| e ORDER INSTITUTING DISCIPLINARY PROCEEDINGS, MAKING FINDINGS, AND IMPOSING SANCTIONS In the Matter of HJ & Associates, LLC, S. Jeffrey Jones, CPA, Robert M. Jensen, CPA, and Charles D. Roe, CPA, Respondents. ) ) ) ) ) ) ) ) ) ) ) PCAOB Release No. 105-2017-001 January 24, 2017 By this Order, the Public Company Accounting Oversight Board ("Board" or "PCAOB") is censuring HJ & Associates ("HJ" or the "Firm"), revoking the Firm's registration, and imposing a civil money penalty in the amount of $10,000 upon the Firm;1 censuring S. Jeffrey Jones, CPA ("Jones"), barring Jones from being an associated person of a registered public accounting firm, and imposing a civil money penalty in the amount of $10,000 upon Jones;2 censuring Robert M. Jensen, CPA ("Jensen") and suspending him from being an associated person of a registered public accounting firm for a period of one (1) year from the date of this Order; and censuring Charles D. Roe, CPA ("Roe") and suspending him from being an associated person of a registered public accounting firm for a period of one (1) year from the date of this Order. The Board is imposing these sanctions on the basis of its findings that the Firm, Jones, Jensen, and Roe (collectively, "Respondents") violated PCAOB rules and standards, as follows: (a) the Firm, Jones, and Roe failed to comply with PCAOB auditing standards in connection with the audits of two issuers; (b) Jensen failed to comply with PCAOB auditing standards in connection with the audit of one issuer; and (c) the Firm failed to comply with PCAOB quality control standards. 1 The Firm may reapply for registration after two (2) years from the date of this Order. 2 Jones may file a petition for Board consent to associate with a registered public accounting firm after three (3) years from the date of this Order. 1666 K Street, N.W. Washington, DC 20006 Telephone: (202) 207-9100 Facsimile: (202) 862-0757 www.pcaobus.org ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 2 I. The Board deems it necessary and appropriate, for the protection of investors and to further the public interest in the preparation of informative, accurate, and independent audit reports, that disciplinary proceedings be, and hereby are, instituted pursuant to Section 105(c) of the Sarbanes-Oxley Act of 2002, as amended (the "Act") and PCAOB Rule 5200(a)(1) against Respondents. II. In anticipation of the institution of these proceedings, and pursuant to PCAOB Rule 5205, Respondents have each submitted an Offer of Settlement (collectively, the "Offers") that the Board has determined to accept. Solely for purposes of these proceedings and any other proceedings brought by or on behalf of the Board, or to which the Board is a party, and without admitting or denying the findings herein, except as to the Board's jurisdiction over Respondents and the subject matter of these proceedings, which is admitted, Respondents consent to the entry of this Order Instituting Disciplinary Proceedings, Making Findings, and Imposing Sanctions ("Order"), as set forth below.3 III. On the basis of Respondents' Offers, the Board finds that:4 A. Respondents 1. HJ & Associates, LLC is, and at all relevant times was, a professional corporation organized under the laws of the state of Utah, and headquartered in Salt Lake City, Utah. The Firm is registered with the Board pursuant to Section 102 of the Act and PCAOB rules. The Firm is licensed to practice public accountancy by the state 3 The findings herein are made pursuant to Respondents' Offers and are not binding on any other person or entity in this or any other proceeding. 4 The Board finds that Respondents' conduct described in this Order meets the conditions set out in Section 105(c)(5) of the Act, 15 U.S.C. § 7215(c)(5), which provides that certain sanctions may be imposed in the event of: (A) intentional or knowing conduct, including reckless conduct, that results in a violation of the applicable statutory, regulatory, or professional standard; or (B) repeated instances of negligent conduct, each resulting in a violation of the applicable statutory, regulatory, or professional standard. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 3 of Utah (license no. 114967-2603). At all relevant times, the Firm was the external auditor for Blue Earth, Inc. ("Blue Earth") and Jameson Stanford Resource Corporation ("Jameson"). 2. S. Jeffrey Jones, age 50, of South Jordan, Utah, is a certified public accountant licensed by the state of Utah (license no. 326621-2601). At all relevant times, Jones was a partner of the Firm and had primary responsibility for HJ's audit practice. Jones served as the engagement partner for the Blue Earth and Jameson audits discussed below. At all relevant times, Jones was an associated person of a registered public accounting firm as that term is defined in Section 2(a)(9) of the Act and PCAOB Rule 1001(p)(i). 