EDUCATION DEPARTMENT / THE UNIVERSITY
OF THE STATE OF
Higher Education and Professional Practice
Draft Amendments to Regents Rules on Public Accountancy
March 15, 2006
Issue for Discussion
Regents amend the Regents Rules to align regulation of the public accountancy
Review of Policy.
Discussion of draft amendments to the Regents Rules.
The Regents discussed the draft amendments in June 2005. 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 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 will again discuss the draft amendments.
In response to significant financial scandals in the 1990’s and early
2000’s, the Federal Sarbanes-Oxley Act of 2002 created a new paradigm in the
regulation of the public accountancy profession. Because the licensure and
discipline of the profession falls within the jurisdiction of the Board of
Regents, amendments to the Rules of the Board of Regents are needed to align the
State regulation of the profession with the new Federal model and to recognize
the evolution of interstate professional practice. 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 close gaps in
The proposed amendments would:
Changes have been made in the draft amendments since the June 2005 discussion to address issues raised by members of the Board of Regents and other interested parties including the NYS Society of Certified Public Accountants (NYSSCPA) and the Big 4 accounting firms. Most significant are the changes in the provisions relating to events that must be reported to the Regents and the provisions that afford additional due process to respondents in disciplinary proceedings.
Attached to this item is the current draft of the express terms of the proposed amendments to the Regents Rules. We are continuing discussions with the major stakeholders in an effort to address their concerns if possible.
The Regents should discuss the policy implications of the proposed amendments and advise staff of any additional revisions to be made prior to the formal publication of the draft amendments for public comment.
Timetable for Implementation
Upon the Regents direction, the draft amendments to the Regents Rules
will be published in the State Register for review and public comment and will
be before the Regents for action at the June 2006 meeting. The proposed effective date of the
amendments will be July 13, 2006, with an extended effective date of January 1,
2007 for those amendments that apply to the receipt of Federal sanctions by
licensees and public accounting firms.
The extended effective date will provide additional time to notify
UNIVERSITY OF THE STATE OF
THE STATE EDUCATION DEPARTMENT
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] 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 _______________.
3. Subdivision (d) of section 29.10 of the Rules of the Board of Regents is added, effective _______________, 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 _______________, 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
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 money 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
(b) fraud or misappropriation of funds relating to the practice of public
(c) breach of fiduciary responsibility relating to the practice of public accountancy
(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
(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 State Securities and Exchange Commission or the Public
Company Accounting Oversight Board;
(b) another agency
(c) an agency of
the government of another state or territory of the
that regulates the practice of public accountancy; or
(d) an agency of the government of another country that regulates the practice of
(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 he 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 under subparagraphs (i) or (ii) of paragraph (2) of this subdivision, or agency notice of disciplinary penalty under subparagraph (iii) of paragraph (2) of this subdivision, shall not be deemed to constitute unprofessional conduct if the court or agency has included in such decision or notice language that specifically provides that the decision or notice shall not be reported to the department pursuant to this subdivision.
(6) Reports submitted to the department in accordance with this section 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. 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 _______________, 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 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 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 _______________, as follows:
(g) A prima facie case of unprofessional conduct in the practice of public
accountancy shall be established against an individual licensee or public accountancy firm when an individual licensee has consented to a monetary penalty of at least $50,000 or a public accountancy firm has voluntarily consented to a monetary penalty of at least $250,000, 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 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, 2007. The individual licensee or public accountancy firm may rebut such prima facie case by an affirmative showing based upon substantive evidence that the individual licensee or public accountancy firm did not engage in the conduct charged which resulted in the consent to the monetary penalty and/or is not guilty of professional misconduct in New York State based upon such conduct.
