08-002648PL Department Of Business And Professional Regulation, Board Of Accountancy vs. David Mcquay, Jr. Status: Closed Recommended Order on Monday, October 27, 2008.

Summary: Petitioner proved several instances of negligence in conduct of audit of nonprofit corporation; Recommend probation.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BUSINESS AND )

PROFESSIONAL REGULATION, BOARD )

OF ACCOUNTANCY, )

)

Petitioner, )

)

vs. ) Case No. 08-2648PL

)

DAVID MCQUAY, JR., )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a final hearing was held in this case

before Lawrence P. Stevenson, Administrative Law Judge of the

Division of Administrative Hearings ("DOAH"), on July 22, 2008,

in Tampa, Florida.

APPEARANCES

For Petitioner: Eric R. Hurst, Esquire

Department of Business and

Professional Regulation

1940 North Monroe Street

Tallahassee, Florida 32399-2202

For Respondent: David McQuay, Jr., pro se

110 North Lincoln Avenue

Tampa, Florida 33609-2908

STATEMENT OF THE ISSUE

The issue in this case is whether Respondent, David

McQuay, Jr., committed the violations alleged in a four-count

Amended Administrative Complaint issued by Petitioner,

Department of Business and Professional Regulation, Board of

Accountancy, on February 6, 2008, and, if so, what penalty

should be imposed.

PRELIMINARY STATEMENT

Petitioner issued a four-count Amended Administrative

Complaint (the "Complaint") on February 6, 2008, against

Respondent, based on an audit that Respondent performed for the

Mid-Florida Center for Medical Health and Substance Abuse, Inc.

("Mid-Florida Center"), a non-profit organization, for the

financial year ending September 30, 2002. Petitioner's

accounting expert reviewed the audit and found that Respondent

failed to properly address several significant areas. These

areas were set forth in the Complaint as follows:

(a) Financial Statements

i. Amendment No. 2 (Auditor

Communication) to the Yellow Book

necessitated changes to auditor's reports.

ii. Several necessary disclosures are

missing in the notes to the financial

statements.

iii. The Statement of Activities and

Statement of Functional Expenses should not

contain captions of "Memorandum Only" for

the total columns.

iv. Donations of long-lived assets

(depreciable) should not be reported as

"Permanently Restricted Net Assets."

(b) Working Papers

i. There was no evidence of a reporting

and disclosure checklist for not-for-profit

organizations, which is common practice to

include.

ii. No audit evidence was located for

fraud risk factors or planning materiality.

iii. The management representation

letter in this instance omitted the specific

representations relative to the Single Audit

and the referenced schedule of uncorrected

misstatements in the management

representation letter.

iv. No documentation was evident

regarding a consideration of a going concern

with the entity's financial position.

v. The management representation letter

addressed the $158,429 liability owed to the

Executive Director, which was reversed off

the books; however, the letter failed to

justify the removal of the liability from

the financial statements by specifically

finalizing the matter.

vi. Relative to compliance testing, the

working papers contained evidence of testing

only one monthly invoice/progress report.

Based on these findings, the Complaint alleges in Count One

that Respondent "violated Subsection 473.323(1)(g), Florida

Statutes, by failing to properly address significant areas in

the audit." Count Two alleges that Respondent "violated Section

473.323(1)(h), Florida Statutes, through Rule 61H1-22.002,

Florida Administrative Code, by failing to comply with generally

accepted auditing standards." Count Three alleges that

Respondent "violated Section 473.323(1)(h), Florida Statutes,

through Rule 61H1-22.003, Florida Administrative Code, by

issuing an opinion on financial statements that departed from

generally accepted principles without describing the

departures." Count Four alleges that Respondent "violated

Section 473.323(1)(h), Florida Statutes, through Rule 61H1-

22.001, Florida Administrative Code, by failing to perform his

engagements with competency."

Respondent timely filed an election of rights requesting a

formal hearing to contest the factual allegations of the

Complaint. On June 5, 2008, the case was referred to the DOAH

for assignment of an administrative law judge to conduct a

formal administrative hearing. The case was set for hearing on

July 22, 2008.

At the final hearing, Petitioner presented the testimony of

Thomas F. Reilly, the expert in accounting who performed the

review of the Mid-Florida Center's audit on behalf of

Petitioner; and of Allan Nast, another expert in public

accounting and auditing. Petitioner's Exhibits 1 through 16

were admitted into evidence. Respondent testified in his own

behalf and presented the testimony of Selvin McGahee, a member

of the board of directors of the Mid-Florida Center.

Respondent's Exhibits 1 through 5 were admitted into evidence.

A Transcript of the hearing was filed with the DOAH on

August 20, 2008. Petitioner filed a proposed recommended order

on August 27, 2008. Without objection from Petitioner,

Respondent filed his proposed recommended order on

September 3, 2008. Both proposed recommended orders have been

fully considered in entering this Recommended Order.

All references to Florida Statutes and the Florida

Administrative Code in this Recommended Order are to the

versions applicable at the time of the Complaint, unless

otherwise indicated.

FINDINGS OF FACT

1. Petitioner, the Department of Business and Professional

Regulation, Board of Accountancy (hereinafter referred to as the

"Department"), is the state agency charged with the duty to

regulate the practice of certified public accountants in Florida

and to prosecute administrative complaints pursuant to Section

20.165, and Chapters 120, 455, and 473, Florida Statutes.

2. At all times relevant to the allegations of the

Complaint, Respondent David McQuay, Jr., has been licensed in

Florida as a certified public accountant. Mr. McQuay's license

number is R 1736, and his address of record is 110 North Lincoln

Avenue, Tampa, Florida 33609-2908.