3. Robert M. Jensen, age 59, of Salt Lake City, Utah, is a certified public accountant licensed by the state of Utah (license no. 149726-2601). At all relevant times, Jensen was the managing partner of the Firm, and he served as the engagement quality reviewer for HJ's audit of the 2012 financial statements of Blue Earth. At all relevant times, Jensen was an associated person of a registered public accounting firm as that term is defined in Section 2(a)(9) of the Act and PCAOB Rule 1001(p)(i). 4. Charles D. Roe, age 65, of Salt Lake City, Utah, was at all relevant times a certified public accountant licensed by the state of Utah (license no. 145257-2601). Roe's license with the state of Utah expired on September 30, 2016. At all relevant times, Roe was a partner of the Firm, and he served as the engagement quality reviewer for HJ's audits of the 2013 financial statements of Jameson, the 2013 financial statements of Blue Earth, and the 2013 internal control over financial reporting ("ICFR") of Blue Earth. At all relevant times, Roe was an associated person of a registered public accounting firm as that term is defined in Section 2(a)(9) of the Act and PCAOB Rule 1001(p)(i). B. Summary 5. This matter concerns Respondents' violations of PCAOB rules and auditing standards in connection with the audits of the 2013 financial statements of Jameson, the 2012 and 2013 financial statements of Blue Earth, and the 2013 ICFR of Blue Earth (collectively, the "Audits"). Respondents repeatedly failed to obtain sufficient appropriate audit evidence and to exercise due care and professional skepticism in connection with the Audits. More specifically: (a) the Firm and Jones failed to comply with PCAOB auditing standards in connection with each of the Audits; (b) Jensen failed to comply with PCAOB auditing standards in connection with the audit of Blue Earth's 2012 financial statements; and (c) Roe failed to comply with PCAOB auditing standards in connection with the audit of Jameson's 2013 financial statements, and the audits of Blue Earth's 2013 financial statements and ICFR. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 4 6. This matter also concerns the Firm's violations of PCAOB rules and quality control standards by failing to establish and implement quality control policies and procedures sufficient to provide HJ with reasonable assurance that Firm personnel would comply with applicable professional standards and the Firm's standards of quality. C. Respondents Violated PCAOB Rules and Auditing Standards in Connection with the Audits. 7. In connection with the preparation or issuance of any audit report, PCAOB rules require that a registered public accounting firm and its associated persons comply with the Board's auditing and related professional practice standards.5 An auditor may express an unqualified opinion on an issuer's financial statements only when the auditor has formed such an opinion on the basis of an audit performed in accordance with PCAOB standards.6 Among other things, those standards require that an auditor exercise due professional care and professional skepticism in performing the audit.7 8. PCAOB standards require auditors to take certain steps in connection with the identification and assessment of risks of material misstatement. The auditor should perform risk assessment procedures that are sufficient to provide a reasonable basis for identifying and assessing the risks of material misstatement, whether due to error or fraud, and designing further audit procedures.8 The assessment of risk should continue throughout the audit and, when the auditor obtains audit evidence that contradicts audit evidence on which the original risk assessment was made, "the auditor should revise the risk assessment and modify planned audit procedures or perform additional procedures in response to the revised risk assessments."9 5 See PCAOB Rule 3100, Compliance with Auditing and Related Professional Practice Standards; and PCAOB Rule 3200T, Interim Auditing Standards. 6 See AU § 508.07, Reports on Audited Financial Statements. 7 See AU § 150.02, Generally Accepted Auditing Standards; AU § 230, Due Professional Care in the Performance of Work. 8 See Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement ("AS12") ¶ 4. 9 Id. ¶ 74; see also Auditing Standard No. 9, Audit Planning ("AS9") ¶ 15 (auditors should modify overall strategy and audit plan as necessary if circumstances ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 5 9. In the case of significant transactions that are outside the normal course of business for the entity, or that otherwise appear to be unusual given the auditor's understanding of the entity and its environment, PCAOB standards require the auditor to gain an understanding of the business rationale for such transactions and whether that rationale (or the lack thereof) suggests that the transactions may have been entered into to engage in fraud.10 And the auditor should evaluate whether the company's selection and application of accounting principles are appropriate for its business and consistent with the applicable financial reporting framework and accounting