AC-2017-98 - California Department of Consumer Affairs

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XAVIER BECERRA Attorney General ofCalifornia JAMES M. LEDAKIS Supervising Deputy Attorney General RON ESPINOZA Deputy Attorney General State Bar No. 176908

600 West Broadway, Suite 1800 San Diego, CA 92101 P.O. Box 85266 San Diego, CA 92186-5266 Telephone: (619) 738-9447 Facsimile: (619) 645-2061

Attorneys for Complainant

BEFORE THECALIFORNIA BOARD OF ACCOUNTANCY DEPARTMENT OF CONSUMER AFFAIRS

STATE OF CALIFORNIA

In the Matter of the Accusation Against:

DARREL R. WHITEHEAD 18592 Main Street Huntington Beach, CA 92648

Certified Public Accountant Certificate No. 88433

and

DARREL WHITEHEAD CPAS, AN ACCOUNTANCY CORPORATION 18592 Main Street Huntington Beach, CA 92648

Certified Public Accountancy Corporation Certificate No. 5798

Respondents.

~~----------------------------~

Case No. AC-2017-98

ACCUSATION

Complainant alleges:

PARTIES

1. Patti Bowers (Complainant) brings this Accusation solely in her official capacity as the

Executive Officer ofthe California Board of Accountancy, Department ofConsumer Affairs.

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ACCUSATION

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2. On or about February 25, 2004, the California Board ofAccountancy (CBA) issued

Certified Public Accountant Certificate Number 88433 to Darrel R. Whitehead (Respondent

Whitehead). The Certified Public Accountant Certificate was in full force and effect at all times

relevant to the charges brought herein and will expire on July 31, 2019, unless renewed.

3. On or about September 11, 2006, the CBA issued Certified Public Accountancy

Corporation Certificate Number 5798 to Darrel Whitehead CPAs, An Accountancy Corporation

(Respondent Corporation). The Certified Public Accountancy Corporation Certificate was in full

force and effect at all times relevant to the charges brought herein and will expire on

September 30, 2018, unless renewed.

JURISDICTION

4. This Accusation is brought before the CBA, Department of Consumer Affairs, under

the authority of the following laws. All section references are to the Business and Professions

Code (Code) unless otherwise indicated.

5. Section 5100.5, subdivision (a), ofthe Code states:

"(a) After notice and hearing the board may, for unprofessional conduct, permanently restrict

or limit the practice of a licensee or impose a probationary term or condition on a license, which

prohibits the licensee from performing or engaging in any of the acts or services described in

Section 5051."

6. Section 5109 of the Code states:

"The expiration, cancellation, forfeiture, or suspension of a license, practice privilege, or

other authority to practice public accountancy by operation of law or by order or decision ofthe

board or a court of law, the placement ofa license on a retired status, or the voluntary surrender of

a license by a licensee shall not deprive the board ofjurisdiction to commence or proceed with any

investigation of or action or disciplinary proceeding against the licensee, or to render a decision

suspending or revoking the license."

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7. Section 5116 of the Code states, in part:

"(a) The board, after appropriate notice and an opportunity for hearing, may order any

licensee or applicant for licensure or examination to pay an administrative penalty as provided in

this article as part of any disciplinary proceeding or other proceeding provided for in this chapter.

"

"(d) Administrative penalties assessed under this article shall be in addition to any other

penalties or sanctions imposed on the licensee or other person, including, but not limited to, license

revocation, license suspension, denial of the application for licensure, denial of the petition for

reinstatement, or denial of admission to the licensing examination. Payment of these administrative

penalties may be included as a condition of probation when probation is ordered."

STATUTORY PROVISIONS

8. Section 51 00 of the Code states:

"After notice and hearing the board may revoke, suspend, or refuse to renew any permit or

certificate granted under Article 4 (commencing with Section 5070) and Article 5 (commencing

with Section 5080), or may censure the holder of that permit or certificate for unprofessional

conduct that includes, but is not limited to, one or any combination of the following causes:

"

"(c) Dishonesty, fraud, gross negligence, or repeated negligent acts committed in the same

or different engagements, for the same or different clients, or any combination ofengagements or

clients, each resulting in a violation ofapplicable professional standards that indicate a lack of

competency in the practice ofpublic accountancy or in the performance of the bookkeeping

operations described in Section 5052.

