ALJDEC decisions subject to certification as final

13F-2011.134-ACY · State Board of Accountancy · 2013-01-15

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: December 12, 2012, with the record held open until December 27, 2012 APPEARANCES: Denise H. Troy, Esq. for Stephen M. Evans; Assistant Attorney General Seth T. Hargraves for the Board of Accountancy ADMINISTRATIVE LAW JUDGE: Thomas Shedden _____________________________________________________________________ FINDINGS OF FACT The Arizona State Board of Accountancy (“Board”) is the authority for regulating Certified Public Accountants (“CPA”) in the State of Arizona. The Board does not regulate the practice of accountancy, but rather it regulates only CPAs. On October 23, 2012, the Board issued a Complaint and Notice of Public Hearing setting this matter for hearing at 8:00 a.m. December 12, 2012, at the Office of Administrative Hearings On December 5, 2012, the Board issued a Notice of Withdrawal of Party & Certain Pending Allegations. In that Notice, the Board notified the tribunal that Harner/Evans PLC’s Firm Registration No. 876-L had been cancelled and that Harner/Evans PLC was no longer a party to this matter. The Board presented the testimony of its compliance manager Ryan Edmonson, and Marshall King, CPA. Mr. Edmonson’s official title or job classification is that of Program Project Specialist II, but his job classification has varied over time. Mr. King provides investigative services to the Board based on a contract with the Board. Stephen M. Evans testified on his own behalf. Mr. Evans is the holder of Certified Public Accountant Certificate No. 7551- E issued by the Board, which allows him to practice as a CPA in Arizona. The Board’s basic allegation against Mr. Evans as set out in the Complaint and Notice of Public Hearing is that he failed to respond to the Board’s July 27, 2012 letter requesting certain information. In the letter dated July 27, 2012, the Board informed Mr. Evans that within days of the date of the letter, he was required to submit his entire file related to his Lindahl & Associates LLC (“Lindahl”) Damages Report dated January 14, 2011, and his January 24, 2011 Supplemental Damages Report. Lindahl was involved in a lawsuit with a Mr. and Ms. Ray and Lindahl’s attorney, Karen Palecek, hired Mr. Evans in that matter. The Rays’ attorney in that lawsuit was Claudio Iannitelli. The parties in the Lindahl matter entered into mediation to resolve the dispute. Mr. Evans asserts that the requested files are confidential based on A.R.S. § 12-2238. Although only the July 27, 2012 letter is directly at issue in this matter, the Board and Mr. Evans have exchanged other correspondence related to the Board’s investigation of the Lindahl matter. Before issuing the July 27, 2012 letter, the Board was aware that Mr. Evans was asserting that the requested information was confidential. However, based on information provided by Mr. Iannitelli showing that Mr. Evans had prepared some of the material prior to the mediation, the Board did not agree that A.R.S. § 12-2238 was applicable. The Board’s investigation of Mr. Evans was initiated based on an anonymous complaint (the “Complaint”) the Board received on June 13, 2011. The Complaint was assigned file number 2011.134, showing that it was the 134th complaint received in fiscal year 2011. Mr. Edmonson assigned the Complaint to the Board’s Accounting and Auditing Standards Committee (the “Committee”). The Committee makes advisory recommendations to the Board, with the Board being responsible for the final determination in any given matter. In a letter to the Board dated July 5, 2011, Mr. Evans informed the Board of his opinion that he was prohibited by A.R.S. § 12-2238 from disclosing any information in this matter.[1] Mr. Evans’s letter does not make any request for immunity from the Board, nor does it assert that the requested information is subject to any confidentiality statutes or rules other than A.R.S. § 12-2238. Mr. Evans’s letter does not show that he would provide the requested information if the Board issued a subpoena. In a letter dated September 13, 2011, the Board requested that Mr. Evans provide it with “all engagement letters” related to the Lindahl matter within 30 days. In a letter dated October 12, 2011, Ms. Palecek responded to Board’s September 13, 2011 request. Ms. Palecek informed the Board that her law firm had been engaging Mr. Evans to perform forensic accounting work for 20 years, but had not used engagement letters for the past 10 years. Ms. Palecek then wrote that her conduct and the conduct of Mr. Evans was governed by A.R.S. § 12-2238, which provides that the mediation process is confidential and that the Complaint did not meet any of the exceptions to that statute.