Letter from the State Board: What Should You Do Next?

How to handle complaints when they occur.
BY MICHAEL R. RUBLE

EXECUTIVE SUMMARY
  • STATE BOARDS OF ACCOUNTANCY are responsible for investigating complaints from the public regarding CPA performance and behavior.
  • STATE BOARDS CAN REQUIRE practitioners to take specific CPE courses to correct an apparent deficiency, to cease and desist certain behaviors and to submit to some form of practice monitoring. They also can suspend or terminate an individual's or firm's license to practice or an individual's CPA certificate.
  • COVER YOUR BASES by following guidelines set under Statement on Auditing Standards no. 46, Consideration of Omitted Procedures After the Report Date , which suggests the CPA consult the firm's attorney and assess the importance of the omitted procedures by reviewing all of the working papers, discussing the situation with engagement personnel, reevaluating the overall scope of the audit and considering the impact of omitted procedures on your firm's ability to support the opinion previously expressed on the financial statements.
  • ADOPT A COOPERATIVE RELATIONSHIP with the state board investigator. This not only can ease the tension involved in such a situation but also speed up the investigation.
MICHAEL R. RUBLE, CPA, PhD, is an assistant professor of accounting at Western Washington University, Bellingham, Washington.


Nothing can be more disquieting than a letter from your state board of accountancy saying that a client has filed a complaint against your firm regarding an engagement. Managing partners who receive such a notice immediately want to know what to do. Should they call the state board official, call the client, review the engagement working papers or close up shop and call a travel agent?

BE PREPARED!
State boards do review complaints, and they have the power to suspend or terminate an individual's or firm's license to practice.

While it is hoped that you never receive such a letter, some practitioners will be forced to deal with just such a set of circumstances. Today's external quality control environment consists primarily of a proactive approach through peer review and specific engagement reviews of government audits. However, state boards also play a crucial, though often-overlooked, role in peer review.

This article provides some background on the state boards' investigative function and outlines a course of action you should take to minimize the time and concern associated with state board investigations.


BOARDS AS INVESTIGATORS
Most CPAs are familiar with the state boards' responsibilities for continuing professional education reporting, CPA examination administration and the issuance of certificates and licenses; however, relatively few have experience with the state board as an investigative and judicial body.

State boards are responsible for overseeing the accounting profession in the public interest within their states. Part of that responsibility is investigating complaints from the public regarding CPA performance and behavior. The standards used to measure performance or behavior come from the provisions of the state accountancy act as well as from rules and regulations adopted by the state board as allowed under the state act. Performance measures are quite similar from state to state because most state legislatures relied heavily on the Model Accountancy Act when they developed their own accountancy acts.

Complaints against CPAs can come from a variety of sources, including clients; third parties such as federal, state and local governments; and other CPAs, especially successor accountants and auditors. Complaints can address many issues of a technical (accounting, auditing or tax), ethical (independence, proper professional behavior) or legal (violations of state or federal laws) nature. The state board must investigate each complaint to assess its merit and, if necessary, determine the appropriate corrective action.

Actions taken by state boards include requiring practitioners to take specific CPE courses to correct an apparent deficiency, directing CPAs to cease and desist certain behaviors and requiring CPAs to submit to some form of practice monitoring such as preissuance report reviews. On the more drastic side, state boards can either suspend or terminate an individual's or firm's license to practice or an individual's CPA certificate.

State Board of Accountancy
State Capitol Office Building
Capitol City, Anystate

John Smith
Smith, Jones & Johnson, CPAs
1200 Fifth Avenue, Suite 5000
Anycity, Anystate

Subject: Complaint #95-001, XYZ Manufacturing Co.

Dear Mr. Smith:

The board recently received a complaint regarding your firm's audit of the financial statements of the XYZ Manufacturing Co. for the year ended June 30, 1994. The board assigned James Jones to investigate this complaint. Mr. Jones has completed a preliminary review but would like additional information from your firm regarding this engagement.

Please respond to this request as soon as possible. However, state board rules require a licensee to respond in writing within 20 days of board inquiry.

Sincerely,
Mary Official
Executive Director
Anystate State Board of Accountancy


PRELIMINARY INVESTIGATION
Before a state board requests more information, a complaint is reviewed for merit by a board-appointed investigator or technical consultant. If the investigator finds possible violations of the state accountancy act or board rules and regulations or is uncertain because of the lack of complete information provided by the complainant, the investigator will write or telephone you.

The initial contact is crucial because it will set the tone for the relationship between you and the investigator for the duration of the investigation. You can choose to be cooperative, which not only eases the tension involved in the situation but also speeds up an investigation. The state board's consideration of any penalties for your firm is likely to reflect the level of your cooperation. On the other hand, you can chose to be defensive or confrontational, attitudes that may decrease the chances the investigation will be resolved quickly and with minimal pain.