principles used in the relevant industry.11 10. PCAOB auditing standards require auditors to design and implement appropriate audit responses to the risks of material misstatement.12 The auditor should determine whether it is necessary to make pervasive changes to the nature, timing, or extent of audit procedures to address adequately the assessed risks of material misstatement.13 "The auditor's responses to the assessed risks of material misstatement, particularly fraud risks, should involve the application of professional skepticism in gathering and evaluating audit evidence."14 Where a risk of fraud is identified, the auditor is required to perform substantive procedures, including tests of details, that are specifically responsive to the assessed fraud risks.15 11. The auditor must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for the auditor's opinion.16 The "auditor should take into account all relevant audit evidence, regardless of whether it change significantly during audit, including discovery of previously unidentified risk of material misstatement or revised assessment of risk of material misstatement). 10 See AU § 316.66, Consideration of Fraud in a Financial Statement Audit. 11 See AS12 ¶¶ 12-13. 12 See Auditing Standard No. 13, The Auditor's Responses to the Risks of Material Misstatement ("AS13") ¶ 3. 13 See id. ¶ 6. 14 Id. ¶ 7. 15 Id. ¶ 13. 16 See Auditing Standard No. 15, Audit Evidence ("AS15") ¶ 4. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 6 appears to corroborate or to contradict the assertions in the financial statements."17 The auditor should evaluate the results of the audit to determine whether the audit evidence obtained is sufficient and appropriate to support the opinion to be expressed in the auditor's report.18 "If the auditor has not obtained sufficient appropriate audit evidence about a relevant assertion . . . the auditor should perform procedures to obtain further audit evidence to address the matter."19 The auditor must evaluate whether the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework.20 12. The auditor must evaluate the reasonableness "of accounting estimates made by management in the context of the financial statements taken as a whole."21 Further, while management representations are part of the evidential matter the auditor obtains, they are not a substitute for the application of those auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial statements under audit.22 If management representations are contradicted by other audit evidence, the auditor should investigate the circumstances and consider the reliability of the representation made and, based on the circumstances, consider whether his reliance on management's representations relating to other aspects of the financial statements is appropriate and justified.23 13. As described below, HJ and Jones failed to comply with the above PCAOB rules and auditing standards in connection with the Audits. 17 Auditing Standard No. 14, Evaluating Audit Results ("AS14") ¶ 3. 18 See id. ¶ 4. 19 Id. ¶ 35. 20 See id. ¶¶ 30-31. 21 AU § 342.04, Auditing Accounting Estimates; see also id. § 342.07. 22 See AU § 333.02, Management Representations. 23 Id. § 333.04. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 7 Jameson Stanford Resource Corporation 14. At all relevant times, Jameson Stanford Resource Corporation24 was a Nevada corporation headquartered in Las Vegas, Nevada. The public filings of Jameson disclosed that it was a mining development company. At all relevant times, its common stock was registered under Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act") and was quoted on the OTCQB marketplace. At all relevant times, Jameson was an issuer as that term is defined by Section 2(a)(7) of the Act and PCAOB Rule 1001(i)(iii). 15. Jones was the engagement partner for the Firm's audit of the December 31, 2013 financial statements of Jameson, and he supervised the work of the engagement team. On April 15, 2014, Jones granted permission for the Firm's issuance of an audit report expressing an unqualified opinion on Jameson's 2013 financial statements. The audit report was included in the Form 10-K that Jameson filed with the Commission on April 15, 2014. HJ and Jones failed to exercise due professional care and professional skepticism, and failed to obtain sufficient appropriate audit evidence in connection with the audit of Jameson's 2013 financial statements.25 Common Stock 16. HJ and Jones failed to comply with PCAOB auditing standards in connection with their audit of Jameson's reported common stock. During the audit, HJ and Jones learned that the CEO and majority shareholder of Jameson (the "CEO") sold Jameson common stock to a third party for approximately $750,000,26 failed to record the issuance of the common stock in Jameson's books and records, and deposited the proceeds from the stock sale into the bank account of an entity that the CEO controlled. HJ and Jones also learned that the CEO: (a) purportedly used these funds to pay company expenses; (b) caused Jameson to issue a note payable to himself to cover those expenses; and (c) later caused Jameson to extinguish that note payable in exchange for approximately 1.5 million shares of company stock. 