7. Subdivision (h) of section 29.10 of the Rules of the Board of Regents is
added, effective _______________, as follows:
(h) Unprofessional conduct in the practice of public accountancy, as such
practice relates to the audit in the practice of a public accountancy firm of an issuer of publicly traded equity security that is subject to the Federal Sarbanes-Oxley Act of 2002, shall include, for purposes of the application of subdivisions (f) and (g) 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, ____ 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). 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.
8. Subdivision (i) of section 29.10 of the Rules of the Board of Regents is added,
effective _______________, as follows:
(i) Unprofessional conduct relating to the audit of certain issuers of publicly
traded equity securities.
(1) Prohibited non-audit services.
(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
(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
(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 Securities 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 this paragraph from a prohibition against offering such services contemporaneously with the audit of an issuer of publicly traded equity securities that is 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 Securities 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 an issuer of publicly traded equity securities 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 an issuer of publicly traded equity securities 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 an issuer of publicly traded equity securities that is 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 an issuer of publicly traded equity securities 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 Securities and Exchange Commission or the Public Company Accounting Oversight Board have exempted or excepted public accountancy firms from audit partner rotation for audits of an issuer of publicly traded equity securities that is 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 an issuer of publicly traded equity securities 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.
The Need for Regulatory Reform in
By the late 1990’s, a booming stock market and the prospect of extraordinary gains resulted in more Americans than ever investing an increasing percentage of their net assets in the stock market. This change in investment philosophy was augmented by employers that were expanding their offerings of tax deferred retirement options for their workers and a securities industry that was providing easier access to stock market investments through Internet-based brokerage services.
Large stock market gains brought extraordinary times of financial growth and corporate management tried to keep pace with Wall Street earnings expectations. Independent auditors reported that they felt pressured to apply aggressive accounting methods to allow corporate management to meet those earnings expectations. This era of extreme financial growth was brought to a screeching halt by numerous financial disasters that were attributed to massive misinformation caused by accounting errors. As a result, individual investors had absorbed huge losses from these fraudulent financial statements by the early 2000’s. Americans of all ages and walks of life suffered significant declines in their net worth. Many Americans planning to retire were forced to work longer, some who had retired were forced back into the work force or had to depend on family members for income. Others saw their family college savings accounts decimated. See chart below and Attachment 1.
These significant financial disasters served as the catalyst for Congress to enact the Federal Sarbanes-Oxley Act of 2002 (Act).
The Act brought significant change to corporate governance, the accounting profession and the financial markets by making fundamental changes in how corporate management, corporate audit committees and independent auditors of public companies carry out their respective responsibilities. Rather than allow corporate governance to be dominated by management insiders, the Act mandated independent corporate directors and required these directors to work directly with the outside auditors. The Act also reformed oversight of the accounting profession by enhancing auditor regulation and independence in an attempt to restore investor confidence.
Among its many provisions, the Act established a new national regulatory agency, the Public Company Accounting Oversight Board (PCAOB) that is empowered to inspect, investigate and discipline CPA firms that audit publicly-traded companies with more than $10 million in assets and 500 or more investors. The PCAOB inspection, investigation and discipline process is extensive and affords respondents with:
· the opportunity to take early corrective action to remedy violations and therefore terminate the federal discipline; and,
· extensive due process rights throughout the process – including the opportunity to ask for changes in the findings issued by the PCAOB as part of the final decision.
Because sanctions imposed by the PCAOB only apply to a licensees’ or public accounting firms’ practice before the U.S. Securities & Exchange Commission (SEC) or PCAOB, these Federal sanctions are not reflected in the licensees’ or firms’ State-level disciplinary record. This means that not only do these Federal sanctions not impact on the individuals’ or firms’ ability to provide services to smaller publicly-traded companies, privately-held companies or governmental entities, including school districts, but also that the public has no notice of the Federal sanctions which might have effected the decision whether or not to hire the CPA or firm.
