Meeting of the Board of Regents | April 2003

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
COMMITTEE:	Professional Practice
TITLE OF ITEM:	Proposed Promulgation of the Rules of the Board of Regents Relating to the Definition of Unprofessional Conduct in the Practice of Public Accountancy
DATE OF SUBMISSION:	April 8, 2003
PROPOSED HANDLING:	Discussion
RATIONALE FOR ITEM:	To Implement Policy
STRATEGIC GOAL:	Goal 3
AUTHORIZATION(S):

SUMMARY:

Attached for discussion is a proposed promulgation of subdivisions (d), (e), (f), and (g) of section 29.10 of the Rules of the Board of Regents, relating to the definition of unprofessional conduct in the practice of public accountancy. Supporting materials for the proposed regulation are available upon request from the Secretary to the Board of Regents.

The purpose of the proposed regulation is to establish in the definition of unprofessional conduct in the practice of public accountancy standards that licensees must meet relating to their independence when performing prescribed services for a client and relating to reports that they must submit to the State Education Department.

A Notice of Proposed Rule Making concerning the proposed regulation will be published in the State Register no later than April 23, 2003. It is recommended that formal action on the proposed regulation be taken at the June 2003 meeting of the Board of Regents.

Attachment

 

AMENDMENT TO THE REGULATIONS OF THE COMMISSIONER OF EDUCATION

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

1. Subdivision (d) is added to section 29.10 of the Rules of the Board of Regents, effective July 10, 2003, as follows:

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

(1) violating any of the following basic principles of auditor independence when providing audit services for a client that issues securities registered with the United States Securities and Exchange Commission in accordance with federal securities laws, rules and regulations:

(i) functioning in the role of management of the client;

(ii) auditing his or her own work; and/or

(iii) serving in an advocacy role for his or her client;

(2) providing the following non-audit services for a client that issues securities registered with the United States Securities and Exchange Commission, in accordance with federal securities laws, rules and regulations, contemporaneously with the audit of such client:

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

(ii) financial information systems design and implementation;

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

(iv) actuarial services;

(v) internal audit outsourcing services;

(vi) management functions or human resources;

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

(viii) legal services and expert services unrelated to the audit;

(3) providing any non-audit services not described in paragraph (2) of this subdivision for a client that issues securities registered with the United States Securities and Exchange Commission, in accordance with federal securities laws, rules and regulations, contemporaneously with the audit of such client unless such non-audit activity is approved in advance by the audit committee of the board of directors of the audit client, or in the absence of an audit committee, by the full board of directors of the audit client;

(4) providing any audit service for a client that issues securities registered with the United States Securities and Exchange Commission, in accordance with federal securities laws, rules and regulations, 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; and/or

(5) providing any audit service for a client that issues securities registered with the United States Securities and Exchange Commission, in accordance with federal securities laws, rules and regulations, 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 a public accounting 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.

2. Subdivision (e) is added to section 29.10 of the Rules of the Board of Regents, effective July 10, 2003, as follows:

(e) It shall be unprofessional conduct in the practice of public accountancy for a licensee to violate the requirements of this subdivision.

(1) General provisions.

(i) As used in this subdivision, commission means a fee calculated as a percentage of the total sale or service that is paid by a third party to the licensee and/or his or her firm or any other remuneration that is paid by a third party to the licensee and/or his or her firm.

(ii) A licensee employed by a business corporation whose services are leased to a public accounting firm shall comply with the standards prescribed in this subdivision and paragraph (6) of subdivision (a) of this section.

(iii) This subdivision does not prohibit payment for the purchase of an accounting practice or retirement payments to individuals presently or formerly engaged in the practice of public accountancy or payments to their heirs or estates.

(2) A licensee shall not solicit or accept a commission or fee solely for the referral of a client to the products or services of a third party.

(3) A licensee shall not receive a commission for any professional service rendered to a client if the licensee is performing any of the following services for that client: any audit or review service; any compilation service, when the licensee expects or reasonably might expect that a third party will rely upon the financial statements and the licensee's compilation report does not disclose a lack of independence; any examination of prospective financial information; and/or any other service requiring independence. These prohibitions apply during the period in which the licensee or his/her firm is engaged to perform any of these services and the period covered by any financial, accounting or related statements involved in such services.

(4) A licensee who is not performing any of the services set forth in paragraph (3) of this subdivision for the client but is performing other professional services for the client may accept a commission for recommending the products or services of a third party to the client, provided that the licensee discloses the receipt of the commission to the client by way of a written disclosure statement in 12 point type or larger containing the following information:

(i) a description of the product(s) or services(s) which the licensee is recommending to the client, the identity of the third party that is expected to provide the product or service, the business relationship between the licensee and the third party, a description of any commission which may be received by the licensee, including, but not limited to, any supplemental commission allocable to the client receiving the product or service of the third party. Where the product(s) or service(s) cannot be specifically identified at the time of the initial disclosure, this information shall be included in a supplemental disclosure which the licensee must provide to the client within 30 days of receipt of the commission; and

(ii) The dollar amount or value of the commission or the basis on which the payment(s) shall be computed.

