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:	Higher Education and Professional Practice
TITLE OF ITEM:	A Reasoned Approach to Reform in Public Accountancy
DATE OF SUBMISSION:	November 30, 2004
PROPOSED HANDLING:	Discussion
RATIONALE FOR ITEM:	Increasing Regents Oversight of Public Accountancy
STRATEGIC GOAL:	Goal 3
AUTHORIZATION(S):

SUMMARY:

This is an update on the status of activities of the Board of Regents and State Education Department (SED) related to the profession of public accountancy. The last major revision of the public accountancy statute occurred in 1947. By the 1990’s, the accountancy profession had been impacted by two significant changes: the expanded breadth of professional services offered by certified public accountants (CPAs), public accountants (PAs) and public accounting firms, and consolidation within the accountancy profession led by business corporations purchasing the non-attest portions of accounting practices and simultaneously hiring the firms’ staff. These major changes have taken place during a time of high profile scandals in the financial industry.

The approach taken by the Board of Regents and the Department to reform the practice of public accountancy includes both statutory reforms and regulatory changes. Both are needed to improve oversight of the profession and ensure meaningful public protection. Statutory reform requires action on the part of both houses of the Legislature and Governor and is therefore more difficult to accomplish. While continuing to pursue the necessary legislative action, the Board of Regents can and should exercise its authority to make appropriate regulatory reforms that would increase public protection and enhance the practice of the profession.

Legislative Action

Even before the most recent accountancy disasters of Enron, WorldCom and similar events, the Board of Regents and the State Education Department, with the assistance of the State Board for Public Accountancy, have been working to expand the definition of the scope of practice of public accountancy to reflect contemporary practice and increase public protection. This change requires a revision to the statute that would clarify that a certified public accountant or public accountant is responsible for all the professional services they provide to the public (including performance of tax, bookkeeping, estate planning and other services) independent of the core attest services that are set out in Education Law. Department staff, State Board representatives and members of the Board of Regents have participated in numerous federal and state public hearings, legislative roundtable discussions and meetings with all key stakeholders to work toward updating and modernizing the public accountancy statute. These meetings have included the New York State Legislature, the Governor’s office, the Office of the New York State Attorney General, the Accountants Coalition representing the Big 4 international public accounting firms, the New York State Society of CPAs and the Foundation for Accounting Practitioners and other key stakeholders. These activities and a formal survey to all 35,000 New York State registered accountants were intended to reach consensus among the key parties on concepts needed for legislative reform in New York.

Since it was first developed, the Regents legislative proposal on CPAs has matured to reflect the key concepts generated through the discussions with various stakeholders. In 2003, recognizing the significance of these issues to the public and the profession, the Regents elevated the legislative proposal to a Regents Priority Legislative proposal.

Regulatory Action

Several major accounting related disasters also resulted in the enactment of significant federal legislation (Sarbanes-Oxley Act of 2002) that produced a new federal oversight model for auditors of publicly traded companies and accentuated the need to reform New York’s existing regulatory model. Recognizing the urgency of this need, in 2003, the Department and the State Board developed a series of regulatory amendments to be implemented under the Regents existing authority. These amendments sought to establish, in the definition of unprofessional conduct, standards that licensees must meet in relation to providing professional services to publicly traded companies, specific reportable events that must be reported to the Department by licensees and rules concerning the acceptance and disclosure of commissions and referral fees. These proposed amendments were published in the State Register in the spring of 2003. Prior to scheduled discussion and action by the Regents, these proposals were withdrawn following a series of meetings with stakeholders who asked the Department to delay the regulations to instead focus on finalizing the needed legislative proposal.

To date, the Legislative reforms that are necessary to expand the definition of the scope of practice of public accountancy in New York and increase public protection have not been enacted. Last year, in response to a letter written by Attorney General Eliot Spitzer, Chancellor Bennett reiterated the commitment of the Regents and the Department to making meaningful regulatory changes to increase public protection and enhance the practice of public accountancy in New York.

This past August, the Department focused again on regulatory amendments to be considered by the Board of Regents, while continuing to participate in discussions on possible legislation. At its September 2004 meeting, the State Board for Public Accountancy discussed and unanimously recommended a set of three regulatory amendments that propose to establish in the definition of unprofessional conduct standards for unprofessional conduct when the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board impose any discipline, penalty or sanction on a New York licensee. The proposed amendments also establish in the regulations standards relating to reports licensees must submit to the State Education Department and to the process used to issue an endorsed license as a certified public accountant in New York. These proposals will be presented to the Regents for discussion and possible action in the coming months (tentatively scheduled for discussion in January 2005).

