Misbehavin’ clients. Misbehavin’ CPAs. Part 1.

Image courtesy of DollarPhotoClub.com
Image courtesy of DollarPhotoClub.com

Wow, yesterday I read of a bunch of CPAs that are in some deep trouble.

First, a couple of partners of Grant Thornton and the firm itself were sanctioned by the SEC for some lousy audits. Second, I read of a local firm in California that was sued by the state Attorney General for allegedly helping their charity client allegedly deceive donors. The first situation is now admitted by the firm and partners, the second situation is merely alleged by the AG.


The AG lawsuit was filed this week, on December 1, 2015.

Lesson to be learned by all CPAs is do a good job if you are an auditor. Don’t ignore massive red flags that are waving boldly in the brisk wind.

The caution to California CPAs is that it is actually possible for the AG to sue your firm and you personally. If you still thought that audits of charities are low risk, the mere filing of this case ought to change your mind.

This is a long discussion, so I will break it into three posts over three days.

National firm sanctioned by SEC

Going Concern explains to us that Fake Occupants Caused Some Problems in Grant Thornton’s Audit of Assisted Living Concepts. If you want to know why I won’t be using the “alleged” word in the discussion of their audit problems, you can see the SEC’s press release: Grant Thornton Ignored Red Flags in Audits. I think the red flags were actually 10 foot tall flashing purple neon signs.

The press release says:

Grant Thornton admitted wrongdoing and agreed to forfeit approximately $1.5 million in audit fees and interest plus pay a $3 million penalty.

That’s four and a half million dollars. Three times the total audit fees on two engagements over several years.

The SEC says the firm and the named partners

…allowed the companies to make numerous false and misleading public filings.

The core issue on an audit of an assisted living organization was

….making false disclosures and manipulating internal books and records by listing fake occupants at some senior residences in order to meet lease covenant requirements.

Check out the Going Concern article for all the gory details, but in essence the client padded the number of residents in order to meet a debt covenant ratio which kept the loan on several of their facilities from getting called.

The audit staff, a manager, and a partner all knew the numbers were weird. When responsibility for the audit was taken over by another partner, he also knew the numbers were off. Nobody insisted they be corrected.

Making it even worse, the first of the partners had four different clients with restatements in the prior two years. That’s a massive warning sign of a quality problem on some of the partner’s work.

Both partners received an inconsequential fine – $10k and $3K. The bigger consequence is that both were banned from practice before the SEC for five years. I can’t find either of the partner’s names at the California Board of Accountancy’s (CBA) website. If their home state is as aggressive and meticulous as the CBA, they will both be losing their license in about three or four years.

Like I said, check out the article to see how bad it really was.

Local firm sued by the California Attorney General

I was looking at the California AG’s Registry of Charitable Trust website for a client project and glanced at the listing of cases in the top right corner of the page. I recognized two previous cases but the newest one caught my eyes: People v. Cars 4 Causes.

In a very short summary, the AG describes the charity as raising donations of vehicles, selling them, and giving a large portion of the proceeds to the charity selected by the donor.

The AG alleges the charity used a large portion of the money to pay for salaries of insiders and their relatives with an allegedly low portion of money actually paid out to charities.

Okay, that’s interesting but not what really caught my eye. Take a look at the list of the defendants and you’ll see that one of them is a CPA firm.


Scroll forward to paragraph 10 on page 4 of the complaint and you’ll see that the firm is an LLC. I checked at the CBA’s website and, sure enough, the firm is in good standing. They were first licensed in 2010.

The AG alleges the firm

“… advised and facilitated the unlawful and deceptive acts and practices of C4C alleged herein, including but not limited to C4C’s deceptive methods of reporting, and/or concealing, expense obligations on financial statements, tax returns and advertising statements made to prospective donors.”

Next, in paragraph 11 the complaint alleges a named partner in the firm participated in the allegedly inappropriate activities. Complaint alleges the partner personally

“… prepared and signed tax documents, prepared and signed audited financial statements, and advised and overseen (sic) the financial affairs of C4C.”

In doing so, the AG repeats the same allegation as raised against the firm, specifically that the partner:

“… advised and facilitated the unlawful and deceptive acts and practices of C4C alleged herein, including but not limited to C4C’s deceptive methods of reporting, and/or concealing, expense obligations on financial statements, tax returns and advertising statements made to prospective donors.”

The partner named in the complaint shows up as the first person listed at the firm’s website. My guess is that’s the managing partner. That page shows two partners and four staff, two of whom have their license. Looks like it is a firm with six professionals. Their website suggests a full-service local firm.

Paragraph 21 alleges the charity

“… kept and spent millions of dollars in donations that they should have given to other charities. By their own accountings, C4C currently owes about $2 million dollars to thousands of charities, and lacks the ability to pay it back.”

Disclaimer:  All I know of these situations is what I read on the ‘net. Let me know if you think I missed something.

Next post: The accounting issue alleged by the AG and a look at the 990.

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