"

"(e) Violation of Section 5097.

"

"(g) Willful violation of this chapter or any rule or regulation promulgated by the board

under the authority granted under this chapter.

" "

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ACCUSATION

9. Section 5062 ofthe Code provides that a licensee shall issue a report which conforms

to professional standards upon completion ofa compilation, review or audit offmancial

statements.

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4 I 0. Section 5097 of the Code states:

5 "(a) Audit documentation shall be a licensee's records of the procedures applied, the tests

performed, the information obtained, and the pertinent conclusions reached in an audit

engagement. Audit documentation shall include, but is not limited to, programs, analyses,

memoranda, letters ofconfirmation and representation, copies or abstracts ofcompany documents,

and schedules or commentaries prepared or obtained by the licensee.

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I0 "(b) Audit documentation shall contain sufficient documentation to enable a reviewer with

relevant knowledge and experience, having no previous connection with the audit engagement, to

understand the nature, timing, extent, and results of the auditing or other procedures performed,

evidence obtained, and conclusions reached, and to determine the identity of the persons who

performed and reviewed the work.

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15 "(c) Failure of the audit documentation to document the procedures applied, tests performed,

evidence obtained, and relevant conclusions reached in an engagement shall raise a presumption

that the procedures were not applied, tests were not performed, information was not obtained, and

relevant conclusions were not reached. This presumption shall be a rebuttable presumption

affecting the burden of proof relative to those portions of the audit that are not documented as

required in subdivision (b). The burden may be met by a preponderance of the evidence.

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21 "(d) Audit documentation shall be maintained by a licensee for the longer ofthe following:

22 "(I) The minimum period of retention provided in subdivision (e).

23 "(2) A period sufficient to satisfy professional standards and to comply with applicable laws

and regulations. 24

25 "(e) Audit documentation shall be maintained for a minimum of seven years which shall be

extended during the pendency of any board investigation, disciplinary action, or legal action

involving the licensee or the licensee's firm. The board may adopt regulations to establish a

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ACCUSATION

different retention period for specific categories of audit documentation where the board finds that

the nature ofthe documentation warrants it. 2

3 "(t) Licensees shall maintain a written documentation retention and destruction policy that

shall set forth the licensee's practices and procedures complying with this article." 4

5 11. Section 5156 ofthe Code states:

6 "An accountancy corporation shall not do or fail to do any act the doing ofwhich or the

failure to do which would constitute unprofessional conduct under any statute, rule or regulation

now or hereafter in effect. In the conduct of its practice, it shall observe and be bound by such

statutes, rules and regulations to the same extent as a person holding a permit under Section 5070

of this code. The board shall have the same powers of suspension, revocation and discipline

against an accountancy corporation as are now or hereafter authorized by Section 51 00 of this

code, or by any other similar statute against individual licensees, provided, however, that

proceedings against an accountancy corporation shall be conducted in accordance with Chapter 5

(commencing with Section 11500) of Part I ofDivision 3 ofTitle 2 ofthe Government Code, and

the board shall have all the powers granted therein."

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16 REGULATIONS

17 12. California Code of Regulations, title 16, section 58, provides that licensees engaged in

the practice ofpublic accountancy shall comply with all applicable professional standards,

including but not limited to generally accepted accounting principles and generally accepted

auditing standards.

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21 13. California Code of Regulations, title 16, section 40, states:

22 "(a) A frrm performing services as defmed in Section 39(a) shall have a peer review report

accepted by a Board-recognized peer review program once every three years in order to renew its

license.

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25 "(b) A frrm performing services as defmed in Section 39(a) for the first time shall have a

peer review report accepted by a Board-recognized peer review program within 18 months ofthe

date it completes those services."

