Water chairman, CPA partners

August 27, 2008 10:55 pm

— Limestone County Water and Sewer Authority board Chairman Mark Yarbrough is partners in limited liability corporations, Bent Brook Phase One LLC and Bent Brook Phase Two LLC, with Fred Pepper, one of the partners of certified public accounting firm Christopher, Durham, Pepper and Armstrong.
CDPA has been employed by the authority to conduct annual audits for the past 24 years.
The General Accounting Office in Washington’s Government Auditing Standards (1994 revision), Amendment 3, states:
“In all matters related to audit work, the audit organization and the individual auditor, whether government or public, should be free both in fact and appearance from personal, external, and organizational impairments to independence.”
Pepper, however, while one of the principals in CDPA, did not physically conduct authority audits. The audits in recent years have been conducted by Cecil Armstrong Jr. and Annette Barnes of CDPA.
Papers dated March 3, 2006, on file with Alabama Secretary of State Beth Chapman’s office in Montgomery list the partners of Bent Brook LLC Phase One and Bent Brook LLC Phase Two as Mark Yarbrough, Terry McDonald, Neal Swann Johnston, John William Johnson, Mitchell K. Shelly, John Plunk, Fred Pepper and James M. Corder.
As of Wednesday the Alabama Department of Revenue holds Certificates of Good Standing on the LLCs.
Papers on file with the Madison County Probate Judge’s Office and signed by Yarbrough and Shelly, an Athens attorney in the firm of Alexander, Corder, Plunk & Shelly, show that Bent Brook Phase One borrowed $1,987,500 and Bent Brook Phase Two borrowed $2,062,500 from First American Bank for the development of 19.6 acres at Nance and Harbin roads in far western Madison County.
“I was involved in one real estate transaction with him (Yarbrough) during the last 18 months,” said Pepper. “I am a limited partner and I didn’t even know Mark. It sure didn’t have anything to do with the stuff that’s going on with the water board.”
Yarbrough, owner of All Power Construction of Toney, was appointed to the board by the Limestone County Commission in 2005 to replace Nancy Stevenson, who resigned. Yarbrough was elected board chairman in January 2007 after 15-year board chairman Bobby Gilbert was not reappointed by the commission.
In April the water board fired its legal counsel Jim Moffatt after friction arose between him and Yarbrough when Moffatt questioned the ethics of a road-building contractor serving on the water board.
Earlier this month, the water board fired three-year general manager Tony Sneed and comptroller Harvey Cooper after they disputed findings of CDPA accountants Cecil Armstrong Jr. and Annette Barnes, which found that the authority was failing two bond tests.
Bond tests are submitted every six months to determine a utility’s eligibility for construction bonds and determine the rates the utility must charge customers to repay the bond.
The board gave no reason for terminating Sneed’s contract other than to say in a written statement that, “it is in the best interest of all parties concerned to go in a different direction with the General Manager position.”
Cooper was not under contract and it did not take board approval to fire him.
Sneed spoke in the July meeting of “friction” between Cooper and CDPA auditors Christopher and Barnes. Sneed recommended rotating auditors every three years.
Sneed and Cooper also disagreed with the figures that Armstrong and Barnes had returned in the spring on bond tests and called in a second independent CPA, Dale Fowler, who arrived at different figures that he said showed a smaller deficit.
Armstrong and Barnes stood by their calculations.
Sneed sent requests for proposals to five firms, including CDPA. Sneed recommended going with Dyer & Smith LLC of Huntsville at a cost of $5,000. The board voted to remain with CDPA, although the firm priced the audit at $30,000.
Professional services are not subject to the state’s competitive bid law and public entities could hire whomever they were most comfortable with.
December 2007 water board minutes stated that Armstrong had praised Cooper and his staff. The minutes read: “Mr. Armstrong mentioned there were zero adjustments made, which was the first time in his auditing career that any entity had such a clean audit.”
In December the board also unanimously voted to extend Sneed’s contract.
Yarbrough could not be reached Wednesday for comment on the business relationship between him and Pepper. A woman who answered the phone at Yarbrough’s residence said he was at work. A message on the All Power Construction number said it was “not in service for incoming calls.”
A receptionist at the Water and Sewer Authority said that Yarbrough’s number would have to be released by acting authority General Manager Tammy Smith. Repeated calls to Smith’s extension went unanswered.
The American Institute of Certified Public Accountants Code of Professional Conduct Rule 102 states: “Independence shall be considered to be impaired if (a) during a period of professional engagement a covered member (3) had a joint closely held investment that was material to the covered member.”
The Alabama State Board of Public Accountancy Administrative Code Rules of Professional Conduct state: “Independence shall be considered impaired if, for example, (a) During the period of professional engagement or at the time of expressing his opinion, he or his firm (3) had any joint closely held business investment with the enterprise or any officer, director, or principal stockholder thereof which was material in relation to his or his firm’s net worth”
However, Hugh Evans, legal counsel for the state Ethics Commission, speaking hypothetically and not specifically about this partnership, said of such business relationships, “In and of itself, there is nothing wrong. It would depend on quid pro quo — giving something to get a good audit. It is not a clear-cut yes or no. It would depend on attendant circumstances.”
When asked if he was concerned about the appearance of impropriety because of being in business with Yarbrough, Pepper said, “You’re implying that I’ve done something wrong. I am an accountant and I try to go by the rules.”
He later came to The News Courier office to say because his involvement in the LLC was limited — he said he was not involved in day-to-day operations — the partnership “does not impair independence” and follows the AICPA code of ethics.
The water board is scheduled to meet today at 3 p.m.