1 XAVIER BECERRA Attorney General of California 2 LINDAL. SUN Supervising Deputy Attorney General 3 HELENE E. ROUSE . Deputy Attorney General 4 State Bar No. 130426 300 So. Spring Street, Suite 1702 5 Los Angeles, CA 90013 Telephone: (213) 269-6279 6 Facsimile: (213) 897-2804 Attorneys for Complainant 7 ------·----... ·--·------~--- -·:.• -·---- ··-·-··-·C~------"'------,._ ------8 BEFORE THE .. ~": .CALIFORNIA BOARD OF ACCOUNTANCY 9 DEPARTMENT OF CONSUMER AFFAIRS . ;.'• IO STATE OF CALIFORNIA 11 12 In the Matter of the Accusation Against: Case No. AC-2019-57 13 NICHOLAS PATRICK NAWORSKI ACCUSATION 14 1920.20th Street Bakersfield, CA 93301 15 Certified .Public Accountant Certificate No. 16 CPA64246
17 And
18 NICK NAWORSKI, CPA, A Professional CoQ>oration 19 · 1920 .20th Street Bakersfield,--CA ·93301 20 Certified Public Accountancy Corporation 21 CertificateNo. COR 7905,
22 Respondent.
23
24 PARTIES 25 1. Patti Bowers (Complainant) brings this Accusation solely in her official capacity as
26 the Executive Officer of the California Board of Accountancy (CBA), Department of Consumer
27 Affairs.
28 /// 1 (NICK NA WORSKI, CPA, A.P.C, NICHOLAS PA TRICK NA WO RS KI and NICHOLAS PA TRICK NA WORSKI) ACCUSATION 1 2. On or about December 1, 2016, the CBA issued Certified Public Accountancy 2 Corporation Certificate Number COR 7905 to Nick Naworski, CPA, A Professional Corporation
3 (Respondent Corporation). The Certified Public Accountancy Corporation Certificate was in full
4 force and effect at all times relevant to the charges brought herein and will expire on December
5 31, 2020, unless renewed.
6 3. On or about May 13, 1993, the CBA issued Certified Public Accountant Certificate 7 Number CPA 64246 to Nicholas Patrick Naworski (Respondent). The Certified Public
8 Accountant Certificate was in full force and effect at all times relevant to the charges brought
9 herein and will expire on November 30, 2020, unless renewed.
10 JURISDICTION
11 4. This Accusation is brought before the CBA, under the authority of the following
12 laws. All section references are to the Business and Professions Code unless otherwise indicated.
13 5. Section 5109 states:
14 The expiration, cancellation, forfeiture, or suspension of a license, practice privilege, or other authority to practice public accountancy by operation of law or by 15 order or decision of the board or a court of law, the placement of a license on a retired status, or the voluntary surrender of a license by a licensee shall not deprive the board 16 of jurisdiction to commence or proceed with any investigation of or action or disciplinary proceeding against the licensee, or to render a decision suspending or 17 revoking the license.
18 STATUTES
19 6. Section 5062 provides that "A licensee shall issue a report which conforms to
20 professional standards upon completion of a compilation, review or audit of financial statements."
21 7. Section 5097 states:
22 (a) Audit documentation shall be a licensee's records of the procedures applied, the tests performed, the information obtained, and the pertinent 23 conclusions reached in an audit engagement. Audit documentation shall include, but is not limited to, programs, analyses, memoranda, letters of confirmation and 24 representation, copies or abstracts of company documents, and schedules or commentaries prepared or obtained by the licensee. 25 (b) Audit documentation shall contain sufficient documentation to enable a 26 reviewer with relevant knowledge and experience, having no previous connection with the audit engagement, to understand the nature, timing, extent, and results of 27 the auditing or other procedures performed, evidence obtained, and conclusions reached, and to determine the identity of the persons who performed and reviewed 28 the work. 2 (NICK NAWORSKI, CPA, A.P.C, NICHOLAS PATRICK NAWORSKI and NICHOLAS PATRICK NAWORSKI) ACCUSATION 1 (c) Failure of the audit documentation to document the procedures applied, tests performed, evidence obtained, and relevant conclusions reached in an 2 engagement shall raise a presumption that the procedures were not applied, tests were not performed, information was not obtained, and relevant conclusions were 3 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 4 required in subdivision (b). The burden may be met by a preponderance of the evidence. 5
6 8. Section 5100 states, in pertinent part:
7 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) 8 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, 9 one or any combination of the following causes: 10
11 (c) Dishonesty, fraud, gross negligence, or repeated negligent acts committed in the same or different engagements, for the same or different clients, 12 or any combination of engagements or clients, each resulting in a violation of applicable professional standards that indicate a lack of competency in the practice 13 of public accountancy or in the performance of the bookkeeping operations described in Section 5052. 14
15 (e) Violation of 5097. 16
17 (g) Willful violation of this chapter or any rule or regulation promulgated by the board under the authority granted under this chapter. 18
19 9. Section 5100.5 provides as follows:
20 (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 21 or condition on a licensee, which prohibits the licensee from performing or engaging in any of the acts or services described in Section 5051. 22 (b) A licensee may petition the board pursuant to Section 5115 for reduction of 23 penalty or reinstatement of the privilege to engage in the service or act restricted or limited by the board. 24 ( c) The authority or sanctions provided by this section are in addition to any 25 other civil, criminal, or administrative penalties or sanctions provided by law, and do not supplant, but are cumulative to, other disciplinary authority, penalties, or 26 sanctions.