3. Thomas Reilly, an expert in public accounting and

auditing, reviewed an audit that Mr. McQuay performed for the

Mid-Florida Center, a non-profit organization, for the financial

year ending September 30, 2002. The audit was completed on

July 18, 2003.

4. Mr. Reilly prepared a report of his findings, dated

September 5, 2005. He filed a subsequent report dated

June 25, 2007, to include copies of various accounting standards

and reference materials that were cited in the original report.

In preparing his original report, Mr. Reilly met with Mr. McQuay

and reviewed Mr. McQuay's complete set of working papers.

5. Mr. Reilly testified that he billed the Department

$3,444.00 for his services. No billing statements, invoices, or

other documents were entered into evidence to support the amount

of Mr. Reilly's fee. No expert testimony was offered to

establish the reasonableness of the fee.

6. As indicated in the Preliminary Statement above,

Mr. Reilly identified four issues relating to the financial

statements. First, Mr. Reilly found that the audit did not

include certain statements that are required by government

auditing standards. The "Yellow Book" contains the

authoritative auditing standards issued by the federal

Governmental Accountability Office ("GAO"). Amendment No. 2 to

the auditing standards, adopted in July 1999, requires that

certain language be included in the auditor's report on the

financial statement. In particular, Section 5.16.1 of Amendment

No. 2 provides:

When auditors report separately (including

separate reports bound in the same document)

on compliance with laws and regulations and

internal control over financial reporting,

the report on the financial statements

should also state that they are issuing

those additional reports. The report on the

financial statements should also state that

the reports on compliance with laws and

regulations and internal control over

financial reporting are an integral part of

a GAGAS [Generally Accepted Government

Accounting Principles] audit, and, in

considering the results of the audit, these

reports should be read along with the

auditor's report on the financial

statements.

7. Mr. McQuay's report on the financial statements did not

contain a statement calling the reader's attention to the fact

that a separate report on internal control and compliance is

included elsewhere in the audit report.

8. Mr. Reilly stated that the quoted language from the

Yellow Book is mandatory, and that the GAO felt that the issue

was important enough to call for the issuance of Amendment No. 2

to emphasize the revised mandate.

9. In response, Mr. McQuay pointed to his reliance on a

commercially produced practice guide that did not include the

revised language of Amendment No. 2. While conceding the error,

Mr. McQuay continued to contend that the practice guide's

position was reasonable: that the statement is required only

when the reports on compliance with laws and regulations and

internal control over financial reporting are issued separately

from the report on financial statements. In Mr. McQuay's case,

the reports were issued under a single cover.

10. Given that the express language of Amendment No. 2

references "separate reports bound in the same document,"

Mr. McQuay's response to the charge is insufficient. The

Department has demonstrated that Mr. McQuay's audit report

deviated from professional standards as to its failure to

include the mandatory Yellow Book language. The deviation is

ameliorated by the fact that all of the reports referenced in

Amendment No. 2 were in fact contained in Mr. McQuay's audit

report. There was no indication that Mr. McQuay's failure to

include the mandatory statement was intended to mislead a reader

of the audit report, or that his failure to comply with the

strict language of Amendment No. 2 had any practical effect on

the soundness of the audit report.

11. The second allegation as to the financial statements

is that necessary disclosures were missing in the notes to the

financial statements. Mr. Reilly stated that the notes to the

financial statements did not disclose the entity's

capitalization policy for capital assets. The American

Institute of Certified Public Accountants ("AICPA") Audit and

Accounting Guide for Not-for-Profit Organizations requires

disclosure of the entity's capitalization policy. Mr. Reilly

testified that it is important for a reader of the audit to

understand the dollar threshold at which the entity has decided

to capitalize fixed assets, and that the professional standards

require the disclosure in the audit report.

12. In response, Mr. McQuay contended that the audit

report did disclose the capitalization policy, citing to the

following paragraph:

Property donated to the Center is stated at

its estimated fair market value.

Depreciation expense is computed by use of

the straight-line method of the estimated

economic life of the respective assets.

Maintenance and repairs are expensed as

incurred. Extraordinary repairs that

significantly extend the useful lives of the

related assets are capitalized and

depreciated over the assets' remaining

economic useful life.

13. This response is insufficient because the quoted

language does not address the dollar threshold for capitalizing

fixed assets, which is required under the standards for audits

of nonprofit organizations.

14. Mr. Reilly stated that the notes also failed to

include a required statement as to lease commitments. Where the

entity has operating leases that commit the entity for more than

one year, professional standards require disclosure of the

amount of the future commitments for each of the first five

years subsequent to the date of the statement of financial

position. Mr. McQuay's audit notes indicate that Mid-Florida

Center had leases ranging as far as three years into the future,

but do not disclose the amount of those lease commitments.

15. Mr. McQuay responded that audit standards provide that

immaterial items need not be disclosed, and that it was his

professional judgment that the leases in question were not

material. Mr. Reilly replied that the audit report gives the

reader no basis for making an independent judgment as to the

materiality of the leases. Mr. Reilly's view is more consistent

with the specific standard regarding lease disclosure, though

Mr. McQuay's exercise of independent professional judgment in

this instance was not so unreasonable as to constitute a

violation of professional standards.

16. Mr. Reilly stated that the notes to the financial

statements also omitted a statement of cash flows. However,

Mr. McQuay's audit report properly identified this omission as a

departure from generally accepted accounting principles

("GAAP"), rendering irrelevant any further discussion of the

definition of cash equivalents.