This report is separated into two sections. The first highlights the major provisions of the Regents Priority Legislation. To make these necessary changes, the Legislature must amend Education Law to clarify or expand the Regents licensing and regulatory authority to reflect contemporary practice. It will also provide a brief analysis of some of the significant concerns the Department has with an accountancy bill, S302D that passed the Senate in 2003 and 2004.

The second section briefly outlines the four regulatory amendments that will be presented to the Regents in early 2005. Existing Education Law gives the Regents the authority to make these regulatory amendments without further legislative action.

Attachment

PROPOSED REFORMS IN REGENTS PRIORITY LEGISLATION

Clarify the Accountancy Scope of Practice

Amend the current definition of the scope of practice of public accountancy to include all professional services provided by a certified public accountant or public accountant when using the professional skills and competencies of a licensed accountant.

As the Education Law is currently written, unless related to the core attest services, the Regents do not have jurisdiction over licensed accountants when they provide professional services such as tax return preparation and advisory services, financial planning and advisory services, and management advisory and consulting services, including the design and implementation of computer systems. These professional services are not included in the current definition of the scope of practice of public accountancy. The Regents Priority bill would expand the profession’s scope of practice to include the full range of services that accountants currently provide to consumers, even if they are not related to an attest or compilation engagement. This proposal would modernize New York's Law and bring it into conformity with the more progressive practice definitions of most other states.

Some stakeholders resisted the Department’s early attempts to propose legislation that would provide a list of professional services that fall within the definition of the scope of practice of public accountancy because they were concerned that the list would not keep pace with the evolution of professional services provided by licensees and their firms. The current definition included in the Regents priority legislation reflects the Department’s effort to consider these views while maintaining its goal to better protect the public interest by clearly defining the scope of practice.

The Department rejected the definition of the scope of practice contained in the other accountancy bill, S302D, because this definition would allow licensees who do not hold out as CPAs or PAs or who perform professional services pro bono to fall outside of the Regents regulatory oversight. Many licensees have made strategic business decisions to eliminate the term “public accounting firm” from their firms’ name to better reflect the broad array of professional services provided to the public. Many firms have also eliminated the designation “CPA” or “PA” from their employees’ business cards. These actions have further complicated the Department’s ability to prove that licensees or firms are practicing within the definition of the practice of public accountancy. Similarly, exempting licensees and firms from regulation if they provide services pro bono does not protect the public. Often, it is the entities that receive the pro bono professional services that need the greatest protection.

Individual and Firm Registrations

Require all licensed certified public accountants and public accountants to maintain a current registration with the Department, whether employed by a public accounting firm, private industry, government or academia. Similarly, require all public accounting firms to register with the Department, regardless of their business structure.

The Regents Priority Legislation reflects the evolution of the practice of public accountancy. CPAs and PAs often provide a number of necessary services, including tax return preparation and financial planning services as employees of business corporations or other unlicensed entities. The ability of licensees to provide those services is unclear under current law. The proposed bill clarifies recent court decisions allowing these additional services to be provided in a business corporation by licensed accountants, but also sets out necessary public safeguards. The Regents Priority bill would hold all licensees to the same standards of practice whether employed by public accounting firms or business corporations.

The Regents Priority bill would further enhance the regulation of the profession by requiring all firms to maintain current registration with the Department. Currently, professional service limited liability companies (LLCs) register with the Department when initially established and sole proprietorships have no registration requirement. By requiring all firm types to maintain current registration with the Department, all firms would be held to the same standard of oversight.

Other legislative proposals, including S302D, include similar provisions requiring all public accounting firms to maintain a registration with the Department.

Continuing Education

Update Education Law to require all currently registered CPAs and PAs to participate in mandatory continuing education while simultaneously broadening the 24-hour concentration options to meet the continuing education requirement.

The Education Law provides an exemption from mandatory continuing education if a licensee is not employed in a public accounting firm. Demographic shifts in employment have resulted in a large segment of licensees being employed in private industry, government and academia. The Regents Priority legislation provides that all CPAs and PAs, with limited exceptions, would be required to participate in mandatory continuing education as part of the continuum of learning throughout a professional's career. Recognizing the need for adequate course content, the bill would expand the breadth of allowable areas of study for a concentrated learning program. The bill would also change the reporting requirement from an artificial September to August fiscal year to an easily understandable calendar year.

The Department rejected the provisions of S302D because the bill proposed the elimination of the 24-hour concentration option while also eliminating the exemption from mandatory continuing education for licensees employed in private industry, government or academia. The elimination of the 24-hour concentrated learning option would require all licensees, including those working in private industry, government and academia, to participate in 120 hours of continuing education every three years with a minimum of 20 hours per year. S302D places a significant burden on licensed accountants who have until now been exempt from mandatory continuing education. No other profession licensed and regulated by the Board of Regents requires mandatory continuing education in excess of 45 hours per triennial registration period. Finally, S302D ignores the conclusions drawn by a 1987-1990 legislative funded Department study of mandatory continuing education in public accountancy that found that concentrated learning above 24 hours does not result in additional learning on the part of participants. The Regents Priority legislation provides a compromise that recognizes that all licensees should participate in mandatory continuing education as a continuum of learning during one’s professional career at a level that is responsive to the outcomes found in the legislative study.

