THE STATE EDUCATION DEPARTMENT / THE UNIVERSITY OF THE STATE OF NEW YORK / ALBANY, NY 12234

 

TO:

Higher Education and Professional Practice and

Subcommittee on Audits

 

FROM:

Johanna Duncan-Poitier

SUBJECT:

Preliminary Draft Regulations on Public Accountancy

DATE:

June 16, 2005

STRATEGIC GOAL:

Goal 3

AUTHORIZATION(S):

 

 

SUMMARY

 

Issue for Discussion

 

The need for regulatory reform in the public accountancy profession.

 

Reason(s) for Consideration

 

To update the Regents Rules.

 

Proposed Handling

 

          Discussion of preliminary draft regulations.

 

Procedural History

 

The Regents discussed the need for legislative and regulatory reforms in the public accountancy profession in November 2004.  The attached preliminary draft regulations have been developed to reflect specific areas of contemporary practice.  These changes are important for the Board of Regents and the State Education Department to continue to protect the public and to ensure the integrity of the accountancy profession.

 

Background Information

 

Following a number of high-profile corporate financial scandals, the enactment of the Federal Sarbanes-Oxley Act, which established independent standards for auditors of publicly traded companies, and the development of a national regulatory model, the Department and the State Board for Public Accountancy began a series of discussions with interested parties to develop proposed amendments to the Rules of the Board of Regents so that the public can better rely on the professional services of New York State public accountants in a changing practice environment.  The four major areas addressed in the proposed regulations are: unprofessional conduct under Federal laws, rules and regulations; independence standards for auditors; reportable events; and, professional standard setting bodies. 

 

These regulations would significantly strengthen the Regents oversight of accounting services in order to protect the public from future failures similar to Enron, WorldCom, Baptist Foundation, and the Roslyn school district.

 

Recommendation

 

NA

 

Timetable for Implementation

 

We anticipate that the draft regulations will be published for formal comment this summer and for discussion and possible Regents action in the fall.


Preliminary Draft Regulations on Public Accountancy

 

 

Attached is a copy of the preliminary draft regulations for the accountancy profession. The Department prepared these preliminary draft regulations to foster greater feedback from the field before regulations are brought before the Regents for formal consideration. The State Board for Public Accountancy has voted in favor of these regulations and over the next several weeks we will continue discussions with the professional associations, consumer groups, the Attorney Generals office, Executive and legislative staff and others, to receive input on the proposal.  There are currently two distinct legislative proposals on public accountancy introduced in the State Legislature, Senate Bill (S4642) and Assembly Bill (A8358). The language in the attached preliminary draft regulations is compatible with both bills. 

 

The key provisions of the proposed public accountancy regulatory amendments are as follows:

 

 

Unprofessional Conduct under Federal Laws, Rules and Regulations

 

Adds a provision that defines unprofessional conduct as the imposition of any discipline, penalty, or sanction on a New York licensed certified public accountant, public accountant or registered public accounting firm by the United States Securities and Exchange Commission (SEC) or the Public Company Accounting Oversight Board (PCAOB) for violating the provisions of the federal Sarbanes-Oxley Act.


Independence Standards for Auditors of Other Publicly Traded Entities

 

The proposal would also establish a New York State category of unprofessional conduct when a licensed accountant or firm fails to meet specific independence standards when auditing publicly traded companies that are not subject to the jurisdiction of the PCAOB or the SEC.

 

Reportable Events

 

The proposal would establish, in the Regents Rules, standards for unprofessional conduct specific to the public accountancy profession that delineate specific events that a licensee must report to the Department within 45 days of occurrence.