(5) The written disclosure statements prescribed in paragraph (4) of this subdivision shall be on letterhead of the licensee, if a sole proprietor, or otherwise on the letterhead of the firm authorized to practice public accountancy that employs the licensee, and shall be signed by the licensee. The disclosure statement shall be signed and dated by the client and contain an acknowledgement by the client that the client has read and understands the information contained in the disclosure. Supplemental disclosures as described in subparagraph (i) of paragraph (4) of this subdivision need not be signed by the client or by the licensee. The licensee shall retain disclosure statements for a period of seven years and shall provide copies to clients upon request.

3. Subdivision (f) is added to section 29.10 of the Rules of the Board of Regents, effective July 10, 2003, as follows:

(f) Reportable events.

(1) Unprofessional conduct in the practice of public accountancy shall include failure of a licensee to submit a written report to the department within 30 days of the occurrence of any of the following events:

(i) conviction of the licensee for committing an act constituting a crime under the laws of New York State; or conviction of the licensee, in any other jurisdiction, for committing an act which, if committed within New York State, would have constituted a crime under the laws of New York State. For purposes of this subparagraph, conviction shall include the initial plea, verdict, or finding of guilt, pleas of no contest, or pronouncement of sentence by a trial court, even though the conviction may not be final or sentence actually imposed until appeals are exhausted;

(ii) cancellation, revocation, or suspension of a license or other authority to practice public accountancy, or refusal to renew a license or other authority to practice public accountancy by any other jurisdiction;

(iii) cancellation, revocation, or suspension of the right to practice public accountancy before any governmental body or agency;

(iv) any civil action settlement or arbitration award against the licensee relating to the practice of public accountancy;

(v) any notice of the opening or initiation of any investigation of the licensee relating to the practice of public accountancy by the Public Company Accounting Oversight Board or any governmental body or agency;

(vi) the presentation to the licensee of a Wells submission by the United States Securities and Exchange Commission or presentation of an equivalent submission by any governmental body or agency to the licensee;

(vii) any final or non-final judgment against the licensee in any civil action alleging any of the following:

(a) dishonesty or fraud, including but not limited to: embezzlement, theft, misappropriation of funds or property, and/or obtaining money, property, or other valuable consideration by fraudulent means or false pretenses;

(b) breach of fiduciary responsibility;

(c) preparation, publication, and/or dissemination of false, fraudulent, and/or materially incomplete or misleading financial statements, reports or information; and/or

(viii) the issuance of any of the following restatements of financial statements attested to by the licensee:

(a) any restatement of a financial statement reporting the correction of an error in a previously issued financial statement of a client that is a publicly traded company, incorporated and/or maintaining its principal place of business in New York State;

(b) any restatement of a financial statement reporting the correction of an error in a previously issued financial statement of a client that is a government agency located in New York State when the financial restatement(s) exceeds the planning materiality used by the licensee 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 statements to not be presented fairly, in all material respects, in conformity with generally accepted accounting principles;

(c) any restatement of a financial statement reporting the correction of an error in a previously issued financial statement of a client that is charitable organization registered by the New York State Department of Law, when such restatement has resulted in the filing of an amended or superceding Internal Revenue Service Form 990 or 990PF; and/or

(d) any restatement of a financial statement reporting the correction of an error in a previously issued financial statement of a client that is any other entity incorporated and/or maintaining its principal place of business in New York State, where disclosure of the financial statement is required by law.

(2) Unprofessional conduct in the practice of public accountancy shall include the failure of a licensee to report to the department the occurrence of any of the reportable events set forth in paragraph (1) of this subdivision either by or against any other licensee within 30 days of acquiring knowledge of such events, unless the licensee knows or reasonably believes that the department is already aware of such occurrence.

(3) Reports required by this subdivision shall meet the following requirements:

(i) All reports required by this subdivision shall be signed by the licensee, or by an authorized representative of a firm authorized to practice public accountancy that employs the licensee if the report is submitted by such firm, and shall set forth the facts which constitute the reportable event.

(ii) Reports concerning the issuance of restatements of financial statements attested to by the licensee shall be made by the licensee issuing the report on the restatement even if the licensee did not perform the original audit, except that a firm authorized to practice public accountancy that employs the licensee may make such reports on behalf of the licensee. Such reports shall meet the requirements prescribed in subparagraph (i) of this paragraph and shall also include an explanation of the reason for the restatement. In addition, such reports shall include copies of the original and the restated financial statements and any notes to such financial statements. Reports concerning 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 charitable organization registered by the New York State Department of Law shall also include those portions of the original and the amended Forms 990 or 990PF related to the reissued financial statement.

(iii) If the reportable event involves the action of an administrative agency or court, the report shall also set forth the title of the matter, the court or agency name, the docket number, and the dates of occurrence of the reportable event, provided that the individual making the report has access to such information.

4. Subdivision (g) is added to section 29.10 of the Rules of the Board of Regents, effective July 10, 2003, as follows:

(g) Unprofessional conduct in the practice of public accountancy shall include the failure of a licensee or public accounting firm that participates in a peer review or quality review program, or an inspection by the Public Company Accounting Oversight Board to submit to the department within 30 days of receipt a copy of a qualified peer review, quality review or inspection report.