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I4. California Code of Regulations, title 16, section 41, states:

"A firm shall enroll with a Board-recognized peer review program provider, and shall

cooperate with the Board-recognized peer review program provider with which the firm is enrolled

to arrange, schedule, and complete a peer review, in addition to taking and completing any

remedial or corrective actions prescribed by the Board-recognized peer review program provider."

15. California Code of Regulations, title 16, section 52, states:

"(a) A licensee shall respond to any inquiry by the Board or its appointed representatives

within 30 days. The response shall include making available all files, working papers and other

documents requested.

"

"(d) A licensee shall provide true and accurate information and responses to questions,

subpoenas, interrogatories or other requests for information or documents and not take any action

to obstruct any Board inquiry, investigation, hearing or proceeding."

I6. California Code of Regulations, title I6, section 68.4, states:

"(a) Audit documentation that is not completed prior to the date of issuance ofthe report

shall be completed during the document assembly period specified in this subsection.

"(I) The document assembly period is the 60-day period following the date of issuance of

the report. If the report is not issued in connection with such an engagement, the document

assembly period ends 60 days after the date that the fieldwork was completed. If the auditor was

unable to complete such an engagement, then the document assembly period ends 60 days from the

date the engagement ceased.

"(2) Notwithstanding the document assembly period specified in paragraph (I) of this

subsection, licensees shall comply with applicable professional standards specifying a shorter

document assembly period.

"(b) After the end of the document assembly period, any, removal, deletion, substitution, or

editing ofaudit documentation, is prohibited. Additions to audit documentation shall comply with

the requirements in subsection (c).

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"(c) In addition to any other documentation required by professional standards, any addition

to audit documentation after the end ofthe document assembly period shall include the following:

I) the reason for the addition, 2) the identity of the persons preparing and approving the addition,

and 3) the date of the addition. The documentation which is added shall contain sufficient detail to

enable a reviewer with relevant knowledge and experience, having no previous connection with the

audit engagement, to understand the nature, timing, reason for, and extent of the addition.

"(d) Nothing in this section authorizes the deferral of audit procedures required to be

performed prior to the date of issuance of the report."

PROFESSIONAL STANDARDS

I7. Standards of practice pertinent to this Accusation and the engagements at issue

include, without limitation:

A. Generally Accepted Auditing Standards (GAAS) are issued by the American

Institute of Certified Public Accountants (AICPA). The ten interrelated GAAS (AU 150.02) and

other Statements on Auditing Standards (SAS) are codified by "AU" number in the AICPA's

Codification ofStatements on Auditing Standards. They are applicable for audits ofentities with

periods ending before December 15, 20 I2. Auditing sections in the Codification ofStatements on

Auditing Standards were re-drafted according to established clarity drafting conventions. Clarified

Statements· on Auditing Standards are effective for periods ending on or after December 15,2012,

and differ from non-clarified standards through the addition of a "C" (i.e., AU-C). Among the

sections relevant herein are:

AU-C 200 - Overall Objectives

AU-C 2IO - Terms of Engagement

AU-C 220 - Quality Contro I

AU-C 230 - Audit Documentation

AU-C 240 - Consideration ofFraud

AU-C 260 - Communication with Those Charged with Governance

AU-C 265 - Communicating Internal Control Matters

AU-C 300 - Planning an Audit

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ACCUSATION

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AU-C 315 - Understanding the Entity

AU-C 320 - Materiality

AU-C 330 - Procedures in Response to Risks and Evaluating Audit Evidence

AU-C 450 - Evaluation of Misstatements Identified

AU-C 501 - Evidence for Specific Items

AU-C 510 - Opening Balances- Initial Engagements

AU-C 520 - Analytical Procedures

AU-C 550 - Related Parties

AU-C 560 - Subsequent Events

AU-C 580 - Written Representations

AU-C 700 - Forming an Opinion and Reporting

AU-C 705 - Modifications to Opinion

B. Generally Accepted Government Auditing Standards (GAGAS) promulgated by the

U.S. Government Accountability Office (GAO) are discussed in the GAO's Government Auditing