[2] Ms. Palecek’s letter did not request that the Board provide Mr. Evans immunity, nor did it assert that the requested information was subject to any confidentiality statutes or rules other than A.R.S. § 12-2238. Ms. Palecek’s letter does not show that Mr. Evans would provide the requested information if the Board issued a subpoena. Ms. Palecek’s letter was presented to the Committee. At the Committee meeting on November 3, 2011, which was the first meeting after Ms. Palecek’s letter was received, the Committee voted to have Mr. King contact the Rays to determine whether Mr. Evans’s involvement in the Lindahl matter was limited to the mediation. Mr. King contacted Mr. Iannitelli, the Rays’ attorney, who informed Mr. King that Mr. Evans had been disclosed as an expert during the litigation phase of that matter. Mr. Iannitelli provided Mr. King with an expert report and other documentation prepared by Mr. Evans during the Lindahl litigation, which was information Mr. Iannitelli had received in the Rays’ Rule 26.1 Disclosure Statements or in response to subpoenas issued by Mr. Iannitelli. Mr. King prepared a Report to the Committee dated November 23, 2011. In that Report, Mr. King wrote that based on his discussions with Mr. Iannitelli and with the Board’s attorney, Assistant Attorney General Seth Hargraves, Mr. Evans’s file was not protected by A.R.S. § 12-2238 because the documents in the file were prepared in connection with the civil litigation. Mr. Edmonson was of the belief that Mr. King’s November 23, 2011 Report was provided to the Committee. In the November 23, 2011 Report, Mr. King criticized Mr. Evans’s work, but concluded that the work papers and an interview with Mr. Evans were required to determine whether Mr. Evans had complied with the applicable accounting standards. At its June 14, 2012 meeting, the Committee voted to send Mr. King’s November 23, 2011 Report to Mr. Evans and give him 30 days to respond. In a letter dated June 15, 2012, the Board provided Mr. Evans a copy of that Report. In a letter from his attorney Timothy J. Thomason dated July 16, 2012, Mr. Evans responded to the Board’s June 15, 2012 letter. Attached to Mr. Thomason’s letter were invoices from the Lindahl matter. Mr. Thomason’s letter disputes Mr. King’s findings and allegations as to the quality and appropriateness of Mr. Evans’s work, but as to the issue in this hearing, footnote 3 of the body of the letter is the only relevant information. In footnote 3, Mr. Thomason wrote that Mr. Evans was concerned that by providing the requested information to the Board, he might be in violation of A.R.S. § 12-2238. Mr. Thomason wrote that Mr. Evans would be willing to provide the required information provided that he was given assurance that he would not be violating the mediation confidentiality statute. Mr. Thomason also stated that both Mr. Evans and Ms. Palecek had tried to obtain such assurances from the Board. Mr. Thomason did not explicitly state or opine that the information was subject to A.R.S. § 12-2238. Mr. Thomason wrote that “Much of the case stems from what occurred at mediation.” Mr. Thomason did not assert that the requested information is subject to any confidentiality statutes or rules other than A.R.S. § 12-2238. Mr. Thomason’s letter does not show that Mr. Evans would provide the requested information if the Board issued a subpoena. Mr. Edmonson’s opinion is that the letter from Mr. Thomason did not show that the entire Lindahl matter was covered by the statute, but rather only that part of it was. At the January 19, 2012 meeting, the Committee voted to have Mr. King interview Mr. Evans and review his work papers. Mr. King tried to get the interview scheduled but was unable to do so. On May 2, 2012, Mr. Evans informed Mr. King that by May 17, 2012, his attorney would send Mr. King a letter with proposed meeting dates, but Mr. King did not receive such a letter by that date. At its May 17, 2012 meeting, the Committee voted to have Mr. King write an investigator’s report, which he then did. At the Committee’s meeting on July 19, 2012, it voted to have staff send Mr. Evans a request to provide his files related to the Lindahl Damage Report and the Supplemental Damages Report. This decision led to the July 27, 2012 letter that is the subject of this hearing. That letter informed Mr. Evans his “failure to timely respond and/or submit the requested material” might be considered a violation of A.A.C. R4-1-455.03(F) and constitute grounds for discipline pursuant to A.R.S. § 32-741(A)(9) and or (A)(15). Mr. Evans signed a Certified Mail return card showing that he received the letter on July 28, 2012. At the Committee’s meeting on September 6, 2012, it voted to recommend that the Board issue the Complaint and Notice of Public Hearing to Revoke Mr. Evans’s CPA certification. In a letter dated September 11, 2012, the Board informed Mr. Evans that it would consider the Committee’s recommendation at its October 15, 2012 Board Meeting. On October 23, 2012, the Notice of Public Hearing was issued. According to Mr. Edmonson, Mr. Evans did not respond within 30 days of the July 27, 2012 letter and that as of the hearing date the Board had not received the requested documentation. Mr. Evans testified that he had responded to the letter by leaving voicemail messages for Mr. Edmonson and Mr. King. In his closing memorandum, Mr. Evans argues that the correspondence from Mr. Evans, Ms. Palecek, and Mr. Thomason also constitute a response to the July 27, 2012 letter. According to Mr. Edmonson, Mr. Evans did not leave any voicemails between July 27 and August 31, 2012, which would have been the approximate deadline for Mr. Evans