17. In summary, as to the second allegation, the evidence

proved that Mr. McQuay violated the standards by failing to

address the dollar threshold for capitalizing fixed assets, but

did not prove any other violations of the disclosure

requirements.

18. The third allegation as to the financial statements

was that the Statement of Activities and Statement of Functional

Expenses should not contain captions of "Memorandum Only" for

their "total" columns. Mr. Reilly contended that the

"Memorandum Only" caption was inaccurate and misleading.

Historically, the term "memorandum only" was used frequently on

local government financial statements, where the auditor must

give an opinion on different types of columns. Some of the

columns were on a modified accrual basis and others on an

accrual basis. Because these are two different bases of

accounting, the "total" column was irrelevant.

19. Mr. Reilly pointed out that the only time an auditor

would use the "memorandum only" terminology as to a nonprofit

organization's audit would be in presenting comparative

financial statements, or where the prior year's audit included a

summary total that was not in accordance with GAAP. In those

situations, an auditor would use the "memorandum only" caption,

as well as other disclosures, in the notice of the financial

statements and the auditor's report.

20. However, the Mid-Florida Center audit involved a

single year's financial statement. Mr. Reilly opined that the

total column on these financial statements was extremely

significant, and that the "memorandum only" caption was

extremely misleading. Mr. McQuay responded that the decision

was made to use the "memorandum only" caption because this was

the initial audit for Mid-Florida Center, and that the caption

does not materially change any substantive aspect of the

financial statement and is therefore not misleading.

Mr. Reilly's position that the inclusion of the "memorandum

only" caption was misleading and a violation of the standards

cited in his report was correct, and Mr. McQuay's response was

insufficient.

21. The fourth allegation as to the financial statements

was that donations of long-lived depreciable assets should not

be reported as "Permanently Restricted Net Assets." Mr. Reilly

conceded that this was a very complicated issue for which

Mr. McQuay had "quite a bit of support." Mid-Florida Center

purchased land and some equipment from the Highlands County

School Board. The fair value of the property exceeded the price

paid by Mid-Florida Center. Under GAAP, the difference between

the price paid and the value would be recorded as a donated

asset. The dollar amount recorded in the financial statement

was $330,000, but there was no documentation showing how that

number was arrived at, and no documentation showing the breakout

between the land and the equipment.

22. Mr. Reilly testified that when he looked at the fixed

assets, he found a $280,000 item for land but could not be

certain whether the item was part of this land or another piece

of property referenced elsewhere in the notes. However,

$330,000 was shown in a column called "permanently restricted."

Mr. Reilly did not take issue with placing the land in that

column. However, he thought that the equipment, i.e., the

depreciable portion of that asset, should not be placed in the

"permanently restricted" column.

23. Mr. Reilly testified that an item such as an endowment

fund is the only thing that should be placed in a "permanently

restricted" column. Once an asset is placed in service and

begins depreciating, it must be placed in the "unrestricted"

column. In his response, Mr. McQuay referenced a reversionary

clause in the purchase agreement, whereby if Mid-Florida Center

gave up its 501(c)(3) nonprofit status, the property would

revert to the School Board. Mr. Reilly testified that this is a

standard clause in government contracts, and is not a reason to

classify the item as permanently or temporarily restricted.

24. While his report took issue with the placement of

depreciable assets in the "permanently restricted" column,

Mr. Reilly conceded that the relevant Statement of Financial

Accounting Standards is not crystal clear and that he used non-

authoritative practice guides to arrive at his conclusion.

Mr. Reilly believed that it was misleading to label equipment in

operation as "permanently restricted," but also conceded that

the notes to the financial statement fully disclosed the issue.

Mr. McQuay insisted that his audit did distinguish between the

land and equipment in the fixed assets and depreciation

schedules. While his treatment of the item was subject to

dispute, Mr. McQuay cannot be found to have violated

professional standards as to this issue.

25. As indicated in the Preliminary Statement above,

Mr. Reilly identified six issues relating to the working papers.

The first allegation is that there was no evidence of a

reporting and disclosure checklist for not-for-profit

organizations. Mr. Reilly opined that it is common practice to

include such a checklist, and that Mr. McQuay should have used

one on this audit because nonprofits have unique disclosure

requirements and Mid-Florida Center was the only nonprofit

organization that Mr. McQuay was auditing at the time.

Mr. Reilly noted that failure to use a checklist does not

violate a particular auditing standard, but could be held to

violate the more general professional standard of due care.

26. Mr. Reilly believed that due professional care

mandates that a CPA use a checklist when auditing a nonprofit

organization, and that a CPA "would be a fool" not to use one.

A typical checklist is 70 pages long, and an accountant needs

the list to jog his memory as to the many unique requirements of

nonprofits. Mr. Reilly thought that Mr. McQuay might have

avoided some of the cited deficiencies if he had used a

checklist.

27. Mr. McQuay responded that professional standards do

not require the use of a checklist. Moreover, he asserted that

his auditing software contains the functional equivalent of a

disclosure checklist. While conceding that this was the only

nonprofit he audited during the year in question, Mr. McQuay

testified that he has been auditing nonprofit organizations for

over 36 years and that his previous firm conducted 35 to 40 such

audits annually. A checklist would be of no assistance out in

the field, where the auditor is examining the client's working

papers. Mr. McQuay stated that he does use a checklist when he

is reviewing the work of a staff auditor, but that he did not

need a checklist here because he was performing the audit

himself.