Standards, 2011 Revision, as Amended (Yellow Book). The Yellow Book incorporates the ten

GAAS. Among the chapters relevant herein are:

Chapter 2 - Standards for Use and Application ofGAGAS

Chapter 3 - General Standards

Chapter 4 - Standards for Financial Audits

C. Reference to generally accepted accounting principles (GAAP) means generally

accepted accounting principles promulgated by bodies designated by the Council of the AICPA

pursuant to the "Compliance With Standards Rule" and the "Accounting Principles Rule" of the

AICPA Code of Professional Conduct. These principles are codified by the Financial Accounting

Standards Board (F ASB) Accounting Standards Codification (ASC) F ASB-ASC number. Among

the relevant sections herein are:

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Section 230 - Statements of Cash Flows

Section 440 - Commitments

Section 850 - Related Party Disclosures

Section 958 - Not-for-Profit Entities

COST RECOVERY

18. Section 5107, subdivision (a), ofthe Code states:

"The executive officer of the board may request the administrative law judge, as part of the

proposed decision in a disciplinary proceeding, to direct any holder ofa permit or certificate found

to have committed a violation or violations of this chapter to pay to the board all reasonable costs

of investigation and prosecution of the case, including, but not limited to, attorneys' fees. The

board shall not recover costs incurred at the administrative hearing."

STATEMENT OF FACTS

CLIENT P.A.

19. On September 23, 20I5, Respondents issued an audit report with an unqualified

opinion for their client "P .A." Inc.,' for the year ended September 30, 2014, including a report on

internal control over financial reporting under Government Auditing Standards. With respect to

this audit, Respondents failed to comply with professional standards as follows:

A. Respondents' July 8, 2015, engagement letter to P.A. does not include all of the

required elements, including that Respondents will audit the financial statements of P .A., what

comprises the fmancial statements, and uses the term "unqualified opinion" instead of

"unmodified." [AU-C 2I O.I 0]

B. The September 23, 2015, management representation letter from P .A. contains

uncorrected misstatements. The management representation letter states that the representations

are "as of August 13, 20I5", more than one month prior to the date ofthe financial statements.

Also, item 5 states "we believe the effects of the uncorrected financial statement misstatements

1 Respondents' client is identified herein by the initials of its name only.

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summarized in the attached sheet are immaterial..." However, there is no attachment. [AU-C

580.14 & 580.20]

C. Respondents' September 23, 2015, and September 25, 2015, auditors' reports

incorrectly state that the audit was conducted in accordance with GAAS and GAGAS. Such a

representation by Respondents is not appropriate unless the audit was conducted in accordance

with both sets of standards in their entirety, and this was not the case for this audit. [AU-C

700.42; GAGAS 2.15, 2.16, 2.24, 2.25, 4.06 & 4.I5]

D. The Statement of Cash Flows in the September 23, 2015, audit report is not based on

cash and cash equivalents. The total cash reported at both the beginning and the end in the

Statement ofCash Flows incorrectly includes the "long-term" account reported as a non-current

asset. [FASB ASC 230-10-45-4]

E. There was no appropriate engagement team discussion or documentation thereon of

the susceptibility ofthe entity's financial statements to material misstatement due to fraud. This is

a required meeting of the audit team during planning, but what Respondents documented instead is

a meeting held with their client's Executive Director. [AU-C 240.43 & 315.33]

F. Professional standards require the auditor to agree or reconcile the fmancial

statements to the underlying accounting records. However, Respondents' work papers for the

P.A. audit demonstrate that their client's general ledger for fixed assets does not agree with the

fmancial statements. [AU-C 330.21 & 330.33]

G. Respondents performed risk assessments during the P.A. audit, but there were major

discrepancies and contradictions noted between significant risks identified in the work papers,

including discrepancies in risks for cash and management override of controls. Despite the specific

significant risks identified, Respondents failed to perform sufficient procedures to address those

risks, or to link what procedures were performed to the identified risks. As a result, there is

insufficient evidence to support the cash, revenue, or receivables reported [AU-C 200.06, 200.08,

220.19, 230.02 & 330.29]; there is no linkage of procedures performed to the identified risks [AU

C 330.30]; and there is no documentation of testing for compliance with grant requirements.

