THE STATE EDUCATION DEPARTMENT / THE UNIVERSITY OF THE STATE OF NEW YORK / ALBANY, NY 12234
TO:		The Honorable the Members of the Board of Regents
FROM:		Johanna Duncan-Poitier
SUBJECT:		Proposed Amendment to the Rules of the Board of Regents Relating to the Definition of Unprofessional Conduct in the Practice of Public Accountancy
DATE:		June 14, 2006
STRATEGIC GOAL:		Goal 3
AUTHORIZATION(S):

 

SUMMARY

 

Issue for Decision

 

Should the Regents amend section 29.10 of the Regents Rules to align the regulation of the public accountancy profession in New York State with Federal laws and regulations and contemporary professional practice?

 

Reason(s) for Consideration

          Review of Policy.

 

Proposed Handling

 

The proposed amendment is being submitted for approval at the June 2006 meeting of the Board of Regents.

 

Procedural History

 

In June 2005, preliminary draft amendments, developed by the State Board for Public Accountancy and Department staff, were presented to the Regents for discussion.  At that meeting, staff was asked to modify and further refine the preliminary draft amendments and return at a future date for additional discussion with the Regents. 

 

In January 2006, the Regents HE/PP Committee held an Executive Session discussion with Department Counsel, to discuss issues pertaining to the legal authority of the Board of Regents to enact these amendments. 

 

At the March 2006 meeting, the HE/PP Committee discussed the draft amendments and reached agreement on three key areas of the draft regulatory amendments which are now before the Committee for approval.

 

The Board of Regents asked that other provisions be deferred for more extensive discussion. These provisions would include the payment of a significant monetary penalty to the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board in settlement of Federal disciplinary charges in the definition of unprofessional conduct and conflict of interest standards for auditors of all publicly traded companies. 

 

A Notice of Proposed Rule Making concerning these proposed amendments was published in the State Register on April 19, 2006.  An Assessment of Public Comment will be presented at the June 2006 Regents meeting. 

 

Background Information

 

The Regents and the Department have been discussing the need for legislative and regulatory reforms in the public accountancy profession since 2002.  The Department and members of the State Board for Public Accountancy held a public meeting in New York City during May 2002 focused on provisions contained in Federal and/or State legislation that would enhance public protection and the integrity of the public accountancy profession.  Various public interest groups, consumer groups, academics, professional representatives, and former Federal regulators participated in the meeting and urged the Regents, the Department and the State Board to enact a number of accountancy reforms, including those currently proposed in Federal and state legislation.  These groups and individuals included; a former commissioner and a former chief accountant from the United States Securities and Exchange Commission (SEC), the United States Public Research Interest Group (USPIRG), the New York State Public Interest Research Group (NYPIRG), Consumers Union,  the former chief auditor of the Public Company Accounting Oversight Board, and others. 

 

After Congress passed the Federal Sarbanes-Oxley Act, many State Legislatures and regulatory agencies began to revise their statutes and regulations consistent with the Federal Act.   Based on the input received at the May 2002 public meeting, the New York State Board for Public Accountancy and Department staff began to develop amendments to the Regents Rules to increase public protection consistent with the Act

 

and reflective of contemporary practice.   Preliminary draft amendments were discussed by the Regents in June 2005 and staff was asked to make some modifications and bring the draft amendments back to the Regents for further discussion.  After discussion with Department Counsel in January 2006 to clarify the legal authority of the Regents to enact these amendments, in March of 2006, the Regents HE/PP Committee discussed the amendments and came to agreement on the three key provisions included in this item:

 

1.     Updating the list of entities that promulgate generally accepted auditing standards and generally accepted accounting principles;

2.     Establishing revised reporting requirements; and

3.     Establishing definitions of unprofessional conduct based upon disciplinary actions of the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board that result in either an admission or finding of guilt, or the loss of practice privileges before the Securities and Exchange Commission.

 

 These proposals are an important first step in updating the oversight of the evolving public accountancy profession to increase public protection and enhance the integrity of the public accountancy profession.

 

Licensees and firms, forbidden by Federal regulators from performing audits of publicly traded companies because of Federal professional disciplinary actions taken against them, currently remain free to perform similar work in New York State.  The Board of Regents, as the licensing authority for CPAs and accounting firms in New York is the only entity that can take action against the New York license of a CPA or firm via the existing professional disciplinary process.

