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It Looks Like Clifton Gunderson Knew About Rita Crundwell’s Secret Bank Account

Everyone remember Rita Crundwell? She's the horse lady that gave Dixon, Illinois a long face when it was discovered that she had been helping herself to the city's money. About $53 million or so over a couple of decades. That's not Madoff, Stanford, or Petters money, but it's not exactly a small sum.

Last summer Dixon sued their auditors, Sam and Janis Card, for this little oversight. At the time, CliftonLarsonAllen (fka Clifton Gunderson) was named a "respondent in discovery" because they had audited the city prior to the scam and was compiling financial statements for Dixon right up until Rita's little scheme was found out. 

Presumably, The Gipper's birthplace realized that Sam & Jan don't really have the deep pockets they're looking for, so they've set their sights on CLA, a firm that had over $500 million1 in revenues in 2012. They claim CLA/CG should have known that Rita was thieving this whole time. Funny thing — they might be right!

CliftonLarsonAllen knew about the secret bank account former comptroller Rita Crundwell used to steal nearly $54 million at least as early as 2010 – and did not investigate it, according to court documents.
The city is suing the accounting firm, one of the largest in the United States, claiming it should have detected Crundwell’s theft and asking for damages in excess of $53 million.
Documents filed in Lee County Court to add Ron Blaine and Todd Etheridge of Clifton to the suit, filed by the city’s attorney, Devon Bruce of Power, Rogers and Smith in Chicago, show that Clifton knew of the account, which it confirmed had a balance of $142,000.

Okay, admittedly, that looks pretty bad. Really bad, in fact:

In a deposition, Megan Shank, a certified public accountant for Clifton in its Dixon office, confirmed that she worked on the city’s account and that she received a response from Fifth Third Bank identifying the account Crundwell used to steal money as one that was not on a list of city accounts.
When Bruce asked what was done with that information, Shank admitted nothing was done.
“If a jury and a judge rule that Clifton was doing an audit in 2010, do you agree with me that Clifton deviated from the standard of care in not investigating the existence of the 9530 (RSCDA) account?” Bruce asked her in the deposition.
“Yes,” Shank said. “There’s no documentation of further looking into that account.”

So you receive a confirmation from a bank that has a mystery account on it but you bother asking about it. In an audit, that's a big no-no. But the firm wasn't doing an audit! Since the firm claims they were simply compiling the financial statements, no investigation was warranted. Seems odd, but that's technically correct. I guess?

Dixon is also saying that CLA/CG should have "evaluate[d] 179 phony invoices Crundwell fabricated to steal city funds." Huh! For a compilation? 

If CLA/CG has a prayer in this case, here it is — a couple of "General Procedures" from a fairly recent "General Compilation Engagement Checklist" from the AICPA:

With Regard to Establishing an Understanding With the Client:     
Did the accountant establish an understanding with management regarding the services to be performed and document the understanding through a written communication with the client? Did the accountant ensure that the understanding included the objectives of the engagement, management’s responsibilities, the accountant’s responsibilities, and the limitations of the engagement? 
With Regard to a Change in the Scope of the Engagement:     
If the accountant was engaged to perform an audit in accordance with GAAS or was engaged to review the financial statements in accordance with SSARSs, prior to agreeing to change the engagement to a compilation, did the accountant consider (a) the reason given for the client’s request, particularly the implications of a restriction on the scope of the audit or review whether imposed by the client or by circumstances, (b) the additional audit or review effort required to complete the audit or review, and (c) the estimated additional cost to complete the audit or review? 

Isn't that interesting, man? If CLA/CG did the "establishing an understanding" then Dixon would have been perfectly aware of what the firm was doing and, more importantly, what they are NOT doing. Now, if there was "a change in scope" that's a different story but nothing in the article indicates that the former conversation DIDN'T happen or that the latter conversation DID happen. If that's the case, shouldn't that get CLA off the hook?

I don't know! Professional standards are great and all, but sometimes in court it doesn't make any difference. If a judge and/or jury decides that auditors/accountants were grossly negligent despite evidence that shows that they checked all the right boxes, it won't matter. Clifton is one of the most deft box-checking firms out there but it will be tough convince anyone they aren't liable just because they complied with professional standards.

CPA firm knew about secret bank account [SK]

1 Or something. I just rammed together the two firms' revenues, per Accounting Today.