[GAGAS 4.06]

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H. In the P.A. audit, Respondents used work papers belonging to a different client,

demonstrating that they did not perform the engagement with due care. [AU-C 220.16; GAGAS

3.60 & 3.61]

I. For the P.A. audit, Respondents failed to consult or consider the available interpretive

publication, "AI CPA Audit and Accounting Guide for Not-for-Profit entities." [AU-C 200.27]

J. For the P.A. audit, Respondents failed to document an overall strategy or audit plan.

[AU-C 300.07, 300.09 & 300.14]

K. For the P.A. audit, Respondents failed to document adequate understanding of the

internal contro Is, and there was no documentation that they tested them to determine if they were

in place and working. [AU-C 200.08, 315.14 & 315.30]

L. For the P.A. audit, Respondents failed to obtain sufficient appropriate evidence to

support either the fmancial statements or the opinions rendered thereon. [AU-C 200.06, 200.08,

220.19, 230.02, 330.18 & 330.29]

M. For the P.A. audit, insufficient analytics were performed. Respondents performed a

comparison of current year income and expense accounts to the prior year, but there were no

similar analytics of the adjusted balances at the conclusion of the audit, no acceptable variances

were defined, no expectations were developed, and no inquiries were documented. [AU-C

520.05, 520.06, 520.07 & 520.08]

N. Respondents failed to request legal representation letters or document the

reasons it was not considered necessary for the P.A. audit. [AU-C 501.22]

0. Respondents' audit report on the financial statements omits all required section

headings (for example "Auditor's Opinion"), the related elements ofManagement's Responsibility,

and the required description of an audit. [AU-C 700.26, 700.29, 700.34, 700.37, 700.27 &

700.32]

P. Because the management representation letter did not cover the time period through

the date of Respondents' audit report, there is inadequate consideration of subsequent events.

[AU-C 560.09]

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Q. Despite documentation of related party transactions, Respondents failed to note

that the required related party disclosures were omitted, nor did they accumulate this GAAP

departure for materiality determination. [ AU-C 230.13, 550.04; FASB ASC 850-10-50-1]

R. Respondents failed to document their responses to assessed risks, or to link

procedures performed to those risks. [AU-C 240.44, 330.05, 330.06 & 330.30]

S. Respondents failed to document adequate procedures performed to address the

presumptive risk ofmanagement override of contro Is or revenue recognition. [ AU-C 240.32 &

240.46]

T. Respondents failed to perform multiple presumptively mandatory requirements and did

not document the justification for the departures. [AU-C 230.13]

FIRST CAUSE FOR DISCIPLINE

(Repeated Negligent Acts)

20. Respondents are subject to disciplinary action under Code section 5100, subdivision (c),

in that they committed repeated negligent acts within their audit engagement for client P .A., each

resulting in a violation of applicable professional standards indicating a lack ofcompetency in the

practice of public accountancy, as more fully alleged in paragraph 19 above, which is hereby

incorporated by reference.

SECOND CAUSE FOR DISCIPLINE

(Failure to Comply with Professional Standards)

21. Respondents are subject to disciplinary action under Code section 5100, subdivision (g),

in conjunction with California Code of Regulations, title 16, section 58, in that they failed to

comply with all applicable professional standards with respect to their audit engagement for client

P.A., including Generally Accepted Auditing Standards (GAAS), Generally Accepted Government

Auditing Standards (GAGAS), and Generally Accepted Accounting Principles (GAAP), as more

fully alleged in paragraph 19 above, which is hereby incorporated by reference.

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TIDRD CAUSE FOR DISCIPLINE

(Failure to Issue Report Conforming to Professional Standards)


and Code section 5062, in that they issued an audit report on September 23, 2015, for client P.A.

that was not supported by sufficient appropriate evidence and failed to meet professional

standards, as more fully alleged in paragraph 19 above, which is hereby incorporated by reference.

