NOTE: The information in this
blog comes from indictments and depositions in the civil trial of the auditors
for Dixon Illinois. The case is currently on trial. The final verdict will
determine the guilt or innocence of the defendants. I’ve taken factual
statements from these documents.
Please see:
Auditors Miss Phony Invoices – Would You Have Found Them?
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The auditing profession
plays such a vital role in the accountability process. So many people depend
on the work of the auditor that independence and competence are critical to an auditor’s
success and to the public’s confidence in the services provided. Competence,
integrity, objectivity, and independence are the backbone of the auditing
profession.
In the $53 million Dixon, Illinois fraud, independence and competence
will be on trial as this case proceeds to conclusion.
But, based on the factual information available it appears
that:
- Clifton Gunderson was doing the audit work for Dixon while having another firm sign the audit report;
- Clifton Gunderson was doing nonattest functions, including bookkeeping for Dixon at the same time they were doing the audit work.
- The senior audit partner did not have a good understanding of important auditing concepts including professional skepticism and personal relationships with clients;
- The senior partner may have had a personal relationship with Rita Crundwell having dinner, walking her dogs and doing her tax returns (while not fully understanding tax law).
Independence
The CPA firm Clifton
Gunderson LLP was the auditor for Dixon, Illinois from 1990 – 2005. In 2005,
Clifton Gunderson determined they were no longer “…independent according to
nationally recognized accounting standards which precluded Clifton by federal
statute from performing the single audit or annual audit of the City of Dixon
in future years.”[i] It
is not clear from the recortd, why they made this determination.
Clifton Gunderson then
arranged to provide bookkeeping services to the City. In a May 1, 2008 letter
to the Commissioner of Finance they agreed to provide:
In the latest indictment,
it is alleged though that Clifton
arranged for Janis Card & Associates to sign and attest to Dixon’s audit in
future years. Janis Card & Associates only had two CPAs and little or no
experience doing audits of municipal entities.[ii]
In addition, it’s alleged, “…the Clifton partner represented to Janis Card
& Associates that in return for signing the audit for the City of Dixon
that Clifton would perform all of the underlying audit work to prepare the
audit for the City of Dixon.”
After 2005, Clifton
continued to send emails to the City of Dixon specifically stating that Clifton
was performing the audit. Specifically, the supervisor and manager of Clifton's
audit field work for the City of Dixon for years submitted emails to the City
of Dixon that stated in pertinent part the following:
a. March 28, 2007 email
from Clifton supervisor to the City of Dixon "Here is the total fee for
the April 30, 2007 audit";
b. April l, 2008 email
from Clifton supervisor to the City of Dixon "Per our phone conversation,
here is a breakdown of the fee which will not be exceeded. City Audit $37,000";
c. April 30, 2008 email
from Clifton supervisor to the City of Dixon "I just wanted to set up some
dates for us to come out and do fieldwork for the audit",·
d. February 19, 2009
email from Clifton supervisor to the City of Dixon “Re: 4/30/09 Audit";
and
e. April 8, 2009 email
from Clifton supervisor to the City of Dixon "I also wanted to schedule
the audit field work.". (emphasis added)[iii]
Clifton Gunderson billed
the City in the range of $35,000 a year while Janis Card & Associates
billed in the range of $7,000[iv]
The AICPA rule 101 on
Independence says:
It is impossible to enumerate all
circumstances in which the appearance of independence might be questioned. In
the absence of an independence interpretation or ruling under rule 101 [ET section
101.01] that addresses a particular circumstance, a member should
evaluate whether that circumstance would lead a reasonable person aware of all
the relevant facts to conclude that there is an unacceptable threat to the
member's and the firm's independence…..
A member's independence would not be impaired if the
member performed nonattest services that would have impaired independence
during the period covered by the financial statements, provided that all of the
following conditions exist:
- The nonattest services related to periods prior to the period covered by the financial statements, and
- The financial statements for the period to which the nonattest services relate were audited by another firm (or in the case of a review engagement, reviewed or audited by another firm).
On its face, it would appear
that Clifton Gunderson is going to have a hard time showing it did not actively
work to violate the independence standard critical to our profession.
Client Relationships
When asked if it was OK
to have personal relationships with a client, the senior partner claimed not to
know and claimed not to have learned about it during school:
Here is an audit
partner, under oath, and he claims not to understand having an intimate or
personal relationship with a client is not appropriate.
He went on to say that
he had asked Rita Crundwell out on a date, but she had turned him down. He further
acknowledged she was a good cook because he was there for dinner and he was at
her house a couple of times to, “let out her dogs.”[vii]
Whether he had a
relationship with Rita Crundwell or not, he should have known that it was not acceptable
to have a personal or intimate relationship with a client.
Competence
I’m going to explore the issue of competence in a future blog.
Here are just a few issues of concern from the senior partner of Clifton
Gunderson.
During a deposition, the partner was asked:
For an auditor to not know about the concept of skepticism
is discouraging. Professional skepticism is an attitude that includes a
questioning mind and a critical assessment of evidence. It is fundamental to a
successful audit. For a senior partner to say he doesn’t recall the concept, doesn’t
inspire much confidence.
Independence takes many forms. A competent auditor would know “Independence
of Mind” is a critical factor. It is the state of mind that permits the performance
of an audit without being affected by influences that compromise professional
judgment, thereby allowing an individual to act with integrity and exercise
objectivity and professional skepticism.
Clifton Gunderson does Rita Crundwell’s Tax Returns
It’s also alleged during the period Clifton Gunderson audited
the City of Dixon and did its bookkeeping the senior partner at times was
involved with preparing Rita Gunderson’s tax return. There were all sorts of
questions about the accuracy of the return, including that her income did not
cover her business expenses and how could she live when she had on-going
losses.
But an interesting exchange concerned a small $500 winning
ticket. When asked about it the senior partner said, again under oath, “…you
don’t have to report gambling earnings if you’ve got losses in excess of the winnings.”[ix]
Now I’m not a tax expert and I don’t prepare tax returns,
but the IRS says, “Gambling winnings are fully taxable and must be reported on
your tax return. Gambling income includes, but is not limited to, winnings from
lotteries, raffles, horse races, and casinos.” The IRS goes on to say, “You
may deduct gambling losses only if you itemize deductions. However, the amount
of losses you deduct may not be more than the amount of gambling income
reported on your return.”[x]
A senior partner in a CPA firm, doing a tax return, ought to
know the right answer about gambling winnings.
This small matter though is a reflection of the greater lack
of competence that permeated this audit and resulted in the failure to uncover
the significant fraud that occurred.
I’ll further explore the auditing issues in the next blog.