28. Even after hearing Mr. McQuay's response, Mr. Reilly

continued to hold that it was foolish not to complete a

disclosure checklist. The fact that Mr. McQuay was the only

person working on the audit provided all the more reason for the

use of a checklist.

29. Accepting Mr. McQuay's testimony that his auditing

software contained the equivalent of a checklist, it is found

that his failure to use a paper checklist was not a violation of

auditing standards or of due professional care.

30. The second allegation relating to the working papers

was a lack of audit evidence for fraud risk factors or planning

materiality. Statement on Auditing Standards No. 82 states that

the auditor "should specifically assess the risk of material

misstatement of the financial statements due to fraud and should

consider that assessment in designing the audit procedures to be

performed." The auditor should consider fraud risk factors

relating to misstatements arising from fraudulent financial

reporting and from misappropriation of assets. Statement on

Auditing Standards No. 47 provides that the auditor should

consider audit risk and materiality in planning the audit and

designing auditing procedures and in evaluating whether the

financial statements "taken as a whole are presented fairly, in

all material respects, in conformity with generally accepted

accounting principles."

31. Mr. Reilly found nothing in Mr. McQuay's working

papers documenting that an assessment in conformance with

Statement on Auditing Standards No. 82 was made, or that an

audit risk and materiality assessment was made in accordance

with Statement on Auditing Standards No. 47. Mr. McQuay

responded that a separate section in his work papers dealt with

fraud risk factors and materiality. He testified that his firm

is careful in selecting clients and looks carefully at

management capabilities and the risks involved in the

representation. Mr. Reilly reviewed Mr. McQuay's response and

concluded that it did not come close to meeting professional

standards. As to this issue, it is found that Mr. McQuay did

violate professional standards as to documentation, though he

may well have performed the assessments in question.

32. The third allegation relating to the working papers

was that the management representation letter omitted the

specific representations relative to the single audit and the

referenced schedule of uncorrected misstatements in the

management representation letter. The "single audit" is an

Office of Management and Budget ("OMB") A-133 audit of an entity

that has received $500,000 or more of Federal assistance for its

operations. Mr. Reilly found the omissions in the management

representation letter constituted a violation of professional

standards.

33. Mr. Reilly testified that the standards require that

on every audit, the auditor obtain a management representation

letter signed by the appropriate levels of management.

Statement on Auditing Standards No. 85 contains the basic

requirements for management representations. Mr. McQuay

obtained a management representation letter from Mid-Florida

Center in compliance with this basic requirement. However,

because this was a single audit, additional representations were

required in the management representation letter over and above

those found in a generic audit.

34. AICPA's Statement of Position 98-3, "Audits of States,

Local Governments, and Not-for-Profit Organizations Receiving

Federal Awards," paragraph 6.68 requires the auditor conducting

an OMB A-133 audit to obtain written representations from

management about matters related to federal awards. Paragraph

6.69 of the same document lists 22 items for which the auditor

should consider obtaining written representations in a single

audit. Mr. Reilly testified that most of these items were

applicable in this case, but that none of them were included in

the Mid-Florida Center's management representation letter.

35. In response, Mr. McQuay pointed to his engagement

letter with the client. The engagement letter states that this

would be an OMB A-133 audit, and that Mr. McQuay has explained

to the client and the client has understood that management is

responsible for compliance with the OMB A-133 audit

requirements. Mr. McQuay did not think he needed to include

the detailed representations of paragraph 6.69 when he already

had an extensive engagement letter that covered these areas of

management responsibility.

36. Mr. Reilly replied that the engagement letter and the

management representation letter are two entirely different

things. The engagement letter spells out the scope of

representation to the client at the outset of the engagement;

completely different standards require the auditor to obtain

written representations from management regarding elements

spelled out in the standards, at the conclusion of the

engagement. The engagement letter is irrelevant for purposes of

the single audit's requirement that representations be obtained

from management about matters related to federal awards. None

of the specific statements referenced by Mr. McQuay in his

engagement letter dealt with the specifics of federal awards.

As to this issue, it is found that Mr. McQuay violated

professional standards.

37. The fourth allegation relating to the working papers

was that no documentation was evident regarding a consideration

of a going concern with the entity's financial position.

Mr. Reilly testified that it was apparent from a glance at the

financial statements that the entity had severe financial

problems. It had an adverse current ratio, with assets of

$33,000 and liabilities of $138,000, not considering the issue

of liability for back pay owed to the executive director. Under

Statement on Auditing Standards No. 59, an auditor has the

responsibility to evaluate and document any causes for doubt

about the continuing viability of the entity, and further to

evaluate and document management's plans to turn around the

entity.

38. Mr. Reilly saw nothing that came close to meeting this

standard. The only items of substance he found were a statement

that the Mid-Florida Center was creating a new charter school

and that fundraising activities were "ongoing." There were no

specifics as to the charter school or the fundraising.

Mr. Reilly found these statements "grossly inadequate" to comply

with professional standards. Statement on Auditing Standards

No. 59 includes specific items that an auditor should evaluate,

such as management's specific plans to curb expenditures and

increase revenue. Mr. McQuay supplied a document titled "Going

Concern Evaluation," but the document provided no specifics as

to the evaluation that was performed.

39. Mr. McQuay responded that any startup organization

such as the Mid-Florida Center will have poor current ratios.

However, the entity had the management wherewithal to raise

money and a committed, competent board of directors. The

proposed charter school had already received funding for

building renovation for the 2003-2004 school year. Mr. McQuay

believed that his field work and evaluation of the management

plans was sufficient to satisfy the standard.