Once the PCAOB has taken disciplinary
measures against a licensee or firm, it refers the matter to State regulators to
determine if State-level disciplinary action is appropriate. (As discussed later
in this item, the other large States, and those contiguous to
How does this Apply to
Percentage of Public Company Audit Market (by Total Sales Audited)
Percentage of Public Company Audit Market (by Number of Clients)
The Regents Role in the Regulatory Framework
These charts clearly show that a very
significant percentage of the audits that are subject to the oversight of the
PCAOB are conducted by firms that are registered in
Section 6509 of the New York State Education Law delegates to the New York State Board of Regents and the Commissioner, the responsibility and authority to define unprofessional conduct in the licensed professions in Regents Rules or Commissioner’s Regulations. Section 29.1 of the Regents Rules delineates the general provisions that are applicable to all of the licensed professions and §29.10 adds provisions specific to the public accountancy profession. It is necessary to update this section of the Rules of the Board of Regents to align with the new Federal regulatory model.
Summary of Proposed Amendments
The following is a summary and discussion of the four major amendments to the Regents Rules that the Department is proposing for action by the Regents:
1. Technical Amendments
2. Reportable Events
3. The Definition of Unprofessional Conduct
4. Conflict of Interest Provisions for Auditors of Publicly Traded Companies not Subject to Federal Regulations
1. Technical Amendments
These proposed amendments are necessary to update the regulations to recognize current standard setting bodies and to relocate provisions applicable to public accounting firms to a separate stand-alone subdivision.
Specifically, this proposal would:
Ø Identify the SEC and PCAOB as recognized bodies that promulgate standards for performing audits (generally accepted auditing standards),
Ø Update the list of recognized bodies that promulgate standards for recording financial transactions (generally accepted accounting principles). The list would include such independent standard setting bodies as the Financial Accounting Standards Board, Government Accounting Standards Board and the International Accounting Standards Board, and
Ø Relocate within the Rules of the Board of Regents an existing subdivision that applies general provisions of unprofessional conduct to public accountancy firms.
2. Reportable Events
Over the last two decades, there has been a substantial growth of interstate practice within the public accountancy profession. Within the last three years, the number of New York CPA licenses issued through the endorsement of an out of state license has more than doubled. The increase in interstate practice and the number of licensees practicing in multiple jurisdictions requires the promulgation of reporting requirements for licensed CPAs.
The first draft of the proposed regulations included a list of seven “reportable events” that would have to be reported to the Regents within 45 days of occurrence. Based on the Regents guidance at the June 2005 Regents meeting, the list of reportable events has been pared down to those actions that represent the most egregious instances of unprofessional conduct. As amended, the regulations would now require licensed CPAs and public accounting firms to report to the Department the following events within 45 days of occurrence:
the conviction of a crime in
Ø 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
Ø the imposition of disciplinary actions by a regulatory authority.
In response to comments received from several Regents, similar provisions will be considered later this year that would apply the same 45-day standard to all licensed professions.
3. The Definition of Unprofessional Conduct
The proposed amendments would revise the Regents Rules on unprofessional conduct to include violations of key practice standards established by the SEC and PCAOB and enable the Department to bring charges of unprofessional conduct when there has been an admission or finding of guilt or when a licensee or firm has consented to a loss of practice privileges or to pay a significant fine ($50,000 or more for individual licensees or $250,000 or more for firms), even if the agreement to such sanction includes the boiler-plate language that the respondent neither admits nor denies guilt.
This provision has generated a great deal of discussion and divergent opinions in the field. There is clear support for the Regents to have authority to take action in cases where there is a conviction or admission of guilt. Opponents question the appropriateness of using a settlement as the basis for a professional misconduct charge since the PCAOB settlement process excludes any admission or denial of guilt. They liken these settlements to “slip and fall” settlements in civil court in which defendants will settle what they consider to be nuisance cases, in order to avoid the time and expense involved in litigation.
Proponents of this provision point out that the settlements are reached after an extensive regulatory process. Proponents further point out that, while there are a number of possible sanctions that the SEC or PCAOB can impose against a firm or licensee, i.e.
