Public Accountancy

Current Issues in Public Accountancy

Overview of Public Accountancy Reform Initiatives

The following is a brief update on the most recent activities of the Board of Regents and State Education Department (SED) related to the profession of public accountancy. The last major overhaul of the public accountancy statute occurred in 1947. Over the last seven years, the Board of Regents and the State Education Department, along with the State Board for Public Accountancy, have been working to ensure that the regulatory process keeps pace with changes in professional practice and increases the Regents ability to ensure the integrity of the public accountancy profession and protect the public. This activity is described in greater detail in the 24-month agenda item that was reported to the Professional Practice Committee in February 2003.

Changes Impacting the Profession

Two major changes significantly impacted the profession of public accountancy in the last several years:

1. Broadened scope of services: The profession has evolved from auditors of financial statements into full service accounting and financial services firms that offer a host of accounting, consulting and tax services to the public. The breadth of services provided by certified public accountants (CPAs), public accountants (PAs) and their firms has increased exponentially over the past decade.
   
   
2. Corporations purchasing non-attest portions of accounting practices and simultaneously hiring the firms' staff: Several large business corporations began purchasing the non-attest (financial statement) portions of accounting firms practices and at the same time, hired the accounting firms' staff. The first consolidation of an accounting practice occurred in New York in 1998. Ads began promoting tax and financial services performed by CPAs working for business corporations such as American Express and H&R Block. These business entities became known as consolidators within the profession.
   
   There was some concern that allowing the consolidation of a portion of a professional public accountancy practice into a business entity could impact the independence and professional judgment of CPAs and PAs. Responding to these concerns, SED issued a notification to the field in 1998 providing an analysis of the issue and identifying the rationale for allowing the consolidation of an accounting firm in New York, under specific conditions.

State Education Department Initiatives

Recognizing the need to modernize and update Education Law to provide sufficient public protection by the Board of Regents, SED participated in several meetings with stakeholders to discuss and assess various federal and State legislative and regulatory models. Opinions have varied widely on the types and breadth of reforms required. However, the financial disasters of the past two years have focused everyone's attention on the need to update the national and state oversight models. Key initiatives of SED and the State Board include:

• SED and the State Board took a leadership role by participating in the US Securities & Exchange Commission's public hearings on updating federal auditor independence rules as awareness of a looming financial crisis heightened.
  
  
• SED and the State Board surveyed all 34,739 registered CPAs and PAs in New York State in 2001 to solicit their direct input on several reform issues. A report summarizing the results of that survey was issued in November 2001.
  
  
• SED participated in a series of multi-state conference calls in the spring of 2002 to discuss reform models in the wake of the Enron disaster.
  
  
• SED and State Board representatives met with the Honorable John LaFalce, ranking minority member of the US House of Representatives Financial Services Committee, to share perspectives on accountancy reform measures.
  
  
• SED and the State Board holding a public forum in New York City in May 2002. Participants included former regulators, consumer groups, academics, accounting firms, representatives of the state professional membership society and former US Securities & Exchange Commission Chief Accountant Lynn Turner, who also participated in the October 2000 Regents Conference on the Professions. SED issued a summary report of the public meeting in June 2002.

The Sarbanes-Oxley Act of 2002

In July 2002, the federal Sarbanes-Oxley Act of 2002 was signed into law. The Act was the first major overhaul of federal securities laws since the enactment of the securities acts of 1933 and 1934. Key provisions of that act:

• Prohibit non-audit services to be sold to an audit client,
• Require audit partner rotation, and
• Require a cooling off period before an auditor can go to work for an audit client.

SED provided an overview of the Act at the September 2002 meeting of the Regents Professional Practice Committee. SED and the State Board continue to evaluate the impact the federal Act will have on the regulation of the profession in New York and determine how best to modernize existing rules and regulations to provide sufficient state-based regulation and oversight.

Accomplishments

• Recognizing the evolving practice climate, the Regents recently adopted an amendment to the Commissioner's Regulations that requires all registered accountants to participate in four hours of continuing education focused on ethics during each three-year registration period, beginning September 1, 2001.
  
  
• One of the most disconcerting actions reported to have occurred in the Enron-Andersen scandal was the intentional destruction of documents that could serve as critical evidence in subsequent criminal prosecutions and/or professional disciplinary actions. Effective January 3, 2003, an amendment to the Rules of the Board of Regents established uniform standards for work paper documentation and retention for attest and compilation engagements in the practice of public accountancy.

Ongoing Activities and Next Steps

• In October 2002, the State Board began drafting amendments to the Rules of the Board of Regents with respect to commissions, reportable events, and certain aspects of the Sarbanes-Oxley Act. These amendments will enhance public protection by requiring that licensees self report the occurrence of events that could identify substandard work and establishing in the Rules of the Board of Regents thresholds of unprofessional conduct consistent with certain key provisions of the federal act. The amendments will identify when licensees cannot accept commissions from their clients. The amendments will stipulate specific information that must be provided to clients whenever licensees accept commissions for financial services or products provided to their clients.
  
  
• In February 2003, SED provided a comprehensive report summarizing the activities to date and outlining a series of legislative and regulatory proposals for accountancy reforms to the Regents Professional Practice Committee. At that time, committee members urged SED to aggressively seek legislative and regulatory reforms.
  
  
• Although an initial draft of the amendments was scheduled for discussion in April 2003 by the PPC, a number of comments were received from the field and the State Board. The Executive Secretary of the State Board requested that discussion of the item be postponed to permit additional input on the draft. The State Board convened in May 2003 to discuss in detail the specific provisions of the draft Rule amendments. It was determined that additional revisions would be made to clarify and enhance the proposed language before the item is to be rescheduled.
  
  
• SED is assessing additional public comments received on the proposed amendments to the Rules of the Board of Regents that were published in the State Register in April 2003. Once this item is scheduled for discussion with the Board of Regents, the amendments will be re-published in the State Register and will be included on the Regents Professional Practice Committee agenda.
  
  
• SED and the State Board are having numerous discussions with members of the State Legislature. In addition, we continue to work with various stakeholders, such as the Big 4 multinational accounting firms and the New York State Society of CPAs, to work towards reaching agreement on necessary legislative reforms. While some success has been achieved, additional work is necessary to reach mutual agreement on all reform proposals.

SED will continue to update you as these critical issues evolve and mature.