 

Each of the provisions in the proposed amendments responds to the nationwide recognition that the oversight of the public accountancy profession needs to be strengthened to align with the new Federal regulatory model and an ever increasing amount of interstate practice that requires timely reporting of disciplinary actions among the Federal and state regulators. 

 

The proposed amendments would strengthen the Regents oversight of the public accounting profession by:

 

• Updating the list of recognized professional standard setting bodies that promulgate generally accepted auditing standards and generally accepted accounting principles.  The United States Securities and Exchange Commission and the Public Company Accounting Oversight Board are added to the list of organizations that promulgate generally accepted auditing standards, and the Government Accounting Standards Board and the International Accounting Standards Board are added to the list of organizations that establish generally accepted accounting principles;

 

• Establishing a list of “reportable events.”  This provision would simply require that a licensee or public accountancy firm notify the Department of certain events that may or may not result in follow-up on the part of the Department.  These “events” would include criminal convictions, significant civil settlements and arbitration awards related to professional practice and disciplinary actions by regulatory bodies.   The amendments would require the reporting of such events within 45 days of occurrence, thereby allowing the Department to pursue timely investigations into possible instances of unprofessional conduct (current regulations require the reporting of criminal convictions and disciplinary actions by other jurisdictions every three years). Given the importance of this measure, the Regents have agreed to consider similar reporting requirements for all licensed professions; and

 

• Revising the definition of unprofessional conduct in the practice of public accountancy to include violations of key practice standards established by the United States Securities and Exchange Commission and the Public Company Accounting Oversight Board.  This will enable the Department to take disciplinary action when a licensee or firm has admitted to or been found guilty of a violation of these Federal practice standards or has consented to a penalty that suspends them from appearing or practicing before the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board as an accountant/firm.  The proposed standard is already being applied by other large states, including California, Florida, Ohio & Texas, that license and regulate CPAs and public accounting firms.  In fact, in California, any Federal sanction, including monetary penalties can be prosecuted as professional misconduct. Four of five contiguous states to New York also define as unprofessional conduct having one’s right to practice before any Federal or state agency suspended or revoked.

 

As in these other states, these provisions will strengthen the effectiveness of the regulatory structure in New York by providing a means for the Regents to leverage significant Federal disciplinary cases and the resources of the Federal government, which investigates violations of auditing standards and requirements in the auditing of publicly traded companies.  The public accountant or public accountancy firm will have been afforded full due process opportunities at both the Federal and State level.  

 

           Based on feedback received from an extensive series of discussions with representatives of the Big 4 accounting firms and the New York State Society of CPAs, and feedback submitted during the comment period, these entities continue to express some concerns related to the reporting requirements and the definition of unprofessional conduct.  The Department believes that the proposals provide significant safeguards that respond to their concerns.   These issues will be addressed in the Summary of Public Comment, which is being finalized.  The New York State Board for Public Accountancy, appointed by the Board of Regents, and which includes 4 public members and 17 members of the profession who practice in private industry, government and public accounting firms that include the largest international firms, supports the draft amendments.  Attorney General Eliot Spitzer has also expressed his strong support for the amendments, in particular the provisions related to reportable events and the definition of unprofessional conduct.  

 

Recommendation

 

          I recommend that the Board of Regents take the following action:

 

          VOTED: That paragraph (7) of subdivision (a) of section 29.10 of the Rules of the Board of Regents be amended; that paragraph (13) of subdivision (a) of section 29.10 of the Rules of the Board of Regents by repealed; and that subdivisions (d), (e), (f), and (g) of section 29.10 of the Rules of the Board of Regents be added, as submitted, effective July 13, 2006.

 

Timetable for Implementation

 

The effective date of the proposed amendment is July 13, 2006.

 

Attachment

 

 

AMENDMENT TO THE RULES OF THE BOARD OF REGENTS

          Pursuant to sections 207, 6502, 6504, 6506, 6509, 6510, and 7401 of the Education Law.

          1.  Paragraph (7) of subdivision (a) of section 29.10 of the Rules of the Board of Regents is amended, effective July 13, 2006, 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 [an organization whose standards are generally accepted by other licensing jurisdictions] the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board for licensees subject to such requirements, or a recognized national accountancy organization whose standards are generally accepted by other regulatory authorities 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] a recognized national accountancy organization whose standards are generally accepted by other regulatory authorities 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 July 13, 2006.