27 ( d) Failure to comply with any restriction or limitation imposed by the board pursuant to this section is grounds for revocation of the license. 28 3 (NICK NA WORSKI, CPA, A.P.C, NICHOLAS PATRICK NA WORSKI and NICHOLAS PATRICK NA WORSKI) ACCUSATION (e) For purposes of this section, both of the following shall apply: 1 (1) "Unprofessional conduct" includes, but is not limited to, those grounds for 2 discipline or denial listed in Section 5100.
3 (2) "Permanently restrict or limit the practice of' includes, but is not limited to, the prohibition on engaging in or performing any attestation engagement, audits, or 4 compilations.
5 ADMINISTRATIVE PENALTY
6 10. Section 5116 provides, in pertinent part, that the Board may order any licensee to
7 pay an administrative penalty as part of any disciplinary proceeding. Administrative penalties
8 shall be in addition to any other penalties or sanctions imposed on the licensee, including, but not
9 limited to, license revocation and license suspension. Payment of these administrative penalties
10 may be included as a condition of probation when probation is ordered. 11 COST RECOVERY
12 11. Section 5107, subdivision (a) states:
13 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 14 holder of a permit or certificate found to have committed a violation or violations 15 of this chapter to pay to the board all reasonable costs of investigation and prosecution of the case, including, but not limited to, attorney's fees. The board 16 shall not recover costs incurred at the administrative hearing.
17 REGULATIONS
18 12. California Code of Regulations, title 16, section 58 (Board Rule 58) states:
19 Licensees engaged in the practice of public accountancy shall comply with all applicable professional standards, including but not limited to generally accepted 20 accounting principles and generally accepted auditing standards.
21 APPLICABLE PROFESSIONAL STANDARDS 22 13. Standards of practice pertinent to this Accusation and the engagements in issue
23 include, without limitation:
24 A. Statements on Standards for Accounting and Review Services. Standards
25 applicable to the performance of a compilation are discussed in the Statements on Standards for
26 Accounting Review Services (SSARS) and are codified by the American Institute of Certified
27 Public Accountants (AICPA). The statements are codified by "AR" or "AR-C" numbers,
28 depending upon the version applicable. The SSARS relevant to the compilation for the three 4 (NICK NA WORSKI, CPA, A.P.C, NICHOLAS PATRICK NA WORSKI and NICHOLAS PATRICK NA WORSKI) ACCUSATION 1 months ended March 31, 2015, is AR section 80. For the compilations for both the eight months
2 ended August 31, 2016, and for the ten months ended October 31, 2016, the SSARS relevant are
3 AR-C sections 60 and 80. .. 4 B. Generally Accepted Auditing Standards. Statements on Auditing Standards are l 5 issued by the Auditing Standards Board (ASB), the senior committee of the AI CPA designated to
6 issue pronouncements on auditing matter for nonissuers. The "Compliance with Standards Rule"
7 of the AICPA Code of Professional Conduct requires an AICPA member who performs an audit
8 of a nonissuer to comply with standards promulgated by the ASB. The relevant sections to this
9 Accusation include: AU-C §200 (Overall Objectives); AU-C §210 (Terms of Engagement); AU-
10 C §220 (Quality Control); AU-C §230 (Audit Documentation); AU-C §240 (Consideration of
11 Fraud); AU-C §260 (Communication with Those Charged with Governance); AU-C §265
12 (Communicating Internal Control Matters); AU-C §300 (Planning an Audit); AU-C §315
13 (Understanding the Entity and Assessing Risks); AU-C §320 (Materiality); AU-C §330
14 (Procedures in Response to Assessment Risks and Evaluating Audit Evidence); AU-C 501
15 (Evidence for Specific Items); AU-C §520 (Analytical Procedures); AU-C §550 (Related Parties);
16 AU-C §560 (Subsequent Events); AU-C §580 (Written Representations); AU-C §700 (Forming
17 an Opinion and Reporting); and AU-C §705 (Modified Opinions).