 

Specifically, the amendment would require licensees to report:

 

     the conviction of a crime in New York or a conviction in any other jurisdiction, based on an act that if committed in New York, would constitute a crime,

     the cancellation, revocation or suspension of licensure or authority to practice in any jurisdiction or before any governmental body or agency,

     receipt of a notice of the opening of an investigation by the PCAOB or any government body or agency,

     the reissuance of a financial statement for the correction of an error when that error has a material impact on the financial statement,

     a single civil action settlement or arbitration award/settlement in New York State that is in excess of $150,000 OR five or more such settlements or awards regardless of amount during a 3-year registration period,

     any final or non-final judgment in any civil action alleging:

       negligence, gross negligence or intentional wrongdoing, or

       dishonesty or fraud, including but not limited to: embezzlement, theft, misappropriation of funds or property,

       breach of fiduciary responsibility, or

       preparation, publication and/or dissemination of false, fraudulent and/or materially incomplete or misleading financial statements, or

     receipt of a modified or adverse peer review report against an accounting firm that is required to be conducted pursuant to the United States General Accountability Office's Generally Accepted Government Auditing Standards.

 

Professional Standard Setting Bodies

 

The proposal would update the Rules of the Board of Regents to recognize, for professional disciplinary purposes, that professional accounting standards are promulgated by the following independent organizations: the Financial Accounting Standards Board, the Government Accounting Standards Board and the International Accounting Standards Board.  Licensees would need to justify departures from generally accepted accounting principles promulgated by one of these entities.  


Preliminary Draft Public Accountancy Regulations

 

 

 1.  Paragraph (7) of subdivision (a) of section 29.10 of the Rules of the Board of Regents is amended, effective _______________, as follows:

 

(7) permitting the public accountant's name to be associated with statements purporting to show financial position or results of operations in such a manner as to imply that he or she is acting as an independent certified public accountant or public accountant, unless:

 

(i) the licensee has complied with generally accepted auditing standards. The State Board for Public Accountancy may consider statements on auditing standards promulgated by the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board for licensees subject to such requirements, or an organization whose standards are generally accepted by other licensing jurisdictions in the United States, including but not limited to: the American Institute of Certified Public Accountants to be interpretations of generally accepted auditing standards. Departures from such standards, or other standards considered by the State Board to be applicable in the circumstances, must be justified by a licensee who does not follow them; and

 

(ii) the licensee expresses an opinion on financial statements or financial data presented in conformity with generally accepted accounting principles. The State Board for Public Accountancy may consider those principles promulgated by an organization whose principles are generally accepted by other licensing jurisdictions in the United States, including but not limited to: [the American Institute of Certified Public Accountants and] the Financial Accounting Standards Board, the Government Accounting Standards Board and the International Accounting Standards Board to be generally accepted accounting principles. If financial statements or data contain departures from generally accepted accounting principles but the licensee can demonstrate that the financial statements or data would have been misleading had generally accepted accounting principles been followed, the licensee's opinion should describe the departure, its approximate effect if practicable, and the reasons why compliance with generally accepted accounting principles would have otherwise been misleading;

 

 

2. Paragraph (13) of subdivision (a) of section 29.10 of the Rules of the Board of Regents is repealed, effective _______________.

 

 

3.  Subdivision (d) of section 29.10 of the Regulations of the Commissioner of Education is added, effective _______________, as follows:

 

 (d) In addition to applying to licensees, the definitions of unprofessional conduct prescribed in sections 29.1 and 29.10 of this Part shall also apply to public accountancy firms, meaning any form of business organization that is authorized to engage in the practice of public accountancy and is subject by law to Regents disciplinary proceedings and penalties in the same manner and to the same extent as licensees. 

         

 

4.  Subdivision (e) of section 29.10 of the Regulations of the Commissioner of Education is added, effective _______________, as follows:

 

(e) Reportable events.

(1) For purposes of this subdivision, public accountancy firm shall have the meaning defined in subdivision (d) of this section.