          3.  Subdivision (d) of section 29.10 of the Rules of the Board of Regents is added, effective July 13, 2006, as follows:

          (d) The definitions of unprofessional conduct prescribed in sections 29.1 and 29.10 of this Part that apply to licensees 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, unless public accountancy firms are specifically exempted from the definitions of unprofessional conduct in such sections of this Part. 

          4.  Subdivision (e) of section 29.10 of the Rules of the Board of Regents is added, effective July 13, 2006, 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, even though all available appeals have not yet been exhausted, unless exempted from disclosure pursuant to paragraph (5) of this subdivision or 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;

          (ii) receipt of a court decision awarding a monetary judgment in excess of twenty-five thousand dollars in a civil action brought in a court of competent jurisdiction or an award in excess of twenty-five thousand dollars 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 notice of imposition of a disciplinary penalty upon the licensee, the registered partnership, or public accountancy firm, 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 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;

          (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;

          (iii) for a written notice of imposition of a disciplinary penalty upon the licensee, as prescribed in subparagraph (iii) of paragraph (2) of this subdivision, the report shall consist of a copy of the notice; or

          (iv) in lieu of the documentation described in subparagraphs (i), (ii), or (iii) of this paragraph, a narrative statement on a form prescribed by the department setting forth information specified by the department, including but not limited to the date and jurisdiction of the court decision and/or judgment, conviction, arbitration award, or notice of imposition of disciplinary penalty, as applicable.

          (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 the registered partnership, but each such licensee shall be responsible for ensuring the reporting of the reportable events.

          (5) Failure to submit a report which is subject to a confidentiality order, clause or provision in a court decision or arbitration award under subparagraphs (i) or (ii) of paragraph (2) of this subdivision shall not be deemed to constitute unprofessional conduct under the following conditions:

          (i) the court or arbitrator has included language in such decision that specifically provides that the decision shall not be reported to the department pursuant to this subdivision; or

          (ii) the licensee or firm demonstrates to the satisfaction of the department that the licensee or firm explicitly informed the court or arbitrator in writing prior to execution of any confidentiality order, clause or provision of the duty to report such decision to the department and the effect of any confidentiality order, clause or provision on such duty of disclosure, and the confidentiality order, clause or provision does not expressly provide for disclosure to the department.

          (6) Reports submitted to the department in accordance with this subdivision shall be files of the department relating to the investigation of possible instances of professional misconduct and shall be confidential in accordance with the provisions of subdivision (8) of section 6510 of the Education Law.

          (7) Nothing in this subdivision shall have any effect upon the duty of the licensee or firm to respond fully to all questions on any re-registration application which shall become due, or to respond to written communications from the department pursuant to section 29.1(b)(13) of this Part.

          5.  Subdivision (f) of section 29.10 of the Rules of the Board of Regents is added, effective July 13, 2006, 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, provided that in any adversary proceeding conducted pursuant to subdivision (3) of section 6510 of the Education Law, the individual licensee or public accountancy firm shall have the rights set forth in that subdivision; 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 a disciplinary action was commenced by the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board where any 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, 2007.   In any adversary proceeding conducted pursuant to subdivision (3) of section 6510 of the Education Law, the individual licensee or public accountancy firm shall have the rights set forth in that subdivision.

          6.  Subdivision (g) of section 29.10 of the Rules of the Board of Regents is added, effective July 13, 2006, as follows:

          (g) Unprofessional conduct in the practice of public accountancy, as such practice relates to the audit in the practice of public accountancy of an issuer of publicly traded securities that is subject to the Federal Sarbanes-Oxley Act of 2002, shall include, for purposes of subdivision (f) of this section, a failure of a licensee or public accountancy firm, as appropriate, to meet the standards prescribed in 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, 2000 edition, Volume 7, and  Supplement  II , Volume 1 to the 2000 edition; Superintendent of Documents, U.S. Government Printing Office, Stop SSOP, 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). To the extent that the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board have exempted or excepted licensees or public accountancy firms from these standards, such exemptions or exceptions shall also apply to the requirements of this subdivision.