18 C. Department of Labor ERISA Requirements. The Department of Labor (DOL),
19 through the Employee Retirement Income Security Act (ERISA) of 1974, established auditing
20 and reporting guidelines for defined benefit and defined contribution plans with 100 or more
21 participants. The Auditing Standards Board issues the interpretive AICPA Audit and Accounting
22 Guide for Employee Benefit Plans to assist management of employee benefit plans in the 23 preparation of financial statements in conformity with the US GAAP and to assist auditors in 24 auditing and reporting on such financial statements. The guide represents the application of
25 generally accepted auditing standards and accounting principles to the special circumstances that
26 are unique to audits of employee benefit plans. Thus, while the interpretive guide is non-
27 authoritative, the auditor should be prepared to address how the auditor complied with Statements
28 on Auditing Standards (SAS) provisions addressed by the auditing guidance. This Guide was 5 (NICK NA WORSKI, CPA, A.P.C, NICHOLAS PATRICK NA WORSKI and NICHOLAS PATRICK NA WORSKI) ACCUSATION 1 updated January 1, 2014, is codified as "AAG-EBP" number and reference to ERISA Regulations
2 is included in Appendix A. Among the Guide chapters relevant herein, effective for financial
3 statements for plan years ending before January 1, 2014, are: Chapter 2 - Planning and General
4 Auditing Considerations; Chapter 4 - Internal Control; Chapter 5 - Defined Contribution
5 Retirement Plans; and Chapter 10 - Concluding the Audit and Other Considerations. 6 FACTUAL BACKGROUND 7 14. The CBA received a copy of Respondent's documentation of his accounting and audit
8 engagements, as follows: 9 • S.L. 40l{k) Plan, audit for the year ended December 31, 2013. 1
10 • K.W.K, DDS, Inc., compilation for the year ended December 31, 2013, dated May
11 15, 2014, and compilation for the eight months ended August 31, 2016 dated September
12 28,2016. 13 • S.H.B., Inc., compilation of consolidated financial statements for the three months
14 ended March 31, 2015, dated April 20, 2015.
15 • Dr. C.C., compilation for the ten months ended October 31, 2016, dated December
16 30,2016. 17 15. Respondent received a peer review rating of"fail" on his peer review report dated
18 September 15, 2014, for a system peer review of the year ended May 31, 2014. Respondent
19 stopped offering audit services immediately after receiving the failed peer review. Respondent
20 received a rating of "fail" on his most recent peer review report, which was an engagement
21 review for the year ended May 31, 2017, report dated July 26, 2017. After an investigation by the
22 CBA, the following failures to comply with professional standards were identified: 23 I. With respect to an ERISA audit engagement for the year ended December 21, 2013, 24 Respondent was repeatedly negligent for failing to comply with professional standards, including,
25 but not limited to, the following:
26
27 1 The initials of individuals and entities are used to protect their privacy, but their identities will be disclosed in investigation documents, to be provided to Respondent after a 28 timely and proper request for discovery. 6 (NICK NAWORSKI, CPA, A.P.C, NICHOLAS PATRICK NAWORSKI and NICHOLAS PATRICK NAWORSKI) ACCUSATION 1 A. The engagement letter does not state it will be a DOL Limited Scope, and it
2 incorrectly states that the objective is the expression of an opinion. Consequently, no appropriate
3 understanding was documented. [AU-C 210.lO(a); AAG-EBP 2.36]
4 B. Respondent failed to obtain a management representation letter for the audit. [AU- 5 c 580.10] 6 C. The auditor's report does not reflect current language and it omits the required
7 headings. [AU-C 700.26; AU-C 700.29; AU-C 700.34]
8 D. Respondent's audit documentation lacked evidence to support that the engagement
9 was properly planned, including:
10 i. An audit strategy and plan. [AU-C 300.07; AU-C 300.09]
11 11. An engagement team meeting. [AU-C 240.43; AU-C 315.33]
12 111. Client acceptance procedures. [AU-C 220.25]
13 1v. Respondent failed to establish materiality. [AU-C 320.11]
14 v. Respondent did not perform a risk assessment. [AU-C 200.08; AU-C 315.06]
15 E. There were no communications to either management or those charged with
