Should We Accept Nashville Realty?

Jim Shorts, a new audit manager with the regional CPA firm of B&U CPAs, was recently appointed to the board of directors of a local nonprofit organization. The chairman of the board of the nonprofit is Justin Case, who is also the owner of a real estate development firm called Nashville Realty.

Shorts was excited when Case indicated that his corporation needed an audit, and he wished to discuss the matter with him. During their conversation, Shorts was told that Nashville Realty had never been audited before and that the audit was needed to obtain a substantial amount of financing for some new real estate investments. Presently, Nashville Realty is successful, profitable, and committed to growth. The audit fee for the engagement should be substantial.

Since Nashville Realty appeared to be a good client prospect, Shorts tentatively indicate that B&U CPAs would like to do the work. Shorts then mentioned that B&U CPAs quality control policies require an investigation of new clients and approval by the managing partner, Bob Belmont.

Shorts obtained the authorization from Case to make the necessary inquires for the new client investigation. An internet search by Shorts indicated that Case was a highly respected member of the community. Also, Nashville Realty was highly regarded by its banker and its attorney, and the Dun & Bradstreet report (business credit report) on the corporation reflected nothing negative.

As a final part of the investigation process, Shorts contacted Cases former tax accountant, Jo King. Shorts was surprised to discover that King did not share the others high opinion of Case. King related that on an IRS audit 10 years ago, Case was questioned about the details of a large capital loss reported on the sale of a tract of land to a trust. Case told the IRS agent that he did not have any supporting documentation for the transaction, and that he had nothing in his files that indicated the names of the principals of the trust. A search by the IRS auditor revealed that the land was recorded in the name of Cases married daughter and the Case himself was listed as the trustee. The IRS disallowed the loss and Case was assessed a civil fraud penalty. Shorts was concerned about these findings, but eventually concluded that Case had probably matured to a point where he would not again engage in such activities.

Required:

Assume you are writing a letter to Bob Belmont (quality control director of B&U CPAs) regarding your opinion as to whether to accept or decline the Nashville Realty audit engagement. Present all the facts (both for and against) you have uncovered and make a well explained and justified recommendation to Bob.