24 On November 24, 2014, Jameson filed a Form DEF-14C, Definitive Information Statement, with the U.S. Securities and Exchange Commission ("Commission") stating that the company had changed its name to Star Mountain Resources, Inc. 25 See AU § 150.02; see also AU § 230 and AS15 ¶ 4. 26 For 2013, Jameson reported total assets of approximately $195,000. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 8 17. After becoming aware of these facts, HJ and Jones failed to revise their risk assessment or to consider modifying planned procedures or performing additional procedures to address these matters.27 HJ and Jones also failed to gain a sufficient understanding of the business rationale for these significant unusual transactions to assess whether the transactions may have been entered into to engage in fraudulent financial reporting or to conceal the misappropriation of assets.28 18. HJ and Jones also failed to obtain sufficient appropriate audit evidence to evaluate Jameson's reported share balance. HJ and Jones identified a significant difference between the number of common shares outstanding, as reported by management, and the number of shares outstanding as set forth in a stock register that the Firm received from Jameson's stock transfer agent. HJ and Jones asked Jameson management about the discrepancy. Management replied that the company had improperly issued shares to the CEO, but represented that the company had rescinded the issuance of those shares as of the balance sheet date. HJ and Jones failed to obtain sufficient appropriate evidence to corroborate management's representations.29 Indeed, HJ and Jones failed to reconcile conflicting audit evidence, including a board of directors' authorization to rescind the shares issued to the CEO that was not effective until four months after the year under audit. This evidence suggested that the shares issued to the CEO had not, in fact, been rescinded as of the balance sheet date.30 Reported Expenses 19. During audit planning, HJ and Jones identified a risk of material misstatement with respect to management override of controls. The Firm, moreover, understood that the company's general and administrative expenses increased by over 350 percent between 2012 and 2013. HJ and Jones, however, failed to design and implement appropriate audit responses to these identified risks.31 Moreover, HJ and Jones failed to perform procedures to gather additional audit evidence to address red flags that they encountered during the course of audit.32 These red flags indicated that 27 See AS12 ¶ 74. 28 See AU § 316.66. 29 See AU § 333.02. 30 See AS15 ¶ 29. 31 See AS13 ¶ 3. 32 See AS14 ¶¶ 34-35. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 9 the CEO may have been improperly submitting and approving his own personal expenses as expenses of the company. 20. In the course of the 2013 audit, Jones reviewed work papers that documented first quarter of 2014 cash disbursements, including disbursements that appeared to be highly unusual. For example, the CEO submitted expense reports to Jameson for cash withdrawals from an ATM located in Las Vegas. 21. HJ and Jones failed to gain an understanding of the business rationale for these significant unusual business transactions, and whether that rationale (or lack thereof) suggested that the transactions may have been entered into in connection with fraudulent financial reporting or the misappropriation of assets.33 Further, HJ and Jones failed to evaluate whether to revise their risk assessment in light of these facts.34 Despite being aware of these red flags, HJ and Jones failed to perform any procedures to obtain further audit evidence to address these matters. Restatement 22. On October 10, 2014, Jameson filed an amended Form 10-K with the Commission containing the company's restated 2013 financial statements. Jameson disclosed that it was restating its financial statements to correct "an error related to the failure to record the issuance of common stock to the [CEO] for the period covered by the Original Report." It further disclosed that the company's "Financial Statements also contained errors relating to the incorrect classification of our [CEO's] personal expenses as expenses of our Company." The restatement increased advances to related party shareholders from $0 to $1.23 million. This asset, as restated, constituted 87 percent of Jameson's total assets. 23. The amended Form 10-K also disclosed that the CEO had resigned and the company had filed a civil complaint against the former CEO for committing, among other things, "wrongful and fraudulent acts and omissions resulting in at least [approximately $2.6 million] in losses for the company, [approximately $1.3 million] in fraudulent claimed business expenses, [approximately $1.3 million in] investment monies diverted from the company and monies deposited directly into [the CEO's] personal accounts and the improper issuance to [the CEO] of 25,000,000 shares of the Company's common stock." 