40. As to this issue, it is found that Mr. McQuay violated

professional standards, at least insofar as he failed adequately

to document his consideration of a going concern with the

entity's financial position in accordance with Statement on

Auditing Standards No. 59.

41. The fifth allegation relating to the working papers

was that the management representation letter addressed the

$158,429 liability owed to the executive director, which was

reversed off the books, but failed to justify the removal of the

liability from the financial statements by specifically

finalizing the matter. Mr. Reilly explained that, as of the

balance sheet date, Mid-Florida Center owed several years'

salary to its executive director, Dr. Arthur Cox, a significant

liability that would make Mid-Florida's poor current ratio even

worse. Mid-Florida removed the liability for Dr. Cox' salary

from its books. Mr. Reilly did not have a problem with removing

the salary, in the amount of $158,429 from the books, provided

Mid-Florida had secured a separate, standalone confirmation from

Dr. Cox that he was totally relinquishing any rights to those

funds.

42. However, the relinquishment issue was addressed in a

management representation letter by way of what Mr. Reilly

termed "squirrely wording." Rather than completely extinguish

any rights Mr. Cox had to the salary, the Mid-Florida Center's

board voted to change the liability from deferred compensation

to amounts owed for future salary increases. Essentially, the

board took the liability off the books at the present time, but

left open the possibility of reinstating it when Mid-Florida

Center's finances permitted it to pay Dr. Cox the amount he was

owed.

43. Mr. McQuay responded that the Form 990 for the year in

question had been completed by another CPA and filed prior to

his retention. Form 990 is the tax return for organizations

exempt from income tax. The working trial balance prepared by

the other CPA indicated that the liability for the back pay had

been removed, and the Form 990 had been filed with the Internal

Revenue Service without including the liability. In reconciling

the Form 990 with the working trial balance for purposes of his

audit, Mr. McQuay obtained the management representation letter

referenced by Mr. Reilly. Mr. McQuay testified that he viewed

the letter as firming up the matter that the previous CPA had

dropped in his lap.

44. Selvin McGahee, a member of the Mid-Florida Center's

board of directors, testified that Dr. Cox founded the Mid-

Florida Center, writing the initial grants that got the entity

started. Dr. Cox' focus on providing services led him to forego

some of the salary that was budgeted for his position, in order

to spend the funds on other positions. Mr. McGahee testified

that this situation persisted for a couple of years, with Dr.

Cox supplementing the organization's revenues by not paying

himself. The board ultimately decided to remove the back pay

from its books, but had the intention of paying Dr. Cox his back

salary if and when the organization generated sufficient

unrestricted revenue to do so.

45. As to this issue, it is found that that Mr. McQuay

violated professional standards and departed from generally

accepted accounting principles. Removing the liability for back

salary payments to the executive director should have been

accompanied by an unequivocal renunciation of those funds by the

executive director. As matters were allowed to stand by

Mr. McQuay, Mid-Florida Center's balance sheet was significantly

improved in a manner that did not finalize the issue of the

possible reinstatement of the back pay liability in the future.

46. The sixth allegation as to the working papers was

that, relative to compliance testing, the working papers

contained evidence of testing only one monthly invoice/progress

report. Mr. Reilly testified that the problem here was a lack

of documentation. Though the auditor's judgment is paramount as

to compliance testing, there are stated requirements that the

auditor must meet. Because this was a single audit, OMB

Circular A-133 Compliance Supplement was used. This Circular

lists fourteen specific items of testing, each of which should

be addressed by the auditor at least to the point of indicating

that the auditor has determined the item to be inapplicable to

the audit at hand.

47. Mr. Reilly testified that one of the specific issues

he was called to investigate involved the lack of documentation

regarding a grant that the Mid-Florida Center had obtained from

the City of Bartow. The grant required the submission of a

monthly invoice/progress report. Mr. Reilly could find evidence

that Mr. McQuay had tested only one such invoice. Mr. Reilly

conceded that it was "tough to say" what professional judgment

demanded in this situation because he was not there when the

audit was conducted. Mr. Reilly stated that he would probably

have tested more than one invoice, but he could not say how

many. The usual practice is to expand the testing if a problem

is found with the first invoice. Mr. McQuay found no problems

with the one invoice and progress report that he tested, and

made the judgment that his examination was adequate. Mr. Reilly

believed that, based on the overall scope of problems with Mid-

Florida Center's documentation, Mr. Reilly concluded that the

entity's invoices and progress reports were "lightly tested."

48. As to this issue, it is found that Mr. McQuay did not

violate professional standards or generally accepted accounting

principles. Mr. Reilly testified that he might have conducted

the compliance testing more strenuously than did Mr. McQuay, but

he could not state that Mr. McQuay's actions were outside the

boundaries of his professional judgment.

49. Petitioner offered the testimony of Allan Nast, an

expert in accounting and auditing. Mr. Nast reviewed the audit

performed by Mr. McQuay, and also reviewed the reports prepared

by Mr. Reilly. Mr. Nast agreed with Mr. Reilly's opinions in

every particular. Mr. Nast's opinion has been considered and is

respected by the undersigned, but does not change the findings

of fact made above.

50. Mr. Nast testified that he billed Department $1,365.00

for his services. No billing statements, invoices, or other

documents were entered into evidence to support the amount of

Mr. Nast's fee. No expert testimony was offered to establish

the reasonableness of the fee.

51. Mr. McQuay testified that he believes he has been

singled out for disciplinary action based on business reasons.

Mr. McQuay pointed out that the initial complaint in this matter

was filed by a competitor who was also the father of an

accountant whose firm Mr. McQuay had rejected for work in his

role as director of quality assurance for WorkNet Pinellas, Inc.