 

(2) Unprofessional conduct in the practice of public accountancy shall include failure of a licensee or public accountancy firm to submit a written report, as prescribed in paragraph (3) of this subdivision, to the department within 45 days of the occurrence of any of the following events, unless excused for good cause as determined by the department, such as a circumstance beyond the licensee's or public accountancy firm's control that prevented timely compliance:

 

(i) conviction of a licensee, a registered partnership, or public accountancy firm in New York State or any other jurisdiction of a crime that constitutes a felony or misdemeanor in the jurisdiction of conviction.  For purposes of this subparagraph, conviction shall include a plea of guilty or no contest, or a verdict or finding of guilt that has been accepted and entered by a court of competent jurisdiction, even though all available appeals have not yet been exhausted;

 

(ii) receipt of a court decision in a civil action brought in a court of competent jurisdiction or an award in an arbitration proceeding in which the licensee, the registered partnership, or public accountancy firm is found to be liable for:

(a) negligence, gross negligence, recklessness, or intentional wrongdoing relating to the practice of public accountancy in New York State;

(b) fraud or misappropriation of funds relating to the practice of public accountancy in New York State;

(c) breach of fiduciary responsibility relating to the practice of public accountancy in New York State; or

(d) preparation, publication, and/or dissemination of false, fraudulent, and/or materially incomplete or misleading financial statements, reports, or information relating to the practice of public accountancy in New York State; 

 

(iii) receipt of written disciplinary charges against the licensee, the registered partnership, or public accountancy firm relating to the practice of public accountancy, issued by:

(a) the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board;

(b) another agency of the United States government that regulates the practice of public accountancy;

(c) an agency of the government of another state or territory of the United States that regulates the practice of public accountancy; or

(d) an agency of the government of another country that regulates the practice of public accountancy; and

 

(iv) receipt of written notice of discipline upon the licensee, the registered partnership, or public accountancy firm of discipline, including but not limited to, censure, reprimand, sanction, probation, monetary penalty, suspension, revocation, or other limitation on practice, relating to the practice of public accountancy, issued by:

(a) the United State Securities and Exchange Commission or the Public Company Accounting Oversight Board;

(b) another agency of the United States government that regulates the practice of public accountancy;

(c) an agency of the government of another state or territory of the United States that regulates the practice of public accountancy; or

(d) an agency of the government of another country that regulates the practice of public accountancy;

 

(v) receipt of an executed settlement agreement of a civil action or arbitration proceeding against a licensee, registered partnership, or public accountancy firm when:

(a) the complaint in the civil action or arbitration proceeding alleges:

(1) negligence, gross negligence, recklessness, or intentional wrongdoing relating to the practice of public accountancy in New York State;

(2) fraud or misappropriation of funds relating to the practice of public accountancy in New York State;

(3) breach of fiduciary responsibility relating to the practice of public accountancy in New York State; or

(4) preparation, publication, and/or dissemination of false, fraudulent, and/or materially incomplete or misleading financial statements, reports, or information relating to the practice of public accountancy in New York State; and

(b) the amount of the settlement is $150,000 or greater, unless the licensee, registered partnership, or public accountancy settled five or more cases described in clause (a) of this subparagraph in any registration period.  In that case, the reportable event is triggered by the settlement of the fifth case, and all such cases settled in the registration period irrespective of the amount of settlement shall be reported. 

 

(vi) the issuance of a restatement of a financial statement reporting the correction of an error in a previously issued financial statement of a client that is attested to by the licensee, registered partnership, or public accountancy firm in the practice of public accountancy in New York State, when the financial restatement exceeds the planning materiality used by the licensee, registered partnership, or public accountancy firm in conjunction with the current year audit.  For purposes of this clause, planning materiality means the planned level of misstatements, individually or in aggregate, that would cause the financial statement to not be presented fairly, in all material respects, in conformity with generally accepted accounting principles.  The report on the restatement shall be made regardless of whether the licensee, registered partnership, or public accountancy firm performed the previously issued financial statement which required the restatement.

 

(vii) receipt of a modified or adverse peer review report against the public accountancy firm, registered partnership, or licensee acting as sole proprietor that is required to be conducted pursuant to the United States General Accountability Office's Generally Accepted Government Auditing Standards.