33 See AU § 316.66. 34 See AS12 ¶ 74. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 10 Blue Earth 2012 Financial Statement Audit 24. At all relevant times, Blue Earth, Inc. was a Nevada corporation headquartered in Henderson, Nevada. Blue Earth's public filings disclosed that it was a comprehensive provider of energy efficiency and renewable energy solutions for commercial and industrial facilities. At all relevant times, its common stock was registered under Section 12(g) of the Exchange Act and was quoted on the OTCQB marketplace.35 At all relevant times, Blue Earth was an issuer as that term is defined by Section 2(a)(7) of the Act and PCAOB Rule 1001(i)(iii). 25. Jones was the engagement partner for the Firm's audit of the December 31, 2012 financial statements of Blue Earth, and he supervised the work of the engagement team. On April 1, 2013, Jones granted permission for the Firm's issuance of an audit report expressing an unqualified opinion on Blue Earth's 2012 financial statements. The audit report was included in the Form 10-K that Blue Earth filed with the Commission on April 1, 2013. HJ and Jones failed to exercise due professional care and professional skepticism, and failed to obtain sufficient appropriate audit evidence in connection with the audit of Blue Earth's 2012 financial statements.36 Revenue 26. Blue Earth reported revenue of approximately $9.9 million in 2012, which constituted an increase of approximately 87 percent over the prior year. HJ and Jones failed to obtain sufficient appropriate audit evidence to support the occurrence, completeness, and valuation of Blue Earth's reported revenue for 2012. HJ and Jones identified revenue as a significant audit area and as a risk of fraud involving improper revenue recognition.37 HJ and Jones also understood that Blue Earth management had identified a material weakness related to the company's revenue controls in 2012, and planned to test revenue solely through substantive procedures in response to those risks. 35 On August 1, 2016, Blue Earth filed with the Commission a Form 15, Certification and Notice of Termination of Registration. 36 See AU § 150.02; see also AU § 230 and AS15 ¶ 4. 37 An auditor "should presume that there is a fraud risk involving improper revenue recognition and evaluate which types of revenue, revenue transactions, or assertions may give rise to such risks." AS12 ¶ 68. "For significant risks, the auditor should perform substantive procedures, including tests of details, that are specifically responsive to the assessed risks." AS13 ¶ 11. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 11 27. To substantively test revenue, the engagement team tested major customer transactions for certain months. This approach did not constitute sampling under PCAOB auditing standards, and the results of the Firm's audit procedures could not be projected to the entire revenue population.38 As a result, HJ's revenue testing did not provide any audit evidence for approximately 84 percent of Blue Earth's 2012 revenue.39 28. The engagement team also performed analytical procedures that the engagement team intended to serve as substantive procedures over Blue Earth's reported revenue. However, these procedures were not substantive analytical procedures because the engagement team failed: (1) to develop expectations at a sufficient level of precision to provide assurance that material differences would be identified for investigation, and (2) to establish a threshold for significant differences and evaluate whether there were significant, unexpected differences requiring further investigation.40 29. HJ and Jones also failed to gather sufficient appropriate audit evidence with respect to revenue that Blue Earth accounted for using the percentage of completion ("POC") method. HJ and Jones understood that more than half of Blue Earth's 2012 revenue was recognized using the POC method. To support reported POC revenue, management provided the Firm with budgets and estimates to complete ("ETCs") for projects that were accounted for using the POC method. HJ and Jones failed to obtain sufficient appropriate audit evidence to support the Firm's POC revenue estimates.41 Intangible Assets 30. Reported intangible assets constituted approximately $8.3 million, or 56 percent, of Blue Earth's total reported assets as of December 31, 2012. Under generally accepted accounting principles ("GAAP"), a company is required to assess intangible assets for impairment and to follow certain procedures in performing these 38 See AS15 ¶¶ 25-27. 39 The engagement team also confirmed transactions in Blue Earth's yearend accounts receivable balance; however, this testing covered 12 percent of revenue, and it only provided evidence regarding balances that were outstanding at year-end. 40 See AU §§ 329.17 and .20, Substantive Analytical Procedures. 