Accounting Ethics – When the CPA Loses Neutrality, It’s Called Fraud

The certifications and the training to become a Certified Public Accountant ( CPA ), have always been taken as a highly serious matter. This is especially so when the accountant or the accounting firm is responsible for conducting audits of organizations that handle public funds.

There is possibly no profession that undergoes more ethical training and ethical awareness than does a CPA. This sense of ethical awareness was expanded even more in the early 2000’s when several major accounting firms collapsed under the weight of their ethical misadventures and fraud.

While the points I’ve made above are certainly well-known even to non-accountants, apparently Vazquez & Company, a Los Angeles-based CPA firm and auditor did not get the memo.

Los Angeles County has recently filed suit against Vazquez & Company. It alleges that the CPA firm “failed to detect embezzlement of $9 million” by the firm’s client. The client in this case was the Chicana Service Action Center (CSAC). The even bigger problem was that it was much than an oversight. It seems to have been intentional.

CPA – Auditor of Record?

The Chicana Service Action Center uses public funding (tax dollars) to pay for needed social services for domestic violence victims, the homeless and the jobless. From 2009 to 2012, Vazquez & Co. was retained to audit CSAC books.

The understanding is that when a firm is charged with performing audits that they are completely neutral. While they are hired by the client to satisfy the rules of good accounting practices they are not beholden to the client to be their “best friend, pal or co-conspirator.” The job of the auditor does not include deception.

The County of Los Angeles recently sued Vazquez & Co. because it did not find an embezzlement of millions of dollars in public funds. The penalties placed on the accounting firm were actually higher than the initial crime itself — and it should have been.

In 2015, key executives of the Chicana Service Action Center were charged with misappropriating $8.5 million in public funds. The City and County of Los Angeles wondered how it could be that the misappropriation was not detected by the auditor for more than three years. After all the county relies on the auditor to fairly state the financial condition of the organization to make certain taxpayer dollars are being well-spent.

Upon digging deeper, the city found some disturbing transactions. For example, CSAC used its public funding to pay for the auditor’s managing partner Gilbert Vasquez to take an $8,500 yacht trip along with other gifts. Digging even deeper, the county discovered that the auditing firm knew that CSAC’s director had used the taxpayer dollars to pay rent on two properties in San Marino, buy two Jaguar convertibles, plus nearly 40,000 in “miscellaneous expenses” including season tickets to the Los Angeles Dodgers and the Los Angeles Clippers.

Though the auditing firm found these irregularities they did not report it in the audit and instead they said they accepted explanations of the directors of CSAC at face value without any further inquiry. The CSAC director wasn’t alone in the misuse of funds other colleagues used public money to buy personal automobiles, meals and to pay child support.

The amount stolen at CSAC was $8.5 million, and the auditors saw it and were bribed to conveniently look the other way. Because of that, the county is demanding $9 million from the auditing firm for fraud and deceit and for negligent misrepresentation.

Ethical Breakdown

Certainly, the expected consequences will come down on the necks of the auditing firm. Licenses may be lifted, fines imposed and a loss in the ability of the firm (even if it somehow survives) to work for firms receiving public funding. They saw an opportunity to commit fraud – we don’t yet know the full extent of what they got out of this, and both the auditing firm and CSAC itself rationalized their actions because “it’s just tax money, no one got hurt.”

Obviously, the taxpayers get hurt, not to mention the poorest of the poor, the very people who need the money the most. Neither the executives of CSAC or the auditing firm had any compunction about stealing from the poor.

While the accounting profession is very concerned about ethical behavior, apparently the choices and consequences of unethical behavior are not being reinforced. I’ve no doubt if a smaller auditing firm in Los Angeles is failing to get the right message, that it is happening in many places across the nation. How many auditing firms are “violating neutrality” as we speak? It is impossible to say. An even more difficult question could be this: how many innocent people are being affected by unethical auditors? It is disturbing to think about.

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