FOURTH CAUSE FOR DISCIPLINE

(Audit Documentation)

23. Respondents are subject to disciplinary action under Code section 5100, subdivision (e),

and 5097, in that they failed to obtain sufficient appropriate evidence to support either the fmancial

statements or the opinion rendered thereon, failed to maintain audit documentation sufficient to


audit engagement, to understand the nature, timing, extent, and results of the auditing or other

procedures performed, evidence obtained, and conclusions reached, and to determine the identity

of the persons who performed and reviewed the work, with respect to their audit engagement for

client P .A., as more fully alleged in paragraph 19 above, which is hereby incorporated by

reference.

CLIENT C. W.R.

24. Respondents issued an audit report dated July 16, 2014, for their client "C. W .R.,"

Inc.,2 for the year ended December 31, 2013. With respect to this audit, Respondents failed to

comply with professional standards as follows:

A. The management representation letter from client C. W .R. contains uncorrected

misstatements. The management representation letter is dated April 18, 2014, while the

fmancial statements are dated July 16, 2014. The representations are required to be as ofthe date

of the financial statements. Also, item 5 states "we believe the effects of the uncorrected fmancial

2 Respondents' client is identified herein by the initials of its name only.

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statement misstatements summarized in the attached sheet are immaterial..." However, there is no

attachment. [AU-C 580.14 & 580.20]

B. The Statement of Cash Flows in the audit report is not accurately prepared. Instead of

the amount actually expended it incorrectly reports the net change in fixed assets as "Cash payment

for the purchase ofproperty and equipment". In addition, it does not disclose the amount of

interest paid. These departures from GAAP were not accumulated to determine materiality in the

aggregate. [F ASB ASC 230-1 0-45-13( c) & 230-1 0-50-2]

C. For the C. W .R. audit, Respondents failed to make the required communications with

those charged with governance. [AU-C 260.12 & 265.06]

D. For the C.W.R. audit, Respondents identified internal control weaknesses, but failed to

make the required evaluation to determine if they are significant deficiencies or material

weaknesses, and did not make the required communications of significant deficiencies and material

weaknesses. [AU-C 265.09, 265.1I & 265.12]

E. The C.W.R. audit was an initial audit, but Respondents failed to perform procedures

regarding opening balances. [AU-C 510.08 & 510.15]

F. Respondents' materiality documentation for the C.W.R. audit inappropriately had the

''trivial" amount (the amount that would not be considered individually for correction) exceed the

planning materiality level. [AU-C 320.02, 320.05, 320.09, 320.11 & 450.12]

G. Respondents' documentation of the engagement team discussion simply states

"no discussion, only one auditor involved". For the planned response, it states "n/a". Even when

there is only a single auditor involved, professional standards require that the relevant issues be

considered and documented, including the decisions reached and the auditor's planned response.

[AU-C 240.43 & 315.33]

H. For the C. W.R. audit, Respondents identified an internal control weakness evidenced

in their work paper "Understanding the Entity and Identifying Risks". However, they failed to

complete the risk assessment process to identify risks as required at both the fmancialstatement

and assertion levels. [AU-C 315.06]

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I. Respondents submitted audit documentation to the Board that was created using

Thomson Reuters Checkpoint PPC (PPC) Version 2/15, which was not available at the time the

C.W.R. audit was conducted or the audit report issued on July 16, 2014. Those work papers

prepared on the PPC Version 2115, and the analytics, indicate that the creation date was

September 24, 2015. A total of I9 out of the 30 work papers were determined to have been

created after the audit completion date. Respondents failed to document by whom, when, and why

the work papers were later added. [AU-C 230.07, 230.16 & 230.I8]

J. The Statement of Activities for the C.W.R. audit reports a portion of Program

Services expense in the Temporarily Restricted column. GAAP requires that all expenses be

reported as decreases in unrestricted net assets. This constitutes a departure from GAAP. This

departure from GAAP was not accumulated to determine materiality in the aggregate. [F ASB