41 See AU § 342.10. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 12 assessments.42 GAAP also requires that an assessment be made of the remaining useful life of an intangible asset to ensure that it has been amortized properly.43 31. Blue Earth evaluated intangible assets for impairment by comparing the carrying value of these assets at year-end to the present value of the estimated revenue projections for these assets. Blue Earth's impairment analysis, however, did not include cash outflows related to the revenue projections. HJ and Jones reviewed Blue Earth's impairment analysis and concurred with the company's conclusion that the carrying value of the intangible assets was recoverable because that value did not exceed the present value of the company's revenue projections for the assets. 32. HJ and Jones understood that, as of December 31, 2012, Blue Earth had approximately $34.1 million in accumulated deficit, and had a net loss of approximately $9.6 million, and a negative cash outflow from operations of approximately $5.5 million in 2012. HJ and Jones, nonetheless, failed to perform sufficient procedures to test Blue Earth's impairment analysis.44 First, HJ and Jones failed to evaluate whether the projected revenues that Blue Earth used to test recoverability were reasonable. Indeed, HJ and Jones failed to perform any procedures beyond management inquiry to evaluate the assumptions underlying management's revenue projections. Second, HJ and Jones failed to evaluate whether management's analysis should have also included cash outflows associated with future expenditures necessary to maintain the value of the intangible assets. Finally, HJ and Jones failed to perform any procedures beyond management inquiry to evaluate the reasonableness of management's estimate of the intangible assets' remaining useful life. Blue Earth 2013 Financial Statement Audit 33. HJ also audited Blue Earth's 2013 financial statements. Jones was the engagement partner for this audit and he supervised the work of the engagement team. On March 3, 2014, Jones granted permission for the Firm's issuance of an audit report expressing an unqualified opinion on Blue Earth's 2013 financial statements. The audit report was included in the Form 10-K that Blue Earth filed with the Commission on 42 See Financial Accounting Standards Board Accounting Standards Codification ("ASC") Section 350-20-35, Intangibles – Goodwill and Other – Goodwill – Subsequent Measurement; ASC Section 350-30-35, Intangibles – Goodwill and Other – General Intangibles Other Than Goodwill – Subsequent Measurement. 43 See ASC Section 350-30-35. 44 See AU § 342.07. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 13 March 3, 2014.45 HJ and Jones failed to exercise due professional care and professional skepticism, and failed to obtain sufficient appropriate audit evidence in connection with the audit of Blue Earth's 2013 financial statements.46 34. The departures from PCAOB standards in the 2012 Blue Earth audit – related to revenue and impairment testing – were brought to HJ's and Jones's attention during a PCAOB inspection in summer 2013. However, as discussed below, in performing the 2013 audit of Blue Earth's financial statements, less than a year after receiving the inspection feedback, HJ and Jones violated PCAOB standards in precisely the same respects as they had in the earlier audit. Revenue 35. Blue Earth reported revenue of $10.3 million in 2013. HJ and Jones again failed to obtain sufficient appropriate audit evidence relating to the occurrence, completeness, and valuation of revenue. 36. The engagement team used the same approach to test revenue in 2013 that it had used in 2012. This approach did not provide any audit evidence for approximately 50 percent of Blue Earth's 2013 revenue.47 The engagement team also performed analytical procedures that were intended to serve as substantive procedures over revenue in 2013; however, these procedures – which were similar to the procedures used in 2012 – did not constitute substantive analytical procedures.48 45 Blue Earth filed with the Commission four amendments to the company's Form 10-K to correct various errors or omissions in the company's original filing. The amended Form 10-Ks were filed with the Commission on the following dates: April 11, 2014; May 1, 2014; May 9, 2014; and May 13, 2014. In its amended filings, Blue Earth did not disclose that it was restating its financial statement footnotes or management's assessment of ICFR. In addition, HJ did not update its opinion on the company's financial statements or ICFR. 46 See AU § 150.02; see also AU § 230 and AS15 ¶ 4. 47 The engagement team also confirmed certain accounts receivable transactions, but those procedures covered only a small percentage of revenue, and those procedures only provided evidence for transactions that were outstanding at yearend. See AS15 ¶¶ 25-27. 48 See AU §§ 329.17 and .20. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 14 37. HJ and Jones also failed, again, to gather sufficient appropriate audit evidence to evaluate Blue Earth's POC revenue. Approximately 60 percent of total revenue was recognized using the POC method in 2013. The engagement team's procedures for testing POC revenue in 2013 were similar to its procedures in 2012. HJ and Jones again failed to obtain sufficient appropriate audit evidence to support the Firm's POC revenue estimates.49 Intangible Assets 38. Reported intangible assets constituted approximately $19.8 million, or 23 percent, of total reported assets as of December 31, 2013. HJ and Jones failed to perform sufficient audit procedures to test Blue Earth's evaluation of intangible assets for impairment. As in the 2012 audit, in 2013 HJ and Jones again failed to gather sufficient appropriate audit evidence to evaluate Blue Earth's impairment analysis for certain intangible assets, which included cash inflows, but not associated cash outflows.50 39. Further, HJ and Jones failed to perform any procedures beyond management inquiry51 to evaluate: (1) the assumptions underlying the revenue projections used in management's impairment analysis; and (2) the reasonableness of management's estimate of the intangible assets' remaining useful life,52 despite Blue Earth's growing accumulated deficit, net loss, and negative cash flow.53 Evaluation of Notes Accompanying Financial Statements 40. HJ and Jones failed to evaluate Blue Earth's 2013 financial statements with due care and professional skepticism. The notes accompanying Blue Earth's 2013 financial statements disclosed that the company recognized revenue under the completed contract method of accounting. In fact, the majority of Blue Earth's 2013 revenue was recognized under the POC method. HJ and Jones failed, in their review of 49 See AU §§ 342.07 and .10. 50 See AU § 342.07. 51 See AU § 333.02. 52 See ASC Section 350-30-35. 53 HJ and Jones understood that, as of December 31, 2013, Blue Earth had approximately $62.7 million in accumulated deficit, a net loss of approximately $25.4 million, and a negative cash outflow from operations of approximately $11.9 million. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 15 Blue Earth's financial statements, to evaluate whether the notes accompanying the financial statements contained the information essential for a fair presentation of the financial statements in conformity with GAAP.54 41. The notes accompanying Blue Earth's financial statements also did not include a required disclosure related to the gross carrying amount and accumulated amortization of the company's intangible assets.55 HJ and Jones failed to identify this omission in connection with their review of Blue Earth's financial statements.56 Acquisition Accounting 42. HJ and Jones also failed to gather sufficient appropriate audit evidence to evaluate Blue Earth's purchase accounting for three acquisitions. The acquired entities constituted approximately 69 percent of Blue Earth's total reported assets as of December 31, 2013. GAAP requires acquired intangible assets to be measured at their acquisition-date fair value.57 For each of the acquisitions, Blue Earth management assigned values to the acquired assets and liabilities, and assigned the entire excess purchase price, $58.2 million, to intangible assets. HJ and Jones failed to perform any procedures, aside from recalculating the excess purchase price, to evaluate whether the values that management assigned to the individual intangible assets represented the fair value of those assets as of the acquisition dates.58 54 See AS14 ¶ 31. 55 See ASC Topic 350-30-50-2(a)(1), Intangibles – Goodwill and Other – General Intangibles Other than Goodwill. 56 See AS14 ¶ 31. In response to a Commission comment letter, on April 11, 2014 Blue Earth filed a Form 10-K/A with the Commission. This filing included a restatement of the company's 2013 financial statements to include the missing mandatory disclosure. On May 1, 2014, Blue Earth filed another Form 10-K/A with the Commission, in which Blue Earth again restated its 2013 financial statements, to include a more complete version of the mandatory disclosure. Blue Earth did not identify the filing as a restatement. And HJ did not update its opinion on the company's financial statements or ICFR. 57 See ASC Section 805-20-30-1, Business Combinations – Identifiable Assets and Liabilities, and Any Non-Controlling Interest – Initial Measurement – General – Measurement Principle. 58 See AU § 328.15, Auditing Fair Value Measurements and Disclosures. ORDER PCAOB Release No. 105-2017-001 January 24, 2017 Page 16 43. The acquisition agreement for one of the acquired entities contained a provision for contingent consideration (the "earn-out provision"). GAAP requires companies to recognize the acquisition-date fair value of contingent consideration.59 In its purchase price allocation, Blue Earth management did not assign any value to the earn-out provision. HJ and Jones understood that the acqu |
