About the first I can only write in generalities. He regularly hid receipts in his own business so they wouldn't have to be reported as income and he paid people in cash so he didn't have to pay employment taxes. I have vague recollections of other practices that might be considered illegal or, at least, unprofessional and unethical.

In preparation for discussing the second CPA, let me give you some background information. In 1999 I was really in need of work and started with this small mortgage brokerage primarily as their telephone and computer technician. The boss found out that I knew something about bookkeeping and turned over to me the QuickBooks file and I found myself the bookkeeper for the company.

As just a worker bee in a small company I never begrudged my boss the fact that he was living very well and I was just barely squeaking by.

He owned a horse. All the stabling fees were paid by the corporation as rent and all the veterinary bills were paid by the corporation as medical expenses. The trainer was paid by the corporation and charged off as consulting fees or automobile expenses.

He also owned a boat. The slip fees were charged off as rent and all the maintenance was covered under automobile expenses.

Neither the horse nor the boat was corporate property so these expenses could not be considered business expenses. To the best of my knowledge he never had a party on the boat to which he invited clients and he never allowed clients to ride his horse. Thus it would seem the total amounts paid were income for him and unreported to the IRS. This is only conjecture on my part.

His monthly car payments and maintenance expenses were paid by the corporation. The monthly insurance payments were also paid by the corporation and charged off as automobile expenses. None of his cars were ever brought in as corporate assets so these payments all represented unreported income for him.

His home rent was paid by the corporation. His phone, electric, water, trash, and gas were paid by the corporation as corporate expenses. His home association fees were paid by the corporation as building maintenance. None of these were ever reported to the IRS as income.

He claims to have been audited three times by the IRS and twice by HUD, so possibly these income questions have already been addressed. This treatise, however, is not about him, but the corporation's CPA.

The aforementioned were intended merely as an introduction to our accountant, Rxxxxx Lxxxx Dxxxxx, a licensed California CPA, license number 6xxxx (see editorial note at the end). Each year, in order to be certified by HUD, we had to submit audited financials along with our application and the boss retained Dxxxxx to conduct those audits. In all the years we were HUD certified and I was with the company, Dxxxxx never once conducted what I would consider to be an actual audit. He prepared all the HUD required documentation without looking at any of the accounting procedures we followed or any of the supporting paperwork.

His audit consisted of having me send him a trial balance, printed out from QuickBooks, then having me adjust various amounts so certain ratios were not too high. The only paperwork he looked at was the trial balance I sent him and the bank statements with associated cancelled checks. Never once did he ask to see any bills or invoices.

Was he aware that the financials he was preparing for HUD were inaccurate and (in my opinion) fraudulent? Consider these two points. First, one year my boss was thinking about bringing his boat into the corporation as an asset so he had me carry all the expenses honestly as “boat expense.” For whatever reason, at the end of the fiscal year, we had not made the boat a corporate asset so Dxxxxx told me to change all the “boat expenses” to “automobile expenses” and resubmit the trial balance. The second point is that in 2001 our accounts payable were around $22,000 and Dxxxxx said that was too high. The solution? He had me simply delete bills from the books to lower the payables to around $5,200 and resubmit the trial balance.

HUD required that the audit be conducted by an independent CPA. That implies one who is, although paid by the company, working on behalf of the U.S. Government to ensure compliance with “generally accepted accounting principles.” In two years (2000 and 2001) he was paid $4,700 for the preparation of two reports that were used to secure HUD certification for the company. This was in addition to the fees paid to him for the preparation of the corporate tax returns and the boss's personal tax returns.

Both his 2000 and 2001 audit reports reflected the same thing as summarized in the 2001 report, “In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Xxxxx, Inc. dba XXX as of April 30, 2001 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.”

Prior to submitting this I showed it to my old boss and his comment was, “Maxi, That is a cute fictional story. FYI an audited financial is what is required by HUD and that is based on canceled checks, reports etc. Dxxxxx never went off of your reports which were usually way off.”

To my way of thinking, the boss made two critical errors in making this statement. First is the fact that paragraph 4.27 of the Government Auditing Standards (July 2007 Revision) says:

“4.27 Under both the AICPA standards and GAGAS, auditors should plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Recognizing the possibility that a material misstatement due to fraud could be present is important for achieving this objective. However, absolute assurance is not attainable and thus even a properly planned and performed audit may not detect a material misstatement resulting from fraud.”

If Dxxxxx didn't use my reports for his audit report, he must have used only the cancelled checks. When I entered the checks into or printed out the checks from QuickBooks I'd put something on the memo line regarding slip number (F34) or the boat's name (Cra Sea Horse). When the boss wrote them manually he sometimes included that information and sometimes didn't. Whether there was anything on the memo line or not, one would have to assume that even a high school bookkeeping student would question one thing. There were many checks made out to Newport Dunes Resort Marina, Super Clean Yacht Service, Ricardo's Boat Service, Newport Landing Fuel Dock, Kanqui Diving Service, Green Willow Quarter Horses, Wild West Trailers, and Pacific Coast Hull, Inc. All of them were charged against rent and automobile expenses. Also, a check made out to Charles Liskey, D.V.M. and carried as a medical expense should have raised a red flag, and didn't.

The second error is that an audit is designed to catch procedural errors in the accounting system of a company. If my reports were “way off” that would indicate that our company had procedural errors. If so, why did Dxxxxx not make some comment regarding the poor bookkeeping procedures used by the corporation? A follow-up question would be if he only reviewed the cancelled checks and not my trial balance, how did he come up with amounts for accounts receivable and accounts payable?

All of these instances beg the question of why a licensed CPA would submit a report he knew was erroneous or (again, in my opinion) fraudulent? Was it just a matter of money or does it go deeper? Is there something wrong with the licensing procedure? Does the California Board of Accountancy just issue a license and then wash their hands of any responsibility for the conduct of its licensees? Yes, there is a complaint procedure, but who, in this case, would use it. Certainly not the company as the CPA's report showed it to be doing everything right. Who else but the government would care? Is the federal government going to file any sort of complaint with the board?

I wish I could say I had an answer. I cannot see any way the board can realistically police its licensees. Maybe the moral fiber of the licensees is at question. Can students be taught morality in school? Can teachers or professors do more to ensure graduates actually abide by the publicly expressed high ideals of board members?

Perhaps it goes even deeper and calls into question the integrity of all California licensed CPAs. Following that line of logic, if other states use the same licensing criteria, does that indicate a failure on the part of every CPA in the United States?

[Editorial note: I had originally included the CPA's actual name and license number as well as the corporate name. I was, however, advised by a friend in the legal community that I probably didn't want to do that. Even though I still have the QuickBooks file and copies of the HUD audits and tax forms, she felt it would be better to blank out some information.]