 

(3) The report to the department shall consist of the following:

(i) for a conviction as prescribed in subparagraph (i) of paragraph (2) of this subdivision, the report shall consist of a copy of the certificate of conviction or comparable document of the court;

(ii) for a court decision or arbitration award as prescribed in subparagraph (ii) of paragraph (2) of this subdivision, the report shall consist of a copy of the court decision or arbitration award and any findings of facts or special verdict form; and for an executed settlement of a civil action or arbitration proceeding as prescribed in subparagraph (v) of paragraph (2) of this subdivision, the report shall consist of a copy of the executed settlement agreement and the governing complaint or petition;

(iii) for a written disciplinary charge as prescribed in subparagraph (iii) of paragraph (2) of this subdivision, the report shall consist of a copy of the written disciplinary charge;

(iv) for a written notice of discipline upon the licensee, as prescribed in subparagraph (iv) of paragraph (2) of this subdivision, the report shall consist of a copy of the notice;

 (v) for the issuance of a restatement of a financial statement attested to by the licensee as prescribed in subparagraph (vi) of paragraph (2) of this subdivision, the report shall set forth the facts which constitute the reportable event including an explanation of the reason for the restatement. The report shall also include copies of the original and the restated financial statements; and

(vi) for a modified or adverse peer review report as prescribed in subparagraph (vii) of paragraph (2) of this subdivision, the report shall consist of a copy of the peer review report and a copy of the letter of comments if any.

 

(4) A public accountancy firm shall be responsible for reporting reportable events relating to the public accountancy firm, and shall designate an individual to make such reports.  An individual licensee shall be responsible for reporting those reportable events specifically relating to the licensee.  Licensees who are partners in a registered partnership may designate an individual to report reportable events relating to he registered partnership, but each such licensee shall be responsible for ensuring the reporting of the reportable events.

 

5.  Subdivision (f) of section 29.10 of the Rules of the Board of Regents is added, effective _______________, as follows:

 

(f) Unprofessional conduct in the practice of public accountancy shall include:

(1) having admitted guilt to or having been found guilty of improper professional practice or professional misconduct in a disciplinary proceeding brought by the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board, where the conduct upon which the finding or admission of guilt was based would, if committed in New York State, constitute professional misconduct under the laws of New York State; or  

 

(2) having voluntarily consented to a revocation or temporary or permanent suspension of the authority to appear or practice as an accountant before the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board, or having voluntarily surrendered such authority; or having voluntarily consented to a revocation or temporary or permanent suspension from further association with any public accounting firm registered pursuant to Chapter 98 of Title 15 of the United States Code, or having voluntarily surrendered such authority; or having voluntarily consented to a revocation or temporary or permanent suspension of registration under Chapter 98 of Title 15 of the United States Code, or a voluntary surrender of such registration; all after either a disciplinary action was instituted by the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board, or in lieu of such disciplinary action; where the conduct charged resulting in the consent to such revocation or temporary or permanent suspension or surrender would, if committed in New York State, constitute professional misconduct under the laws of New York State; and where the date of such consent or surrender is on or after January 1, 2006; or

 

(3) having voluntarily consented to a monetary penalty of at least $50,000 against an individual licensee or at least $250,000 against a public accountancy firm, after a disciplinary action was instituted by the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board, or in lieu of such disciplinary action, where the conduct charged resulting in the consent to such monetary penalty would, if committed in New York State, constitute professional misconduct under the laws of New York State, and where the date of such consent is on or after January 1, 2006.

 

6.   Subdivision (g) of section 29.10 of the Rules of the Board of Regents is added, effective _______________, as follows:

 

(g) Unprofessional conduct in the practice of public accountancy shall include a violation of one or more of the following provisions of Federal law: subdivisions (a), (b), (g), (h), (i), (j), (k), and/or (l) of section 78j-1 of Title 15 of the United States Code (United States Code, ____ edition, Volume ___, Supplement ____, Volume ____ to the _____ edition; Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402-0001, ______; available at the NYS education Department, Office of the Professions, 2M West Wing, Education Building, 89 Washington Avenue, Albany, NY 12234). 

 

7.  Subdivision (h) of section 29.10 of the Rules of the Board of Regents is added, effective _______________, as follows:

 

(h) Unprofessional conduct relating to the audit of certain issuers of publicly traded corporation.

 

(1) Prohibited activities. 