COMPLETING THE INVESTIGATION
Following a response to a board's letter, the investigator attempts to resolve the complaint. In some cases, the investigator must conduct a field review, which usually consists of two parts:

  1. A detailed review of the working papers . This review is specifically permitted under Rule 301-Confidential Client Information of the AICPA Code of Professional Conduct (ET section 301.01 of the AICPA Professional Standards ). The purpose of the review is to gain any additional information, as well as to determine whether the examination was done in accordance with generally accepted auditing standards. During the review, you are at risk because the investigator may find violations of professional standards that are not related to the original complaint but will be included as a part of the findings of the investigation.
  2. A broad review of your firm's quality control system . Although this phase of the field review generally does not include an in-depth quality review field investigation, it does examine all elements of the firm's quality control. Especially important are the firm's methods and resources for researching technical problems-an area where deficiencies often are found. For example, if your firm's major client is a common interest realty association but you keep few reference materials on the association in your library, your commitment to quality control would be suspect. Another important area is the CPE courses each member of the engagement team as well as of the firm as a whole has taken. Again, the lack of recent relevant CPE in a major client service area would be considered a negative by the investigator.

The investigation is complete after the field review when the state board notifies you of the results. If you do not dispute the findings, your firm signs an agreement or consent order, which provides for certain penalties or corrective actions deemed necessary by the state board.

Most states would hold a hearing if you disagree with the board's findings. At the hearing, you can present the firm's side of the case. Following the hearing, the state board issues its finding in a letter, possibly with a draft consent order for a signature.


CHOOSING YOUR APPROACH
If you receive a letter from your state board, you should apply Statement on Auditing Standards no. 46, Consideration of Omitted Procedures After the Report Date , which suggests you consult your attorney and assess the importance of any omitted procedures by

  • Reviewing all of the engagement's working papers.
  • Discussing the situation with the employees involved in the engagement.
  • Reevaluating the overall scope of the audit.
  • Considering the impact of any omitted procedures on the firm's ability to support the opinion previously expressed on the financial statements.

SAS no. 46 will help you cover all the bases. It is important to implement each stage of the SAS's recommendations. To do this, use the following procedures as a checklist to applying SAS no. 46.

Note to Readers

It is important to remember that state accountancy laws and regulations vary from jurisdiction to jurisdiction. Therefore, the enforcement procedure described in this article may be different from the process undertaken in the licensing jurisdiction. For more information about individual licensing jurisdictions, it is best to contact your state board of accountancy.

~ Read the complaint carefully to fully grasp the meaning and context of the complaint. If the complaint is not clear, you must contact the state board and request a clarification rather than waste valuable time trying to read between the lines.
~ Speak with the engagement personnel. If the issues relate to the professional conduct of staff members, you should get their input as to the validity of the complaint. Their recollections of events and circumstances that may not appear in the working papers are especially important.
~ Review specific working papers. A detailed review of the working papers helps put the complaint in perspective and allows you to determine the area of exposure.
~ Review remaining working papers. It may be wise to review the remaining working papers for any glaring deviation from standards. Such items as missing attorney's or management representation letters, incomplete audit programs and to-do lists left in the working papers are indications of a sloppy audit.
~ Consider the adequacy of working papers. You should decide whether the engagement working papers are adequate to support the firm's position on the complaint issues as well as to support the opinion on the financial statements.
~ Consider the adequacy of audit work performed. You must evaluate all of the work your firm performed for relevancy and reliability.
~ Consider additional courses of action. Following the steps listed above, you may find it necessary to take additional actions to resolve any issues that were raised and not resolved, such as setting up discussions with client personnel, completing work that may not have been completed or fully documented or possibly doing additional work that was not contemplated during the engagement.
~ Consult with the firm's attorney. If serious issues are raised at the completion of the firm's review of the complaint, you may have to discuss the issues with counsel before responding to the state board.
~ Draft a response to the state board. The response to the state board should focus only on the issues raised in the complaint. It is very helpful to quote accounting or auditing standards in defending the firm's position.
~ Evaluate the board's findings. After the state board has had an opportunity to evaluate all of the evidence, it will come to a conclusion and decide on a course of action. At this stage, you can have input on the penalty phase of the process. The board's remedies may or may not be acceptable to you or the firm. If they are unacceptable, the firm needs to respond as quickly as possible. It is likely that a mutually agreeable settlement can be reached in many situations.


REMAIN CALM
No amount of due professional care makes a firm immune to complaints filed with a state board of accountancy. Therefore, it is important that a firm be ready to handle them if they do occur. They should be treated as any other technical problem. It also is important to remain calm, thoroughly investigate the complaint and take the appropriate action.

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