16 governance, except the engagement letter. [AU-C 230-11; AU-C 240.17; AU-C 240.45; AU-C
17 260.05; AU-C 260.12; AU-C 265.12]
18 F. Inadequate procedures were performed, including the following presumptively 19 mandatory procedures:
20 i. Justification of omitted presumptively mandatory procedures and how
21 alternative procedures met the objectives. [AU-C 230.13]
22 ii. Address the presumed risk of management override of controls. [ AU-C
23 240.32.] 24 iii. Perform procedures for subsequent events. [AU-C 560.09]
25 1v. Reading minutes. [AAG-EBP 10.14(b)]
26 v. Obtain a legal representation letter. [AU-C 501.22; AAG-EBP 10.11]
27 v1. Address the presumed risk ofrevenue recognition. [AU-C 240.46]
28 vii. Analytics do not include expectations or acceptable variance. [AU-C 7 (NICK NAWORSKI, CPA,A.P.C, NICHOLAS PATRICK NAWORSKI and NICHOLAS PATRICK NAWORSKI) ACCUSATION 1 520.05(c) & (d)]
2 viii. Link procedures to the identified risk addressed. [AU-C 330.05; AU-C
3 330.06; AU-C 330.30]
4 ix. Consult available interpretative publications. [AU-C 200.27]
5 G. Respondent failed to follow procedures specific to an employee benefit plan: 6 i. Respondent did not obtain a SOC (Service Organization Control)
7 report. [AAG-EBP 4.13; AAG-EBP 4.28; AAG-EBP 10.37]
8 ii. Respondent did not perform adequate procedures to determine that
9 allocations were in accordance with the plan instrument. Respondent tested the
1O employer match, but did not follow stated procedures. The work paper states that
11 four employees with deferrals on their W-2 will be selected, from employee test,
12 but only one of the four employees on the work paper had deferrals. [AAG-EBP
13 5.124]
14 111. Respondent did not perform procedures for benefit payments.
15 Respondent noted in his analytics that the company had laid off approximately 120
16 employees due to a move to Mexico. The plan had 227 participants at the
17 beginning of the year, and 123 participants at the end of the year. This indicates a
18 partial termination of the plan, which increases the need for both participant and
19 distribution testing. In addition, distributions (benefits paid to participants) for the
20 year were $1,495,317, which is 23% of beginning net assets available, a very
21 material amount. However, there was no testing of distributions. [AAG-EBP
22 5.180 and AAG-EBP 5.203]
23 H. The documentation of those procedures that were performed do not adequately
24 describe the objective, what procedures were performed, and they do not identify the preparer or
25 date. [AU-C 230.08; AU-C 230.09]
26 I. There is inadequate documentation and insufficient audit evidence to support the
27 report issued. [AU-C 200.08; AU-C 200.22; AU-C 220.19; AU-C 230.02; AU-C 330.29; AU-C
28 705.07] 8 (NICK NA WORSKI, CPA, A.P.C, NICHOLAS PA TRICK NA WORSKI and NICHOLAS PATRICK NAWORSKI) ACCUSATION 1 J. Respondent did not possess the necessary skills or experience to conduct an 2 ERISA audit in accordance with professional standards. [AU-C 220.03; AU-C 220.16; AAG-
3 EBP 2.07] 4 II. Respondent performed multiple compilation engagements which have departures
5 from professional standards.
6 A. With respect to the consolidated compilation for the three months ended
7 March 31, 2015, the engagement letter had the following departures:
8 1. The compilation is for 2015 annual and month-end financial statements 9 (statement of assets, liabilities and equity, tax basis, and related statement of revenue,
10 expense, and retained earnings), but the financials do not present a statement of assets,
11 liabilities and equity.
12 11. It does not mention either the consolidation or the single item compilation.
13 iii. It is dated after the compilation report.
14 iv. No appropriate understanding with management was obtained for this 15 engagement by Respondent, who indicated he did not obtain an engagement letter for the
16 consolidated financials. [AR 80.02]
17 B. For both a compilation for the eight months ended August 31, 2016, and a
18 compilation for the ten months ended October 31, 2016:
19 1. The engagement letters included the following departures:
20 a. Refers to GAAP instead of the tax basis in the objective
21 paragraph in the description of management's responsibilities.