Mr. McQuay, an African-American, also testified as to incidents

of racism as he pursued his career in a profession dominated by

white men. The undersigned has considered this testimony by

Mr. McQuay, but cannot find that these matters had any bearing

on the merits of the allegations lodged by the Department in the

Complaint after its thorough investigation of the initial

complaint.

52. In summary, as to the four allegations regarding the

financial statements recited in the Preliminary Statement above,

it was found that the first allegation as to missing statements

in the audit was proven, though ameliorated by the fact that all

of the reports referenced by the missing statements were

included in the audit report. As to the second allegation as to

missing disclosures, it was found that Mr. McQuay violated

professional standards as to only one of several of the alleged

omissions. As to the third allegation regarding the "Memorandum

Only" statement in the "total" columns, it was found that Mr.

McQuay violated the relevant standards. As to the fourth

allegation regarding the categorization of long-lived

depreciable assets, it was found that Mr. McQuay did not violate

professional standards.

53. There were six allegations regarding the working

papers recited in the Preliminary Statement above. As to the

first allegation regarding the disclosure checklist, it was

found that Mr. McQuay did not violate auditing standards or the

duty of professional care. As to the second allegation

regarding lack of evidence for fraud risk factors or planning

materiality, it was found that Mr. McQuay violated professional

standards as to documenting his work, though he may have

performed the assessments in question. As to the third

allegation regarding omissions in the management representation

letter, it was found that Mr. McQuay violated professional

standards. As to the fourth allegation regarding going concern

considerations, it was found that Mr. McQuay violated

professional standards. As to the fifth allegation regarding

removal of liabilities owed to the executive director, it was

found that Mr. McQuay violated professional standards. As to

the sixth allegation regarding the sufficiency of compliance

testing, it was found that Mr. McQuay did not violate

professional standards.

CONCLUSIONS OF LAW

54. The DOAH has jurisdiction over the subject matter of

this proceeding and of the parties thereto, pursuant to Section

120.569 and Subsection 120.57(1), Florida Statutes (2008).

55. In the Complaint, the Department seeks to impose

penalties against Mr. McQuay, including imposition of a fine not

to exceed $5,000 per violation, assessment of costs associated

with the investigation and prosecution of this matter, and/or

imposition of any other penalty authorized by Chapters 455 and

473, Florida Statutes. The Department, therefore, has the

burden of proving the allegations of the Administrative

Complaint by clear and convincing evidence. Department of

Banking and Finance, Division of Securities and Investor

Protection v. Osborne Stern and Co. , 670 So. 2d 932 (Fla. 1996);

Ferris v. Turlington , 510 So. 2d 292 (Fla. 1987); and Nair v.

Department of Business & Professional Regulation , 654 So. 2d

205, 207 (Fla. 1st DCA 1995). Clear and convincing evidence is

the proper standard in license disciplinary proceedings, because

they are penal in nature and implicate significant property

rights. See Osbourne Stern , 670 So. 2d at 935.

56. In Evans Packing Co. v. Department of Agriculture and

Consumer Services , 550 So. 2d 112, 116, n.5 (Fla. 1st DCA 1989),

the Court defined clear and convincing evidence as follows:

[C]lear and convincing evidence requires

that the evidence must be found to be

credible; the facts to which the witnesses

testify must be distinctly remembered; the

evidence must be precise and explicit and

the witnesses must be lacking in confusion

as to the facts in issue. The evidence must

be of such weight that it produces in the

mind of the trier of fact the firm belief of

conviction, without hesitancy, as to the

truth of the allegations sought to be

established. Slomowitz v. Walker , 429 So.

2d 797, 800 (Fla. 4th DCA 1983).

57. Judge Sharp, in her dissenting opinion in Walker v.

Florida Department of Business and Professional Regulation , 705

So. 2d 652, 655 (Fla. 5th DCA 1998)(Sharp, J., dissenting),

reviewed recent pronouncements on clear and convincing evidence:

Clear and convincing evidence requires more

proof than preponderance of evidence, but

less than beyond a reasonable doubt. In re

Inquiry Concerning a Judge re Graziano , 696

So. 2d 744 (Fla. 1997). It is an

intermediate level of proof that entails

both qualitative and quantative [sic]

elements. In re Adoption of Baby E.A.W. ,

658 So. 2d 961, 967 (Fla. 1995), cert.

denied , 516 U.S. 1051, 116 S. Ct. 719, 133

L.Ed.2d 672 (1996). The sum total of

evidence must be sufficient to convince the

trier of fact without any hesitancy. Id.

It must produce in the mind of the fact

finder a firm belief or conviction as to the

truth of the allegations sought to be

established. Inquiry Concerning Davey , 645

So. 2d 398, 404 (Fla. 1994).

58. The Complaint alleges in Count One that Respondent

"violated Subsection 473.323(1)(g), Florida Statutes, by failing

to properly address significant areas in the audit." Count Two

alleges that Respondent "violated Section 473.323(1)(h), Florida

Statutes, through Rule 61H1-22.002, Florida Administrative Code,

by failing to comply with generally accepted auditing

standards." Count Three alleges that Respondent "violated

Section 473.323(1)(h), Florida Statutes, through Rule 61H1-

22.003, Florida Administrative Code, by issuing an opinion on

financial statements that departed from generally accepted

principles without describing the departures." Count Four

alleges that Respondent "violated Section 473.323(1)(h), Florida

Statutes, through Rule 61H1-22.001, Florida Administrative Code,

by failing to perform his engagements with competency."