Firm Quality Review

Require all registered firms that perform attestation and compilation services to participate in a mandatory quality review program.

The original peer review program was developed by the American Institute of Certified Public Accountants (AICPA) as an educational tool for its members to enhance their knowledge of administrative policies and procedures when conducting financial statement services. There were at least two criticisms of the peer review system when it was applied to auditors of publicly traded companies: it was inherently compromised because of the limited pool of peer review firms and peer review was only required on a triennial basis. The federal Sarbanes-Oxley Act of 2002 provides that the newly created Public Company Accounting Oversight Board (PCAOB) will conduct inspections of accounting firms’ audits of publicly traded companies. These shortcomings do not apply to peer reviews conducted of auditors of privately owned businesses because of the substantially larger pool of prospective peer review firms.

Recognizing the potential public benefit of a mandatory quality or peer review program, the Regents Priority bill would require all registered public accounting firms that perform attest or compilation services to participate in a mandatory quality review process. The Regents proposed reform legislation seeks to enhance AICPA's peer review model by requiring licensees conducting peer reviews to consider compliance with New York State laws, rules and regulations as part of the peer review program. Failure to participate in mandatory peer review could result in the revocation of a firm's registration.

The proposed bill also enables the Department to conduct inspections of firms if substandard professional services were identified as part of the quality review process. The Regents proposal also clarifies that firms participating in the federal inspection program will be deemed to have met portions of New York's quality review requirement, thereby eliminating duplication of oversight for auditors of publicly traded companies.

The Department opposed the provisions of S302D because it contains provisions that require the reviewing firms be selected from a roster of qualified reviewers established by a statewide or national professional accounting organization. This provision empowers professional associations to identify and qualify the firms that would conduct reviews in New York. S302D also provides that an inspection conducted by the federal Public Company Accounting Oversight Board shall be deemed to comply with the mandatory quality review requirement. Federal regulators have stated that PCAOB inspectors do not perform the same functions as required under a quality review program; therefore, there is no rationale to correlate a PCAOB inspection to a firm’s quality review. Also, there are firms registered in New York with sizeable audit practices that may perform one audit subject to federal inspection, but whose practice would otherwise be exempt from further review by the State.

Substantial Equivalency

Provide for practice in this state by certified public accountants licensed and in good standing in any other state or jurisdiction after the submission of notification to the Department, and a determination that the individual is licensed in a jurisdiction whose licensure standards are substantially equivalent to New York’s licensure standards, or that the individual’s qualifications are substantially equivalent to New York’s licensure requirements.

The expanded breadth of professional services offered by public accounting firms and recent federal independence rules have resulted in an increase in the number of licensed accountants required to practice public accountancy in multiple jurisdictions.

Substantial equivalency is an effort by the public accountancy profession to adjust to this changing environment. Under this concept, an out-of-state licensed CPA maintaining a principal place of business in another jurisdiction may practice in New York upon the submission of notification and payment of a fee to the Department. As part of the annual notification process, the licensee acknowledges that s/he may be subject to Regents disciplinary action for unprofessional conduct while practicing in New York. This proposal also provides for temporary practice by certified public accountants licensed and in good standing in any other state or jurisdiction to practice on a temporary basis pending the evaluation of his/her application for licensure in this state. The proposal also authorizes disciplinary sanctions for out-of-state practice by New York licensed certified public accountants.

Public Accountancy Oversight Group

Provide additional personnel and resources to accomplish these significant revisions to Education Law, including increased individual and firm registrations, increased continuing professional education participation, implementation of firm quality review and increased disciplinary activities.

The practice of public accountancy is performed in firms ranging from sole proprietorships to multi-national firms earning several billion dollars per year. The current provisions of the Education Law limit fines for professional misconduct to a maximum of $10,000 per specification. Recognizing the inherent differences in the size and structure of registered public accounting firms compared to other licensed professions, the Regents bill proposes to increase maximum penalties for professional misconduct in the practice of public accountancy. In addition, to enhance the Regents oversight of the public accountancy profession, the proposed bill establishes a Public Accountancy Oversight Group consisting of CPA investigators, prosecutors and support staff focused on complaints filed with the Department in the practice of public accountancy. The proposed bill also authorizes the Commissioner to hire staff and create a funding mechanism to utilize registration fees, fines and penalties to pay for the cost of the task force.

