Accounting firm Kafoury Armstrong fined, put on probation

CARSON CITY — A Nevada certified public accounting firm that does business with the state and many local governments has been fined $25,000 and placed on two years’ probation by the state Board of Accountancy.

The disciplinary action imposed on Kafoury, Armstrong &Co. was taken by the board on May 15. It stemmed from the company’s activities in a subsidiary business called Lakeside Mortgage Co. The disciplinary action was agreed to by the firm.

An investigation by the board concluded that a conflict of interest existed in the relationship between Kafoury and its subsidiary, which brokered loans and relied in part on its clients to back those loans, some of which were not repaid when the economy soured in 2008. The relationship between the two companies was disclosed, but not to the degree required by board regulations, the board concluded.

Despite the action, state officials said the firm has always performed well in its audits and that Nevada residents should not be concerned that it continues to do work for government agencies.

“They have always been very responsive,” said state Controller Kim Wallin, who is also a CPA. “They do good work.”

The action had nothing to do with the accounting side of the business or Kafoury’s performance on audits, she said. The controller’s office does not have any contracts with the agency.

“They have an impeccable record in doing their audits,” Wallin said. “The audit firm portion continues to do high-quality work. I don’t think the taxpayers should be concerned at all.”

The disciplinary action was in progress at the same time a panel of the Nevada Legislature approved a contract with Kafoury to handle the single audit report for Nevada for fiscal years 2014 through 2017. The Audit Subcommittee of the Legislative Commission selected the firm over two other competitors, Eide Bailly LLP and CliftonLarsonAllen LLP.

Kafoury had the lowest cost submitted under the request for proposals at $1.4 million. Eide Bailly was at $1.41 million, and CliftonLarsonAllen was at $2.2 million. Kafoury also had the highest score among the three proposals.

Legislative Auditor Paul Townsend said the firm did disclose the pending action in its submission to the subcommittee before its April 28 meeting when the contract was approved.

“After that I did take a look at it since any disciplinary action by a state board is a serious matter,” Townsend said. “I reviewed it, and it did not involve auditing services.”

The firm has produced the single audit report for the Legislature for 20 years, and Townsend said he has never had an issue with the work of the firm in that time.

In addition to the statewide audit, the firm in 2012-13 served more than 40 local governments, performing more than 60 audits. Work was performed for the city of Las Vegas, Clark County, the Clark County School District and the Henderson Libraries, among others. The firm also performed work for the state treasurer’s office on the Higher Education Tuition Trust Fund.

Kirk Gardner, treasurer of Kafoury, said company officials believed that the relationship between Kafoury and Lakeside was properly disclosed to clients, but the accountancy board has specific rules in its regulations that it concluded were not followed.

“It was a very narrow issue that had nothing to do with our auditing business,” he said.

Lakeside still exists but has not brokered any new loans since 2008, Gardner said. The company could have sought a hearing on the matter but determined the best option from a financial perspective was to agree to the stipulation, he said.

Gardner said he does not believe the action should be viewed by the public as a concern.

“We’ve been in business since 1941, and it is the first complaint we’ve ever had,” he said. “We’re proud of our accounting work over the years. We have a very good reputation in the state.”

The disciplinary action stemmed from a complaint filed by Winnemucca resident Les Martin, a client of Kafoury, in late 2010. He followed up with another complaint in 2011. Martin’s first complaint concerned a loan brokered by Lakeside that was not repaid by the borrower. Martin was a lender in the transaction. His later complaint concerned other loans brokered by Lakeside that he was involved in as a lender.

He could not be reached for comment.

Contact Capital Bureau reporter Sean Whaley at swhaley@reviewjournal.com or 775-687-3900. Find him on Twitter: @seanw801.