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The Case of the Inadequate Accountant

RULES THAT APPLY:
Rule 202 - Compliance with Standards
Rule 203 - Accounting Principles

THE PLAYERS:
Respondent: Mr.. Indigo
Complainant: Mr.. Whiner
Audited Party: Loser Township

CASE DETAILS:
Mr.. Indigo performed an audit of the financial statements of the Loser Township for the year ended March 31, 19xx.

Mr.. Whiner wrote in a letter to the ICPAS that Mr.. Indigo’s audit contained major deficiencies. The ICPAS notified Mr.. Indigo of the complaint. The ICPAS Ethics Committee investigators met with Mr.. Indigo at his office.

At the meeting, Mr.. Indigo made the following statements:

  • The Loser Township is one of three municipal clients. Their principle practice is in tax and monthly work.

  • The firm has not completed a quality review as of yet. The review was scheduled for March 19xx, but was not started. None of the governmental audit work appears to follow yellow book standards.
    The firm has available to it, the AICPA audit guide Audits of State and Local Governmental Units and referred to it during the audit.

  • The firm also utilized a PPC Guide on Auditor’s Reports in drafting its report on the Loser Township financial statements.

The following deficiencies were discussed and noted at the meeting:

  • The financial statements presented a prior year column that was also audited by Mr.. Indigo. However, the auditor’s opinion made no reference to the prior year. Other statements were inaccurate or missing.

  • Based on review of the footnotes to the financial statements, the following notes were not present:
    Reporting entity note;

    • Description of funds;

    • Detail on property tax recognition

    • Change of general fixed asset-shown as an exhibit not part of the notes;

    • Insurance coverage for cash and investment disclosure;

    • Disclosure on interfund transfers.

  • The statements, including the footnotes, would not be a complete disclosure and, as such, are not "liftable" as presented.

  • The following items were not present in the workpapers:

    • Assessment of Risk

    • Determination of Materiality

    • Evidence of Review

    • Evidence of Planning

CONCLUSION:
The committee found evidence that Mr.. Indigo violated Rule 202 - Compliance with Standards, and Rule 203 - Accounting Principles

CORRECTIVE ACTION:
The Committee instructed Mr.. Indigo to comply immediately with professional standards applicable to professional service he performs. They also instructed him to complete 16 hours of specified CPE courses within one year, and show evidence of completion.

LESSONS LEARNED:
Don’t try to do work that is unfamiliar or new to you. Accounting standards have become very complex and specialized. This accountant mainly did monthly and tax work, and only had a few municipal clients. In a case such as this, he may have been better off referring the municipal client to an auditor with more expertise in this field. Another option is to do a joint venture with another firm that has more experience. The corrective action in this case focused on trying to educate the member in the area in which he had some inadequacy. But remember that all the CPE in the world can’t take the place of experience.

 

Special thanks to Dr. Howard A. Kanter of the DePaul University School of Accountancy
and the ICPAS Ethics Committee for developing and maintaining the Ethics Case Studies.