None of the other proposed bills provide the Department with the necessary resources to accomplish the aggressive reforms contemplated by those bills.

II

PROPOSED REFORMS IN REGENTS REGULATIONS

Earlier this fall, the Department and the State Board for Public Accountancy revisited the regulatory proposals that were discussed in early 2003 and modified them to reflect current best practices and input from the field. In the next few months, the Department will be proposing three regulatory amendments that focus on:

Ø increasing public protection;

Ø increasing efficiencies in the licensure process by requiring licensees and firms to report to the Department certain events that highlight disciplinary actions or that may be indicative of ineffective professional practice; and

Ø modifying the process to endorse an out-of-state license.

Unprofessional Conduct under Federal Laws, Rules and Regulations

This proposal would amend the Rules of the Board of Regents by adding a provision that defines unprofessional conduct within the public accountancy profession as the imposition of any discipline, penalty, or sanction on a New York registered public accounting firm or any associated licensee of such firm, or both, by the Public Company Accounting Oversight Board or the United States Securities and Exchange Commission, or their designee under the Sarbanes-Oxley Act of 2002 or other federal legislation.

Previous proposals to amend the Rules of the Board of Regents focused on establishing a New York standard of unprofessional conduct when a licensed accountant or firm failed to meet specific independence standards when auditing publicly traded companies.

The current proposal is a preferred model because it is more efficient and it does not require the Regents and the Department to reinvestigate cases initiated and disciplined by federal regulators. Instead, discipline, penalty or sanction by federal regulators could result in professional misconduct charges against a licensee or firm.

Reportable Events

This proposed rule would establish in the Rules of the Board of Regents specific events that must be reported to the Department by licensees within 45 days of occurrence and establish standards of unprofessional conduct specific to the public accountancy profession.

Specifically, the amendment would require licensees to report:

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

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

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

Ø civil action settlements and arbitration awards in excess of $150,000 or 3 or more events totally $300,000 or more during a 3 year registration period, or

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

· 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.

This proposal would significantly enhance public protection because licensees would be required to report these occurrences within 45 days rather than upon renewal of a registration, which occurs every three years.

Endorsement of an Out-of-state License

This proposed rule would streamline the process used to issue a New York license to an individual licensed and in good standing in another jurisdiction. The current regulation requires the submission of a substantial amount of documentation that in some instances may take several months to reach the Department and does not always add value to the credentialing process. This amendment allows the Department to issue a license if the individual is licensed and in good standing in a state determined to have substantially equivalent licensure requirements as New York. Currently, the National Association of State Boards of Accountancy has determined that 47 jurisdictions have substantially equivalent licensure requirements.

Commissions and Referral Fees

The evolution of professional services provided to the public by CPAs and PAs has also increased the means by which licensees are compensated for their services. This is especially true when a CPA or PA provides advice on insurance or financial products and receives a commission for the sale of the product. New York's current regulations lack clarity with respect to the receipt of commissions by CPAs and PAs.

Recognizing the public benefit of clarifying the rules in this area and consistent with professional standards, the proposed rule would prohibit a licensee from accepting a commission when serving a client for whom the licensee performs:

Ø an audit or review of a financial statement,

Ø a compilation of a financial statement when the licensee knows or has reason to know that a third party will use the financial statement and the licensee's compilation report does not disclose a lack of independence,

Ø an examination of prospective financial information, or

Ø any other service requiring independence.

If a licensee performs professional services for a client and a commission is an acceptable form of remuneration, the licensee must provide written disclosure to the client notifying him/her that the licensee will be earning a commission from a third party. The notification must include: a description of the product or service, the identity of the third party, the business relationship between licensee and third party, the dollar amount or value of commission. The notification must be signed and dated by the licensee and the client must acknowledge receipt and understanding of the notification. Referral fees from a third party are specifically prohibited unless related to the sale of a product or service.

NEXT STEPS

The Department and the State Board for Public Accountancy have been actively engaged in upholding New York’s high licensure and practice standards while developing a legislative and regulatory approach that enhances public protection and reflects contemporary practice. The Department and the State Board will continue to obtain input from key stakeholders, provide testimony and other input as requested, and work with federal regulators directly and through the National Association of State Boards of Accountancy.

In the coming months, the Department will propose the additional regulatory reforms referenced above for consideration by the Regents while working with legislators and their staff members to introduce the Regents Priority bill in the Legislature.

We believe that the comprehensive reform plan outlined in this report, incorporating both legislative and regulatory amendments, will begin to restore the public's confidence in the integrity of public accountancy in New York by enhancing compliance by New York’s licensed practitioners while also reflecting contemporary practice of the profession. We will keep the Regents informed of these efforts and ask for the Regents review and continued endorsement.

The Honorable the Members of the Board of Regents