ASC 958-225-45-7]

K. For the C. W.R. audit, Respondents failed to consult or consider the available

interpretive publication, "AI CPA Audit and Accounting Guide for Not-for-Profit entities." [AU-C

200.27]

L. For the C.W.R. audit, Respondents failed to document an overall strategy or audit

plan. [AU-C 300.07, 300.09 & 300.14]

M. For the C.W.R. audit, Respondents failed to document adequate understanding ofthe

internal contro Is, and there was no documentation that they tested them to determine if they were

in place and working. [AU-C 200.08, 3I5.I4 & 315.30]

N. For the C.W.R. audit, Respondents failed to obtain sufficient appropriate evidence to

support either the financial statements or the opinions rendered thereon. [AU-C 200.06, 200.08,

220.I9, 230.02, 330.18 & 330.29]

0. For the C. W.R. audit, insufficient analytics were performed. Respondents performed

a comparison of current year income and expense accounts to the prior year, but there were no

similar analytics of the adjusted balances at the conclusion of the audit, no acceptable variances

were defmed, no expectations were developed, and no inquiries were documented. [AU-C

520.05, 520.06, 520.07 & 520.08]

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P. Respondents failed to request legal representation letters or document the

reasons it was not considered necessary for the C. W.R. audit. [AU-C 501.22]

Q. Respondents' audit report on the financial statements omits all required section

headings (for example "Auditor's Opinion"), the related elements of Management's Responsibility,

and the required description ofan audit. [AU-C 700.26, 700.29, 700.34, 700.37, 700.27 &

700.32]

R. Because the management representation letter did not cover the time period through

the date of Respondents' audit report, there is inadequate consideration of subsequent events.

[AU-C 560.09]

S. Despite documentation of related party transactions, Respondents failed to note

that the required related party disclosures were omitted, nor did they accumulate this GAAP

departure for materiality determination. [ AU-C 230.13 & 550.04; F ASB ASC 850-1 0-50-1]

T. Respondents failed to document their responses to assessed risks, or to link

procedures performed to those risks. [AU-C 240.44, 330.05, 330.06 & 330.30]

U. Respondents failed to document adequate procedures performed to address the

presumptive risk ofmanagement override of controls or revenue recognition. [AU-C 240.32 &

240.46]

V. Respondents failed to perform multiple presumptively mandatory requirements and did

not document the justification for the departures. [A U-C 230.13]

FIFTH CAUSE FOR DISCIPLINE

(Repeated Negligent Acts)

25. Respondents are subject to disciplinary action under Code section 5100, subdivision (c),

in that they committed repeated negligent acts within their audit engagement for client C. W.R.,

each resulting in a violation ofapplicable professional standards indicating a lack ofcompetency in

the practice ofpublic accountancy, as more fully alleged in paragraph 24 above, which is hereby


Ill

Ill

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SIXTH CAUSE FOR DISCIPLINE

(Failure to Comply with Professional Standards)

26. Respondents are subject to disciplinary action under Code section 51 00, subdivision (g),


comply with all applicable professional standards with respect to their audit engagement for client

C.W.R., including Generally Accepted Auditing Standards (GAAS), and Generally Accepted

Accounting Principles {GAAP), as more fully alleged in paragraph 24 above, which is hereby


SEVENTH CAUSE FOR DISCIPLINE

(Failure to Issue Report Conforming to Professional Standards)


and Code section 5062, in that they issued an audit report on July 16,2014, for client C.W.R that

was not supported by sufficient appropriate evidence and failed to meet professional standards, as

more fully alleged in paragraph 24 above, which is hereby incorporated by reference.

EIGHTH CAUSE FOR DISCIPLINE

(Audit Documentation)

28. Respondents are subject to disciplinary action under Code section 5100, subdivision (e)

and 5097, in that they failed to obtain sufficient appropriate evidence to support either the fmancial

statements or the opinion rendered thereon, failed to maintain audit documentation sufficient to


audit engagement, to understand the nature, timing, extent, and results of the auditing or other

procedures performed, evidence obtained, and conclusions reached, and to determine the identity

of the persons who performed and reviewed the work, with respect to their audit engagement for

client C. W.R, as more fully alleged in paragraph 24 above, which is hereby incorporated by

reference.