59. Section 473.323, Florida Statutes, provides that the

Board of Accountancy may take disciplinary action against the

license of a certified public accountant if it is found that the

accountant has committed certain enumerated offenses. Count One

of the Complaint alleges a violation of Subsection

473.323(1)(g), Florida Statutes, which provides:

(1) The following acts constitute grounds

for which the disciplinary actions in

subsection (3) may be taken:

* * *

(g) Committing an act of fraud or deceit,

or of negligence, incompetency, or

misconduct, in the practice of public

accounting.

60. Counts Two through Four of the Complaint allege

violations of Subsection 473.323(1)(h), Florida Statutes, which

provides that disciplinary action may be taken for "[v]iolation

of any rule adopted pursuant to this chapter or chapter 455."

61. Count Two of the Complaint alleges a statutory

violation through Florida Administrative Code Rule 61H1-22.002,

which provides:

A licensee shall not permit his name to be

associated with financial statements in such

a manner as to imply that he is acting as an

independent certified public accountant

unless he has complied with the applicable

generally accepted auditing standards.

Statements on Auditing Standards as

published by the American Institute of CPAs,

are for purposes of this rule, deemed and

construed to be interpretations of generally

accepted auditing standards, and departures

from such statements must be justified by

those who do not follow them.

62. Count Three of the Complaint alleges a statutory

violation through Florida Administrative Code Rule 61H1-22.003,

which provides:

A licensee shall not express an opinion that

financial statements are presented in

conformity with generally accepted

accounting principles if such statements

contain any departure from any such

principle which has a material effect on the

statements taken as a whole, unless he can

demonstrate that due to unusual

circumstances that financial statements

would otherwise have been misleading. In

such cases his report must describe the

departure, the approximate effects thereof,

if practicable, and the reasons why

compliance with the principle would result

in a misleading statement.

63. Count Four of the Complaint alleges a statutory

violation through Florida Administrative Code Rule 61H1-22.001,

which provides:

A licensee shall comply with the following

general standards and must justify any

departures therefrom:

(1) Professional competence. A licensee

shall undertake only those engagements which

he or his firm can reasonably expect to

complete with professional competence. A CPA

must be in charge of all public accounting

services performed by the firm.

(2) Due professional care. A licensee

shall exercise due professional care in the

performance of an engagement.

(3) Planning and supervision. A licensee

shall adequately plan and supervise an

engagement.

(4) Sufficient relevant data. A licensee

shall obtain sufficient relevant data to

afford a reasonable basis for conclusions or

recommendations in relation to an

engagement.

64. As to Count One, Mr. McQuay has not been accused of

committing an act of fraud or deceit, or of misconduct. If the

allegation is to be sustained, Mr. McQuay must be found to have

committed one or more acts of negligence or incompetence. The

above Findings of Fact established by clear and convincing

evidence that Mr. McQuay was negligent as to: addressing the

dollar threshold for capitalizing fixed assets; including the

"Memorandum Only" caption on the "total" columns of the

Statement of Activities and Statement of Functional Expenses;

failing to document his audit evidence for fraud risk factors or

planning materiality; the omissions in the management

representation letter; his failure to document consideration of

a going concern with the entity's financial position; and his

failure to obtain an unequivocal renunciation of future rights

to back pay from Dr. Cox.

65. As to Count Two, the above Findings of Fact

established by clear and convincing evidence that Mr. McQuay did

not comply with the applicable generally accepted auditing

standards as to: his failure to include mandatory Yellow Book

language as to separate reports bound in the same document,

though this failure was de minimus ; his failure to address the

dollar threshold for capitalizing fixed assets; his inclusion of

the "Memorandum Only" caption on the "total" columns of the

Statement of Activities and Statement of Functional Expenses;

his failure to document his audit evidence for fraud risk

factors or planning materiality; the omissions in the management

representation letter; his failure to document consideration of

a going concern with the entity's financial position; and his

failure to obtain an unequivocal renunciation of future rights

to back pay from Dr. Cox.

66. As to Count Three, only one of Mr. McQuay's proven

departures from the applicable generally accepted accounting

standards even arguably had "a material effect on the statements

taken as a whole." This departure was the failure to obtain a

separate, standalone confirmation from Dr. Cox that he was

relinquishing any rights to the $158,429 in back salary that

Mid-Florida Center was removing from its books. It is concluded

that the Department failed to carry the burden of proving by

clear and convincing evidence that, under all the circumstances

(including the fact that this issue was dropped into

Mr. McQuay's lap by a previous accountant), Mr. McQuay's

omission caused a material effect on the entity's financial

statements.

67. As to Count Four, it is concluded that the Department

failed to prove by clear and convincing evidence that Mr. McQuay

undertook the Mid-Florida Center engagement without reasonably

expecting to complete it with professional competence, that

Mr. McQuay failed to adequately plan or supervise the

engagement, or that Mr. McQuay failed to obtain sufficient

relevant data to afford a reasonable basis for his conclusions.

The Department did prove by clear and convincing evidence that

Mr. McQuay failed to exercise due professional care in the

performance of the engagement, for the same reasons he was held

to be "negligent" as to Count One.

68. Subsection 473.323(3), Florida Statutes, provides:

When the board finds any licensee guilty of

any of the grounds set forth in subsection

(1), it may enter an order imposing one or

more of the following penalties:

(a) Denial of an application for licensure.

(b) Revocation or suspension of a license.

(c) Imposition of an administrative fine

not to exceed $5,000 for each count or

separate offense.

(d) Issuance of a reprimand.