· suspension of practice privileges before the PCAOB;
· monetary penalties;
· cease and desist orders;
· censures; and
· required additional professional education or training,
the proposed amendments only include the most significant sanctions – loss of practice privileges and monetary penalties of $50,000 or more for individual licensees and $250,000 or more for public accountancy firms – in the definition of professional misconduct. These sanctions can have a serious impact on the practice of the firm or individual before the SEC or PCAOB. Cases that result in one of the less significant PCAOB sanctions will not be considered by the Department or Regents for possible professional misconduct charges. In effect, this weeds out cases that might be considered comparable to “nuisance” cases.
Historically, just as the vast majority of professional discipline cases before the Board of Regents are resolved through consents, the SEC has settled a substantial majority of its disciplinary cases. We anticipate that a large number of PCAOB cases will also be resolved through these “settlements” which include boiler-plate language that states that the respondent neither admits nor denies guilt. The proposed amendments give the Regents the ability to leverage these significant Federal disciplinary actions instead of conducting lengthy investigations and prosecutions that will duplicate much of the work that was already done at the Federal level.
Opponents also raise the issue of due process, saying that since settlements with the PCAOB are reached instead of a hearing; the licensees and firms have not been afforded due process. The Department disagrees with this assertion because there is significant due process built into the PCAOB disciplinary process including at the point of settlement where the respondent has the opportunity to have input into what goes into the “Findings” portion of the decision. In addition, all PCAOB decisions, including settlements, are reviewable by the SEC. (See Attachment 3)
However, recognizing the due process concerns that have been expressed and in order to reach consensus on this provision, the proposed amendments have been modified. The fact that the licensee or firm agreed to a monetary settlement with the PCAOB would establish a “prima facie” case of professional misconduct in New York State, that can be rebutted by evidence presented by the respondent. In the case of loss of practice privileges, the licensee can challenge whether the findings constitute misconduct in NYS and the penalty to be imposed in NYS. Also, the burden remains on the Department to provide a preponderance of evidence in these cases.
A recent (2005) NYS Court of Appeals case involving the New York State Department of Health supports a charge of unprofessional conduct for loss of practice rights with or without an admission of guilt.
Some people question the need to include settlements in which the sanction is a monetary penalty in the proposed amendments. The sanctions applied in disciplinary actions by the SEC and PCAOB differ depending on whether it is a firm or a licensee being disciplined. With respect to licensed CPAs, federal regulators tend to apply cease & desist orders and suspension of practice rights. On the other hand, the federal regulators tend to assess monetary penalties when settling a disciplinary action with a public accounting firm. Why is this? Given that such a large percentage of audits of publicly traded companies are conducted by the Big 4 firms (78%), a suspension or revocation of practice rights prohibiting one of the Big 4 accounting firms from performing audits of publicly traded companies could have a disastrous impact on the US economy and capital markets. Therefore, firms are assessed monetary penalties.
Although the audit is performed by individual CPAs, it is the public accounting firm that contracts with the client. It is also the public accounting firm that signs the audit opinion on the financial statements upon which the public relies. If monetary penalties are not included in the Regents Rules, the Regents will not be able to take action against any firm that reaches a settlement with the PCAOB in which the firm agrees to a significant monetary penalty absent an admission or denial of guilt.
What do other States do?
A review of
state laws and regulations shows that the four other largest states (California,
Florida, Ohio & Texas) that license and regulate CPAs and public accounting
firms and four of five contiguous states to New York, define as unprofessional
conduct having one’s right to practice before any federal or state agency
suspended or revoked even if there is no admission (See Attachment 4). Six
In a poll of the attorneys present at a recent National Association of State Boards of Accountancy Legal Counsel conference representing the major states (about 30 states in all), only three states, including New York, opined that without revisions to current regulations, they could not proceed with a neither admit nor deny settlement. All of the other states now have laws or regulations that provide that a Federal sanction is unprofessional conduct or the state can proceed with an action based on its acts discreditable provision.
