or that Respondent had abandoned Forrest & Trapp, PC’s clients until shortly before the hearing. Allowing Mr. Trapp more time to continue his efforts to secure Forrest & Trapp, PC’s clients’ files serves the Board’s purpose of protecting the public.[18] RECOMMENDED ORDER Based on the foregoing, it is recommended that on the effective date of the Board’s final order, the Board revoke Respondent David E. Trapp’s Certified Public Accountant Certificate No. 13263-E. It is further recommended that the Board suspend Certified Public Accounting Firm Registration No. 126-C previously issued to Forrest & Trapp, PC until E. Edward Trapp provides proof that is satisfactory to the Board that he owns the majority interest in the firm, including proof that the records of Arizona Corporation Commission reflect his majority interest and that the corporate form of the firm has been restored to a professional corporation. It is further recommended that if on or before ninety (90) days after the effective date of the Board’s order, Mr. Trapp fails to provide proof that he owns majority interest in Forrest & Trapp, PC and that its corporate form has been restored to that of a professional corporation, the Board revoke the firm’s registration. In the event of certification of the Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order will be five days from the date of that certification. Done this day, May 4, 2012.

/s/ Diane Mihalsky Administrative Law Judge

Transmitted electronically to:

Monica L. Petersen, Executive Director Arizona State Board of Accountancy ----------------------- [1] A.R.S. § 32-741(C) provides in relevant part as follows: The certificate of any certified public accountant or public accountant who fails to timely register and pay the biennial registration fee as required by section 32-730, subsection A shall be automatically suspended without prior notice or a hearing. . . . If the certified public accountant or public accountant fails to reinstate the certificate within twelve months of the date of suspension, the certificate expires. . . . [2] A.R.S. § 32-731(E) provides as follows: An applicant for registration or a partnership registered pursuant to this section shall notify the board in writing within one month of any change of partners whose principal place of business is in this state, any change in the number or location of offices of the partnership in this state, any change in the identity of the individuals in charge of the partnership's offices in this state and any issuance, denial, revocation or suspension of a registration, license or permit by any other state. [3] A.A.C. R4-1-346(A) provides that “[w]ithin 30 days of any business, mailing, or residential change of address, a registrant shall notify the Board of the new address in a letter signed by the registrant.” [4] A.R.S. § 41-747(D) provides that “[n]o corporation or professional limited liability company shall be permitted to practice public accounting in this state, except that this subsection does not apply to a professional corporation incorporated under the laws of this state or to a professional limited liability company, either of which is properly qualified to do business within this state and is otherwise qualified to practice accounting under this chapter.” Although the name change may have provided additional grounds for the Board to discipline Forrest & Trapp, PC’s firm registration, as noted above, the Board’s Complaint and Notice of Public Hearing did not charge A.R.S. § 32-747(D). [5] See A.R.S. §§ 41-1092.04; 41-1092.05(D). [6] See A.R.S. § 32-701 et seq. [7] See A.R.S. § 41-1092.07(G)(2); A.A.C. R2-19-119(A) and (B)(1); see also Vazanno v. Superior Court, 74 Ariz. 369, 372, 249 P.2d 837 (1952). [8] See A.A.C. R2-19-119(B)(2). [9] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [10] A.A.C. R4-1-102(A). [11] A.R.S. § 32-741(A)(15) provides that after notice and an opportunity for hearing, the board may suspend, revoke, or otherwise discipline any certificate previously issued for “[f]ailing to respond or furnish information in a timely manner to the board or its designated agent, if the information is legally requested by the board and is in the registrant’s possession or control.” [12] A.R.S. § 32-741(A)(9) provides that after notice and an opportunity for hearing, the board may suspend, revoke, or otherwise discipline any certificate previously issued for “[k]nowing violation of any decision, order or rule issued or adopted by the board.” [13] A.A.C. R4-1-455.03(F) provides as follows: “Communications: When requested, certified public accountants or public accountants shall respond to communications from the Board within 30 days of the mailing of such communications by registered or certified mail.” [14] A.A.C. R4-1-455.03(A) provides on relevant part as follows: Discreditable acts: Certified public accountants, public accountants, or firms shall not commit any act that reflects adversely on their fitness to engage in the practice of public accounting, including: 1. Violation of any of the provisions of R4-1-455 through R4- 1-455.04; . . . . 3. Violation of any of the provisions of A.R.S. Title 32, Chapter 6, Article 3, or any rule promulgated under these statutes. [15] A.A.C. R4-1-455.03(D)(2) provides among other responsibilities and practices with which Registrants are required to comply the following: A certified public accountant or public accountant shall not use a professional or firm name or designation that is misleading about the legal form of the firm, or about the persons who are partners, officers, members, managers, or shareholders of the firm, or about any other matter. A firm name or designation shall not include words such as “& Company,” “& Associates,” or “& Consultants” unless the terms refer to additional full-time CPAs that are not otherwise mentioned in the firm name. [16] A.R.S. § 32-742(A) provides that “[a]fter notice and an opportunity for a hearing, the board shall revoke a firm's registration to practice public accounting if at any time it does not have all the qualifications prescribed by this chapter.” [17] A.R.S. § 32-742(B) provides in relevant part: B. After notice and an opportunity for a hearing, the board may revoke or suspend a firm's registration to practice public accounting and may additionally take disciplinary action concerning the registrant for any of the causes enumerated in section 32-741, subsection A or for any of the following additional causes: 1. The revocation or suspension of any certificate issued by the board of any partner, shareholder, member, manager, officer, director, agent or employee of the firm. (Emphasis added.) [18] The Board’s purpose is “to ensure that the public is protected from the incompetent practice of accountancy.” Laws 2005, Ch. 27, § 3.

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