to respond to the July 27, 2012 letter. In support of his testimony, Mr. Edmonson provided a log in which he keeps a record of all voicemails he receives. That log does not show any voicemails from Mr. Evans. Mr. King testified that he had not received any voicemails from Mr. Evans prior to August 31, 2012. Mr. Edmonson’s opinion is that the July 27, 2012 letter was a legal request for information. The July 27, 2012 letter shows that the Committee was aware that Mr. Evans was concerned about the confidentiality provisions of A.R.S. § 12-2238, but it informed Mr. Evans that based on information from counsel to the Lindahl litigation (i.e., Mr. Iannitelli) the exception found in A.R.S. § 12- 2238(C) was applicable. Mr. Edmonson testified that the Committee did not believe that Mr. Evans was covered by A.R.S. § 12-2238 and so no member of the Committee said that it would ensure that Mr. Evans was not subject to contempt of court or charged with violating the Board’s rules if he provided the Board with the requested information. Even though Mr. King may have received from Mr. Iannitelli a copy Mr. Evans’s file, he felt it necessary for Mr. Evans to provide his own files because often two parties to a dispute do not have the same information in their files. Mr. Evans acknowledged that his files have substantially more documentation than Mr. King received from Mr. Iannitelli. According to Mr. Evans, Mr. Iannitelli provided several inches of documents, whereas his file consists of nine bankers boxes. The Board did not ask Ms. Palecek to waive confidentiality. The Board does have subpoena power, but did not subpoena Mr. Evans’s file. Neither Mr. Edmonson nor Mr. King offered immunity to the Complainant or anyone else, and both men testified that they had no authority to provide anyone with immunity. Mr. Evans brought his files to the Board meeting on October 12, 2012, but the Board would not accept the files at that time. However, at that meeting Mr. Evans was not prepared to provide the files to the Board unless it provided him with some sort of immunity. Mr. Evans’s opinion is that the Complaint against him is part of a conspiracy involving Mr. Edmonson, the Board’s attorney (Mr. Hargraves), potentially Mr. King, and others. Mr. Evans’s opinion is that this matter is a “setup” by Mr. Hargraves, with the intention being to charge Mr. Evans with a violation of statute if he provides the requested information. Mr. Evans believes that Mr. Hargraves is irritated with him because in a prior matter the Board dismissed a complaint against Mr. Evans without finding any violations had occurred. Mr. Evans’s attitude and demeanor toward Messrs. Edmonson, King and Hargraves was openly hostile. Having observed Messrs. Edmonson and King during their testimony, the Administrate Law Judge finds that although they were not openly hostile, there was animosity toward Mr. Evans. Mr. Evans testified that he had informed the Board (through conversations with Mr. Edmonson and Mr. King) that the requested information was confidential based on A.R.S. § 12-2238 and that most of the material was not in his possession, but rather was at Ms. Palecek’s office. The evidence of record shows that these conversations occurred before the July 27, 2012 letter was issued. On direct examination, Mr. Evans testified that based on A.R.S. § 12-2238 he cannot provide the requested information unless he is subpoenaed. On cross examination, Mr. Evans testified that he would be in violation of the statute if he provided documents that would not have existed but for the mediation. Mr. Evans agreed that Mr. Thomason did not violate the statute when he provided invoices from the Lindahl matter to the Board because those invoices were prepared during the litigation phase of that matter and not the mediation. As of the hearing date, Mr. Evans was willing to provide the requested files provided that no one would hold him responsible for a violation of A.R.S. § 12-2238. Mr. Evans does not keep in his own files documents that are privileged. CONCLUSIONS OF LAW The Board has the burden of persuasion. A.R.S. § 41-1092.07(G)(2) and (G)(3). The burden of proof at an administrative hearing falls to the party asserting a claim, right or entitlement; a party asserting an affirmative defense bears the burden of proving that defense. The standard of proof on all issues is that of the preponderance of the evidence. A.A.C. R2-19-119. A preponderance of the evidence is “[e]vidence which is of greater weight or more convincing than the 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.” Black’s Law Dictionary 1182 (6th ed. 1990). The Board has authority to investigate complaints, to employ the personnel necessary to do so, and to take all action necessary and proper to effectuate its duties. See A.R.S. § 32-703. The Board’s July 27, 2012 letter was a legal request for information as that term is used in A.R.S. § 32-741(A)(15). Materials created for or used during a mediation are confidential and may not be discovered or admitted into evidence unless an exception exists. One such exception is that the disclosure is required by statute. A.R.S. § 12-2238(B). Evidence that exists independently of the mediation, even if that