4. Conflict of Interest Provisions for Auditors of Publicly Traded Companies not Subject to Federal Regulations
One of the reasons that Congress enacted the Sarbanes-Oxley Act of 2002 was the evolution of professional services beyond the performance of audits of financial statements by public accounting firms. Between 1990 and 1999, audit revenue decreased from 70% to 48% of total firm revenue because non-audit services such as tax advice, financial advisory services and computer system design and implementation became more lucrative for public accounting firms. Under the Sarbanes-Oxley Act, public accounting firms are generally prohibited from performing these types of services for their audit clients. Such services were seen as impairing the auditors’ independence. Similarly, the Act introduces provisions for mandatory audit partner rotation and a mandatory “cooling off” period before the accounting firm’s audit staff can be employed by the audit client. These provisions were deemed necessary by Congress to enhance independence and protect the public. The Act invited State licensing and regulatory authorities to make an independent determination of the proper standards applicable to licensed accountants and public accounting firms not regulated by the Act, taking into account such factors as the size and nature of the business of the public accounting firms.
The 2003 draft regulations included a codification of independence standards based on the Federal regulatory model. Specifically, the initial draft regulations would have applied three independence standards to auditors of all publicly traded companies (whether or not they are required to register with the SEC), including:
Ø a prohibition on providing to audit clients certain non-audit services that otherwise could impair independence,
Ø a requirement for mandatory audit partner rotation to enhance audit firm independence, and
Ø a mandatory “cooling off” period of one year before a public accounting firm’s staff could seek employment with an audit client.
These provisions were met with significant opposition by the New York State Society of CPAs, the Big 4 accounting firms and several other interested parties. These same provisions were strongly supported by the New York State Office of the Attorney General and others because Federal statute applies only to large publicly traded companies, defined as companies with greater than $10 million in assets and 500 or more investors, and was seen as not sufficiently protecting all of New York’s investing public.
Some proponents of this provision quickly voiced their concerns that without promulgating a regulation to address conflicts of interest between small publicly traded companies and their independent auditors, the state’s regulatory model fails to capture the very public protection provisions that were deemed appropriate by Congress when it passed the Sarbanes-Oxley Act.
Opponents suggest that auditors of smaller publicly traded companies have
a unique understanding of their clients’ businesses and that applying the
Sarbanes-Oxley prohibitions to these companies will be an expensive proposition
that will negatively impact the economy. They believe there are sufficient
safeguards in place to protect
Last year, a bill containing a similar provision passed in the Assembly without action in the Senate. Some have suggested that this provision of the Regents Rules be deleted or separated from the other proposed amendments due to the Legislature’s interest in these independence standards. Others suggest that in the absence of legislative action, it is essential to include this provision in the Regents Rules. Finally, some have suggested that, if the reason to promulgate Regents Rules is to react to independence failures in governmental audits, then the Department should instead seek to promulgate a Regents Rule establishing independence standards through reference to the federal General Accountability Office’s “Yellow Book” audit standards that apply to the auditors of any entity that receives federal financial assistance, including school districts.
Each of the
provisions in the draft amendments responds to heightened awareness that the
oversight of the public accountancy profession needs to be enhanced 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 New York State Board of Regents, as the licensing and regulating
The State Board for Public Accountancy
consists of four public members and seventeen members who practice in various
size public accounting firms from small to regional to the largest international
firms. The State Board participated with the Department in conducting a public
meeting in May 2002 to discuss the need for public accountancy reforms that
would protect the public and enhance the regulation of the profession in
How Other States Approach Federal Disciplinary Actions
Loss of Practice Rights
* imposition of any discipline, penalty or sanction
** revoked, suspended, or otherwise acted against
*** revocation or suspension of, or a voluntary consent decree