Texas State Board of Public Accountancy v. Bass

366 S.W.3d 751
CourtCourt of Appeals of Texas
DecidedFebruary 24, 2012
DocketNos. 03-10-00276-CV, 03-10-00277-CV, 03-10-00278-CV
StatusPublished
Cited by17 cases

This text of 366 S.W.3d 751 (Texas State Board of Public Accountancy v. Bass) is published on Counsel Stack Legal Research, covering Court of Appeals of Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Texas State Board of Public Accountancy v. Bass, 366 S.W.3d 751 (Tex. Ct. App. 2012).

Opinion

OPINION

DAVID PURYEAR, Justice.

Carl Bass, Patricia Grutzmacher, and Thomas Bauer (collectively, the “accountants”) are former employees of Arthur Andersen LLP. While employed by Andersen, they participated in the 1997 and 1998 audits of Enron Corporation’s financial statements. Their work on those Enron audits led to disciplinary actions against them by the Texas State Board of Public Accountancy. This consolidated appeal arises out of their individual suits for judicial review of the Board’s orders revoking Bass’s and Bauer’s professional certificates and suspending Grutzmacher’s certificate and license for three years. On cross-motions for summary judgment, the trial court granted summary judgment for the accountants and denied summary judgment for the Board on the accountants’ claim that the Board violated the Texas Open Meetings Act (“TOMA” or the “Act”). See generally Tex. Gov’t Code Ann. §§ 551.001-.146 (West 2004 & Supp. 2011).1 The trial court held that the Board violated the Act and declared the Board’s orders sanctioning the accountants void. The trial court also enjoined the Board from re-prosecuting the accountants for the conduct that was the subject of the Board’s orders and dismissed the remainder of the accountants’ claims as moot. The Board and the Board members (collectively, the “Board”) appeal the final judgment, arguing that the trial court should have granted its summary-judgment motion because the evidence established that the Board (1) publicly deliberated and publicly voted on its orders sanctioning the accountants; and (2) called the challenged executive sessions to obtain legal advice on matters subject to the at[753]*753torney-client privilege, as authorized under the Act. Alternatively, the Board argues that the evidence at least raises a fact question sufficient to defeat the accountants’ claim that the executive sessions were not authorized under the Act. The Board also challenges the permanent injunction prohibiting it from taking any further action against the accountants, even if any future prosecution by the Board complied with the Act. We will reverse the trial court’s judgment and remand for further proceedings because we find that the accountants failed to establish their TOMA claim.

BACKGROUND

This case concerns actions taken by the accountants when they audited Enron while working at Andersen.2 During the time period relevant to the Board’s action against them, Bass and Bauer were partners at Andersen and were certified public accountants, and Grutzmacher was a manager at Andersen. Grutzmacher was not a certified public accountant when she worked on the Enron audit, but she became one later. After Enron’s collapse, the Board investigated the audits performed by the accountants, and the Board’s staff initiated disciplinary action against them.

The accountants participated in a consolidated contested-case hearing before a panel of two administrative law judges (“ALJs”) at the State Office of Administrative Hearings (“SOAH”). See Tex. Occ. Code Ann. § 901.508 (West 2004) (providing right to hearing for person against whom Board proposes taking disciplinary action); 22 Tex. Admin. Code § 519.40(a) (2011) (Texas State Bd. of Pub. Accountancy, General Provisions) (appointing SOAH as factfinder for Board in contested cases under section 901.508 but explaining that Board retains right to determine sanctions and make final decision in any contested case). The ALJs issued proposals for decision (“PFDs”) after the hearing. They [754]*754concluded that, although the accountants were “able auditors,” they had made serious mistakes in professional judgment that contributed to the material misstatements in Enron’s 1997 and 1998 financial statements and to the subsequent need to restate those financial statements.

The ALJs found that Bass and Bauer violated and that Grutzmacher failed to conform her conduct to a number of generally accepted auditing standards and accounting principles, which the Board has adopted as professional standards. We will briefly summarize some of the ALJs’ findings and conclusions to provide context for the Board’s decision to sanction the accountants. Much of the discussion in the PFDs focused on the accountants’ review of a transaction that involved Enron’s entering into a partnership called JEDI with a company called Chewco. JEDI was an investment vehicle for an Enron division called Enron Capital & Trade. Enron had previously partnered with an outside company in JEDI, which had allowed it to treat JEDI as a nonconsolidated entity for accounting purposes, also known as an “off-balance-sheet entity,” meaning that its losses could be kept off Enron’s financial statements. When the outside company withdrew from JEDI, Enron decided to form Chewco to be its partner in JEDI. To maintain JEDI’s status as a nonconsolidat-ed entity, it was imperative that Chewco achieve and maintain “special purpose entity” (“SPE”) status, which required that (1) at least three percent (3%) of its equity be owned by an entity that was independent of Enron and (2) the outside equity investment retain substantive risks and rewards of ownership for the life of the SPE (i.e., the outside equity must remain at risk and not be supported by a letter of credit or other form of guaranty on the investment). The ALJs found that “Chewco’s SPE status was material to Enron’s financial statements because even a one-dollar reduction of Chewco’s independent equity at risk below the required 3% would cause a material misstatement in the financial statements.” It is undisputed that Chew-co did not in fact have the required 3% independent equity at risk to qualify for off-balance-sheet treatment in 1997 and 1998. Ultimately, in 2001, when Bauer saw for the first time a side agreement that clearly showed Chewco did not qualify as an SPE, he informed Enron management that the financial statements for 1997 and 1998 had to be restated because both Chewco and JEDI had to be consolidated with Enron for both years.

One crucial error leading to the material misstatements occurred when the accountants violated and failed to conform to professional standards when verifying whether Enron had properly treated JEDI and Chewco as off-balance-sheet entities. In essence, the ALJs found that the accountants placed too much reliance on uncorroborated management representations concerning the unavailability of Chewco’s formation documents and its structure, ownership, and financing.3 The ALJs also found that Bauer and Bass violated standards related to their design and supervision of the audits, that they failed to properly assess Chewco’s materiality, and that they failed to discharge their duty to audit for any transactions that would adversely affect Chewco’s status as an SPE. The ALJs determined that (1) Bauer and Grutzmacher did not have sufficient competent evidence to conclude that Chewco’s 3% equity was independent or at risk in 1997 or 1998, and (2) the accountants had access to documents that contained information pertinent to the audit of Chewco’s [755]*755SPE status and that provided evidence that Chewco lacked 3% independent equity at risk. Moreover, the ALJs concluded that any collusive fraud by Enron’s management, employees, or third parties was not the primary cause of the auditors’ failure to conform to the professional standards.

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BD. OF PUBLIC ACCOUNTANCY v. Bass
366 S.W.3d 751 (Court of Appeals of Texas, 2012)

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Bluebook (online)
366 S.W.3d 751, Counsel Stack Legal Research, https://law.counselstack.com/opinion/texas-state-board-of-public-accountancy-v-bass-texapp-2012.