(i) Unprofessional conduct in the practice of public accountancy shall include a public accountancy firm providing the following non-audit services contemporaneously with the audit in the practice of public accountancy in New York State of the issuer of a publicly traded corporation that is not subject to the Federal Sarbanes-Oxley Act of 2002:

(a) bookkeeping or other services related to the accounting records or financial statements of the audit client;

(b) financial information systems design and implementation;

(c) appraisal or valuation services, fairness opinions, or contribution-in-kind reports;

(d) actuarial services;

(e) internal audit outsourcing services;

(f) management functions or human resources;

(g) broker or dealer, investment adviser, or investment banking services; and/or

(h) legal services and expert services unrelated to the audit.

 

(ii) Notwithstanding the requirements of subparagraph (i) of this paragraph, the following shall apply:

(a) To the extent that the United States Security and Exchange Commission or the Public Company Accounting Oversight Board have exempted or excepted any of the non-audit services listed in subparagraph (i) of the paragraph from a prohibition against offering such services contemporaneously with the audit of a publicly traded corporation subject to the Federal Sarbanes-Oxley Act of 2002, the provision of such exempted or excepted non-audit services shall not constitute unprofessional conduct.  

(b) Public accountancy firms that are permitted through waiver by the United States Security and Exchange Commission or the Public Company Accounting Oversight Board to engage in a non-audit service listed in subparagraph (i) of this paragraph contemporaneously with an audit of a public traded corporation that is subject to the Federal Sarbanes-Oxley Act of 2002 shall also be permitted to engage in such activity contemporaneously with the audit of a publicly traded corporation that is not subject to the Federal Sarbanes-Oxley Act of 2002, and engaging in such activity shall not constitute unprofessional conduct.

 

(2) Pre-approval for certain non-audit services.  

(i) Unprofessional conduct in the practice of public accountancy shall also include a public accountancy firm providing any non-audit service that is not described in subparagraph (i) of paragraph (1) of this subdivision contemporaneously with the audit in the practice of public accountancy in New York State of publicly traded corporation whose audits are not subject to the Federal Sarbanes-Oxley Act of 2002, unless such non-audit activity is approved in advance by the audit committee of the board of directors of the issuer, or in the absence of an audit committee, by the board of directors of the issuer, or unless preapproval is waived pursuant to subparagraph (ii) of this paragraph.

(ii) The preapproval requirement under subparagraph (i) of this paragraph is waived with respect to the provision of non-audit services for an issuer, if:

(a) the aggregate amount of all such non-audit services provided to the issuer constitutes not more than five percent of the total amount of revenues paid by the issuer to its auditor during the fiscal year in which the nonaudit services are provided;

(b) such services were not recognized by the issuer at the time of the engagement to be non-audit services; and

(c) such services are promptly brought to the attention of the audit committee of the issuer and approved prior to the completion of the audit by the audit committee or by one or more members of the audit committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the audit committee.

 

(3) Audit partner rotation.   Unprofessional conduct in the practice of public accountancy shall include a public accountancy firm providing any audit service in the practice of public accountancy in New York State for a publicly traded corporation that is not subject to the Federal Sarbanes-Oxley Act of 2002, if the lead or coordinating audit partner, having primary responsibility for the audit, or the partner responsible for reviewing the audit has performed audit services for that audit client in each of the five previous fiscal years of that audit client.  Notwithstanding the requirements of this paragraph, to the extent that the United States Security and Exchange Commission or the Public Company Accounting Oversight Board have exempted or excepted public accountancy firms from audit partner rotation for audits of a publicly traded corporation subject to the Federal Sarbanes-Oxley Act of 2002, such exceptions or exemptions shall also apply to this requirement.

  

(4) Conflicts of interest.  Unprofessional conduct in the practice of public accountancy shall include a licensee or public accountancy firm providing any audit service in the practice of public accountancy in New York State for a publicly traded corporation that is not subject to the Federal Sarbanes-Oxley Act of 2002, if a chief executive officer, controller, chief financial officer, chief accounting officer or any person serving in an equivalent position for the audit client was employed by such licensee or public accountancy firm and participated in any capacity in the audit of that client during the one-year period preceding the date of the initiation of the audit.