evidence is used in connection with the mediation, is subject to service of process or subpoena. A.R.S. § 12-2238(C). In the July 27, 2012 letter, the Board asserted that A.R.S. § 12-2238(C) applied to Mr. Evans’s work. Mr. Evans maintained that he was not required to provide the requested information unless it was subpoenaed. However, in their closing arguments, neither party presented any legal analysis construing this statute or relating it to their respective factual positions. Considering A.R.S. § 12-2238 and the Board’s authority to investigate and regulate CPAs, A.R.S. § 12-2238 does not provide a valid basis under which Mr. Evans may refuse to provide the requested information. The Board’s statutes and rules relating to confidential material do not provide a valid basis for Mr. Evans’s refusal to provide the requested information. See A.R.S. § 32-749(C). The preponderance of the evidence shows that Mr. Evans did not respond to the Board’s July 27, 2012 letter. Although Mr. Evans asserts that he left Mr. Edmonson and Mr. King voicemail messages, there is insufficient evidence to show that he did so. Mr. Evans’s letter dated July 5, 2011, Ms. Palecek’s letter dated October 12, 2011, and Mr. Thomason’s letter dated July 16, 2012 cannot be construed to be responsive to the July 27, 2012 letter as these were all written before that date. The preponderance of the evidence shows that Mr. Evans did not provide the Board the information requested in the July 27, 2012 letter. Consequently, Mr. Evans has violated A.A.C. R4-1-455.03(F)(failure to respond), which is also a violation of A.R.S. § 32-741(A)(9), and he has violated A.R.S. § 32-741(A)(15)(failing to furnish requested information). The Board requests that Mr. Evans’s Certificate be revoked and that he be required to pay for the cost of the investigation in this matter. Considering all the facts and circumstances of this matter, including the long history of correspondence between the parties, the Board has not demonstrated that the requested discipline is appropriate. The evidence of record shows that Mr. Evans believed that he was prohibited by A.R.S. § 12-2238 from providing requested information. This belief, although incorrect, was not unreasonable considering the letters from Ms. Palecek and Mr. Thomason. Consequently, Mr. Evans should not be subject to discipline for his failure to provide the Board the requested information, provided he provides that information to the Board within 10 days of the Final Order in this matter. If Mr. Evans does not provide the Board the requested information within 10 days of the Final Order in this matter, his Certificate should be revoked. Mr. Evans’s belief that he was prohibited from providing the Board the requested information does not excuse his failure to respond to the July 27, 2012 letter. Consequently it is appropriate for the Board to discipline him for that violation. The Board’s request that Mr. Evans pay the cost of investigation is not supported by any information about those costs (for example billing statements or timesheets providing information about its work). The Complaint in this matter has been pending for about 18 months. The evidence of record shows that during that time the Board has made other requests for information to which Mr. Evans has responded (through his own letter and the letters from Ms. Palecek and Mr. Thomason ). The Board has not demonstrated that its request for costs is justified and consequently, that request is denied. However, it is appropriate to assess an administrative penalty of $1,000.00 for Mr. Evans’s failure to respond to the July 27, 2012 letter. ORDER IT IS ORDERED that within 10 days of the effective date of the Final Order in this matter, Mr. Evans must comply with the Board’s July 27, 2012 letter; IT IS FURTHER ORDERED that if Mr. Evans does not comply with the Board’s July 27, 2012 letter within 10 days of the effective date of the Final Order in this matter, his Certified Public Accountant Certificate No. 7551-E is revoked; IT IS ORDERED that within 10 days of the effective date of the Final Order in this matter, Mr. Evans must pay to the Board a $1,000.00 administrative penalty. 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 after the date of that certification. Done this day, January 15, 2013.

/s/ Thomas Shedden Thomas Shedden Administrative Law Judge

Transmitted electronically to:

Monica L. Petersen, Executive Director Arizona State Board of Accountancy ----------------------- [1] Mr. Evans also wrote that although there were exceptions to A.R.S. § 12- 2238, the Complaint did not meet those exceptions, and that the Complainant was in violation of the statute. The issue in this matter is whether Mr. Evans is required to provide the Board with the requested information. Consequently, whether the Complaint itself meets one of the statute’s exception is not dispositive, and whether the Complainant has committed a statutory violation has not been shown to be relevant. [2] Ms. Palecek also asserted that the Complainant was in violation of the statute and she request that the Board provide her with all documentation it had related to the Complaint.

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