Ill

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NINTH CAUSE FOR DISCIPLINE

(Failure to Document Subsequent Changes in Audit Documentation)

29. Respondents are subject to disciplinary action under Code section 5100, sulx.tivision (g),

in conjunction with California Code of Regulations, title 16, section 68.4, in that they added

documents to the audit files after the documentation completion date without making the required

documentation of by whom, when, and why they were added, with respect to their audit

engagement for client C.W.R., as more fully alleged in paragraph 24 above, which is hereby


TENTH CAUSE FOR DISCIPLINE

(Failure to Complete Peer Review)


in conjunction with California Code ofRegulations, title 16, section 40, in that they failed to have

a peer review report accepted by a Board-recognized peer review program once every three years,

from their last peer review report dated October 31, 2012.

ELEVENTH CAUSE FOR DISCIPLINE

(Failure to Cooperate with Peer Review Program)

31. Respondents are subject to disciplinary action under Code section 51 00, sulx.tivision (g),


cooperate with their peer review program provider to arrange, schedule, and complete their peer

review. Specifically, Respondents failed to obtain their peer review by the initial due date assigned

by CalCP A of December 31, 2015, and the revised due date of July 31, 2016, as well as failing to

comply with the requirement to notify CalCPA at the start of field work for any audit performed

from their last peer review.

TWELFTH CAUSE FOR DISCIPLINE

(Failure to Respond to CBA Inquiry)


in conjunction with California Code of Regulations, title 16, section 52, subdivision (a), for

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repeatedly failing to respond to the CBA's inquiries regarding, among other things, their peer

review compliance. The circumstances are as follows:

A. On or about December 31, 2015, the CBA sent Respondents a letter requesting

information regarding their peer review to have been completed, at that time, on December 31,

2015. The CBA's inquiry letter requested a response from Respondents within 30 days. There

was no response. On February 29, 2016, CBA sent a second request by e-mail. Respondents'

administrative assistant responded the same day by e-mail, requesting an extension of time to

provide the requested information until after tax season. CBA granted an extension to April 18,

2016. However, no response was received by that due date. On April29, 2016, CBA sent a third

request to Respondents for the information by letter. Again, there was no response. On July 28,

2016, Respondents were served with an investigative subpoena by CBA. In response to the

subpoena, Respondents finally submitted the requested information on August 30, 2016, and

September 8, 2016, to the CBA.

PRAYER

WHEREFORE, Complainant requests that a hearing be held on the matters herein alleged,

and that following the hearing, the California Board of Accountancy issue a decision:

1. Revoking or suspending, restricting, limiting or otherwise imposing discipline upon

Certified Public Accountant Certificate Number 88433 issued to Darrel R. Whitehead;

2. Revoking or suspending, restricting, limiting or otherwise imposing discipline upon

Certified Public Accountancy Corporation Certificate Number 5798 issued to Darrel Whitehead

CPAs, An Accountancy Corporation;

3. Ordering Darrel R. Whitehead and Darrel Whitehead CP As to pay the California

Board ofAccountancy the reasonable costs of the investigation and enforcement of this case,

pursuant to Business and Professions Code section 51 07;

4. Ordering Darrel R. Whitehead and Darrel Whitehead CPAs to pay the California

Board of Accountancy an administrative penalty pursuant to Business and Professions Code

section 5116; and,

///

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5. Taki ng such other and fu rther act ion as deemed necessa ry and proper.

DATED: 5 ( ;);j10lg

ACCUSATION

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Execut ive Officer Californ ia Board of Accountancy Depa11ment o f Consumer Affairs State of Ca lifornia Complainant

SD20 17705627

AC-2017-98 - California Department of Consumer Affairs

Documents

Transcript of AC-2017-98 - California Department of Consumer Affairs