22 b. Omits management's responsibility for the selection of the
23 financial reporting framework. 24 c. Omits the description of the income tax basis and the summaries
25 of significant accounting policies and how it differs from GAAP.
26 [AR-C 60.26; AR-C 80.08]
27 11. The accountant's compilation reports omitted the following:
28 a. Management's responsibility for determining that the income 9 (NICK NAWORSKI, CPA, A.P.C, NICHOLAS PATRICK NAWORSKI and NICHOLAS PATRICK NAWORSKI) ACCUSATION 1 tax basis is an acceptable financial reporting framework.
2 b. The statement that the income tax basis of accounting is a basis
3 of accounting other than GAAP. [AR-C 80.20(a); 80.2l(c)]
4 C. For only the compilation for the eight months ended August
5 31, 2016, the accountant's compilation report refers to
6 supplemental information, but there is none presented.
7 D. For only the compilation for the ten months ended October 31, 2016, the
8 accountant's compilation report omits the required paragraph stating that management has
9 elected to omit substantially all of the disclosures ordinarily included in financial
1O statements prepared in accordance with the tax basis of accounting, and that if the omitted
11 disclosures were included they might influence the users' conclusions.
12 FIRST CAUSE FOR DISCIPLINE
13 (Repeated Acts of Negligence)
14 16. Respondents' certificates are subject to disciplinary action under section 5100,
15 subdivision (c), in that they engaged in repeated acts of negligence evidencing a violation of
16 applicable professional standards and indicating a lack of competency in the practice of public
17 accountancy, as set forth above in Paragraphs 14-15.
18 SECOND CAUSE FOR DISCIPLINE
19 (Report Failing to Conform to Professional Standards)
20 17. Respondents' certificates are subject to disciplinary action under sections 5062 and
21 5100, subdivision (g), in that Respondents issued an auditor's report and compilation reports
22 which failed to conform to professional standards, as set forth above in Paragraphs 14-15.
23 THIRD CAUSE FOR DISCIPLINE
24 (Failure to Comply with Professional Standards)
25 18. Respondents' certificates are subject to disciplinary action under section 5100,
26 subdivision (g) in conjunction with California Code of Regulations, title 16, section 58, in that
27 Respondents failed to comply with all applicable professional standards, including but not limited
28 to SSARS, GAAS, and BRISA requirements, as set forth above in Paragraphs 14-15, inclusive. 10 (NICK NA WORSKI, CPA, A.P.C, NICHOLAS PATRICK NA WORSKI and NICHOLAS PATRICK NA WORSKI) ACCUSATION FOURTH CAUSE FOR DISCIPLINE 2 (Failure to Obtain Sufficient Appropriate Audit Evidence)
3 19. Respondents' certificates are subject to disciplinary action under sections 5100,
4 subdivision (e) and 5097, in that they failed to obtain sufficient appropriate audit information to
5 support an ERISA audit, as set forth above in Paragraphs 14-15.
6 PRAYER
7 WHEREFORE, Complainant requests that a hearing be held on the matters herein alleged,
8 and that following the hearing, the California Board of Accountancy issue a decision:
9 1. Revoking or suspending, restricting, limiting or otherwise imposing discipline upon
1O Certified Public Accountant Certificate Number CPA 64246, issued to Nicholas Patrick
11 Naworski;
12 2. Revoking or suspending, restricting, limiting or otherwise imposing discipline upon 13 Certified Public Accountancy Corporation Certificate Number COR 7905, issued to Nick
14 Naworski, CPA, A Professional Corporation, Nicholas Patrick Naworski;
15 .)" . Ordering Nicholas Patrick Naworski and Nicholas Patrick Naworski, A Profess ional
16 Corporation to pay the California Board of Accountancy an administrative penalty pursuant to
17 Business and Professions Code section 5116;
18 4. Ordering Nicholas Patrick Naworski and Nicholas Patrick Naworski, A Professional 19 Corporation to pay the California Board of Accountancy the reasonable costs of the investigation
20 and enforcement of this case, pursuant to Business and Professions Code section 5107; and,
21 5. Taking such other and further action as deemed necessary and proper. 22
23
24 Executive Officer California Board of Accountancy 25 Department of Consumer Affairs State of California 26 Complainant
27 LA2019501162; 53546382.docx 28 11 (N ICK NA WORSKI, CPA, A.P. C, NICHOLAS PATRICK NA WORSKI and NICHOLAS PATRJCK NA WORSKI) ACCUSATION