Accounting firm Mayer Hoffman McCann has agreed to pay a $300,000 penalty to the California Board of Accountancy, plus investigation costs of up to $50,000, and be subject to two years’ probation, for its audits of the California city of Bell, where a number of officials have been accused of fraud and public corruption.

As a result of the settlement, the firm, which is affiliated with CBIZ, will be allowed to continue to practice in the state of California. The firm had been facing a six-month stay on its license, but it will be able to practice while remaining on probation.

State Controller John Chiang issued a critical report in December 2010 on the Irvine office of the firm’s audits of Bell’s accounts for the fiscal year ended June 30, 2009. “MHM appears to have been a rubberstamp rather than a responsible auditor committed to providing the public with the transparency and accountability that could have prevented the mismanagement of the city’s finances by Bell officials,” he said in a statement. “Had MHM fully complied with the 17 applicable fieldwork standards, it would have led them to identify some—if not all—of the problems my office has uncovered since August.”

Eight former public officials from the city are facing public corruption charges, according to the Los Angeles Times. Chiang noted that the firm had relied primarily on comparisons to prior-year financial statements, requesting information on variances in excess of $200,000 and 15 percent from the prior year. For example, a $300,000 loan to a local business was not flagged for additional review because the same loan with the same value appeared in prior-year statements. Instead, auditors should have reviewed the age and collectability of a loan that showed no repayment. The now-defaulted loan was made without the City Council’s knowledge.

Mayer Hoffman McCann announced last Friday that the California Board of Accountancy has completed its investigation of the firm’s audit of the financial statements of the City of Bell, for the year ended June 30, 2009. As a result of the investigation, MHM has entered into a settlement agreement with the CBA by which it will continue to practice in California without interruption.

The CBA’s review was prompted by various reports of fraud, abuse and corruption involving City of Bell officials. There were eight specific criticisms identified by the CBA, which focused primarily on audit documentation issues, rather than audit procedures.

“We appreciate the professionalism and input of the representatives of the CBA throughout their investigation,” said MHM president William Hancock in a statement. “We have taken the events at Bell and the findings of the CBA very seriously, and we have used this as an opportunity to renew our commitment to high-quality audit services. As recognized by the CBA, and in addition to addressing the audit documentation issues noted by the CBA, over the past two years we have implemented a wide array of improvement measures in response to the current city and municipal audit environment, including enhancement of our government audit methodology and processes, and additional continuing education programs and training for our professionals.”

“We have also undergone two independent examinations covering our California city and municipal audit practice, each of which has concluded that we are in compliance with audit quality control standards,” Hancock added. “In short, we have emerged as a better firm, committed to serving the public interest and our California clients.”

The CBA cited several factors that generated a favorable disposition of the CBA to Mayer Hoffman McCann, an outside spokesman for the firm noted. “We were never the subject of any prior disciplinary action by the CBA,” he said. “We accepted responsibility at an early stage in the proceedings. We were cooperative in all respects during the investigation. We proactively developed and implemented remedial measures that enhanced and elevated procedures in our local government auditing practice.”

Under the settlement agreement with the CBA, MHM is subject to two years’ probation. During the probation period, MHM is subject to certain terms outlined in the settlement order such as submission of quarterly written reports, personal appearances for interviews with the CBA, a practice investigation conducted by representatives of the CBA, and required dissemination of the settlement order to all MHM professional personnel in California.

Also as part of the settlement agreement, MHM plans to commission another peer review of the firm’s California governmental audit practice group before July 31, 2013. The firm has agreed to pay a $300,000 administrative penalty and reimburse CBA’s investigation costs for an amount not to exceed $50,000.

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