(e) Placement of the licensee on probation

for a period of time and subject to such

conditions as the board may specify,

including requiring the licensee to attend

continuing education courses or to work

under the supervision of another licensee.

(f) Restriction of the authorized scope of

practice by the certified public accountant.

69. Subsection 455.227(3)(a), Florida Statutes, provides:

In addition to any other discipline imposed

pursuant to this section or discipline

imposed for a violation of any practice act,

the board, or the department when there is

no board, may assess costs related to the

investigation and prosecution of the case

excluding costs associated with an

attorney's time.

70. A range of disciplinary guidelines for violations of

Chapter 473, Florida Statutes, has been adopted in Florida

Administrative Code Rule 61H1-36.004. The only provision of the

guidelines that appears to address the statutory and rule

violations alleged in the Complaint is Florida Administrative

Code Rule 61H1-36.004(2)(h), which provides a range from "letter

of guidance" to "reprimand and one (1) year probation

(continuing education and review of practice at licensee's

expense and limited area of practice) for each violation

involving negligence or misconduct."

71. The Department in its Proposed Recommended Order has

suggested imposition of a $500.00 administrative fine, requiring

Mr. McQuay to pay investigative costs of $4,809.00, requiring

Mr. McQuay to take sixteen hours of continuing professional

education beyond the regular requirement, including eight hours

related to nonprofit organizations, and placing Mr. McQuay on

probation for a period of two years with conditions including

the review of his audits by a consultant selected by the Board

of Accountancy for the first year, at Mr. McQuay's expense.

72. The Department did not provide sufficient evidence to

support its investigative costs of $4,809.00. Mr. Reilly and

Mr. Nast testified as to the amount of their billings to the

Department. However, the Department provided no billing

statements, invoices, or other documents to support the amount

of the experts' fees, and offered no expert testimony to

establish the reasonableness of those fees.

73. Florida Administrative Code Rule 61H1-36.004(3)

provides that the Board of Accountancy deviate from the

disciplinary guidelines "upon a showing of aggravating or

mitigating circumstances by clear and convincing evidence

presented to the Board prior to the imposition of a final

penalty."

74. None of the aggravating circumstances set forth in

Florida Administrative Code Rule 61H1-36.004(3)(a) is applicable

to Mr. McQuay's case, and the Department has urged no

aggravating circumstances beyond those enumerated in the rule.

75. Florida Administrative Code Rule 61H1-36.004(3)(b)

sets forth the mitigating circumstances as follows:

Mitigating circumstances; circumstances

which may justify deviating from the above

set forth disciplinary guidelines and cause

the lessening of a penalty beyond the

minimum level of discipline in the

guidelines shall include but not be limited

to the following:

1. In cases of negligence, the minor nature

of the engagement in question and lack of

danger to the public health, safety and

welfare resulting from the licensee’s

misfeasance.

2. Lack of previous disciplinary history in

this or any other jurisdiction wherein the

licensee practices his profession.

3. Restitution of any damages suffered by

the licensee's client.

4. The licensee's professional standing

among his peers including continuing

education.

5. Steps taken by the licensee or his firm

to insure the non-occurrence of similar

violations in the future.

6. The degree of financial hardship

incurred by a licensee as a result of the

imposition of fines or the suspension of his

practice.

7. Cooperation with the Department of

Business and Professional Regulation and the

Board including understanding and admission

of the violation by the Respondent.

76. The evidence established several mitigating

circumstances that should be considered in this case:

a. There was no showing of danger to the public health,

safety and welfare resulting from Mr. McQuay's misfeasance;

b. The Department offered no evidence of prior discipline

involving Mr. McQuay;

c. Mr. McQuay's client suffered no damages and in fact

offered testimony in support of Mr. McQuay; and

d. Mr. McQuay would incur great financial harm if a

significant fine and/or investigative costs were imposed.

77. Under all the circumstances, it is concluded that the

recommended probation and continuing education are the most

appropriate and sufficient disciplinary measures to be imposed

upon Mr. McQuay. It is concluded that a financial penalty would

be needlessly punitive under all the circumstances.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that

A final order be entered finding that David McQuay, Jr.

committed the violations alleged in Counts One, Two, and Four of

the Amended Administrative Complaint and requiring Mr. McQuay to

take sixteen hours of Continuing Professional Education beyond

the regular requirement, including eight hours related to

nonprofit organizations, and placing Mr. McQuay on probation for

a period of two years. During the first year of probation, all

audits (including financial statements and working papers) will

be reviewed by a consultant selected by the Board, at

Mr. McQuay's expense. If any audit is deemed deficient upon

review by the Board, review of all audits will continue through

the second year of Mr. McQuay's probation.

DONE AND ENTERED this 27th day of October, 2008, in

Tallahassee, Leon County, Florida.

S

LAWRENCE P. STEVENSON

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 27th day of October, 2008.

COPIES FURNISHED :

Eric R. Hurst, Esquire

Department of Business and

Professional Regulation

1940 North Monroe Street

Tallahassee, Florida 32399-2202

David McQuay, Jr.

110 North Lincoln Avenue

Tampa, Florida 33609-2908

Veloria A. Kelly, Director

Department of Business and Professional

Regulations, Board of Accountancy

240 NW 76th Drive, Suite A

Gainesville, Florida 32607

Ned Luczynski, General Counsel

Department of Business and

Professional Regulations

Northwood Centre

1940 North Monroe Street

Tallahassee, Florida 32399-0793

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this recommended order. Any exceptions

to this recommended order should be filed with the agency that

will issue the final order in this case.