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THE STATE
EDUCATION DEPARTMENT / THE UNIVERSITY
OF THE STATE OF |
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TO: |
Higher Education and
Professional Practice |
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FROM: |
Johanna
Duncan-Poitier |
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SUBJECT: |
Draft Amendments to Regents Rules on Public Accountancy
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DATE: |
March 15,
2006 |
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STRATEGIC GOAL: |
Goal 3 |
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AUTHORIZATION(S): |
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Issue for
Discussion
Should the
Regents amend the Regents Rules to align regulation of the public accountancy
profession in
Reason(s) for
Consideration
Review of Policy.
Proposed Handling
Discussion of draft amendments to the Regents
Rules.
Procedural History
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.
Background
Information
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:
- update
the list of recognized professional standard setting bodies that are used by
the State Board and Department when initiating disciplinary actions to include
the U.S. Securities and Exchange Commission (SEC), the Public Company
Accounting Oversight Board (PCAOB) and other entities; as well as make other
technical changes;
- establish a list of “reportable events” – events that the
licensee is required to report to the Regents - including the imposition of
disciplinary penalties by a regulatory authority including the SEC and PCAOB.
The amendments would require the reporting of such actions within 45 days of
occurrence, thereby allowing the Regents to take timely professional
discipline actions to protect New York State residents and businesses (current
regulations require the reporting of criminal convictions and disciplinary
actions by other jurisdictions every 3 years);
- 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 fine of $50,000 or more for individual
licensee or $250,000 or more for a firm even if the agreement to such sanction
includes the boiler-plate language that the respondent neither admits nor
denies guilt.
- establish a
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.
Recommendation
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
DRAFT
THE
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
accountancy in
(c) breach of
fiduciary responsibility relating to the practice of public accountancy
in
(d) preparation,
publication, and/or dissemination of false, fraudulent, and/or
materially incomplete or misleading financial
statements, reports, or information relating to the practice of public
accountancy in
(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
of the
public accountancy;
(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
public accountancy;
(3) The report to the department shall
consist of the following:
(i) for a conviction as prescribed in subparagraph (i) of paragraph (2) of this
subdivision, the report shall consist of a copy of the
certificate of conviction, or comparable document of the
court
(ii) for a court
decision or arbitration award as prescribed in subparagraph (ii) of
paragraph (2) of this subdivision, the report shall
consist of a copy of the court decision or arbitration award and any findings of
facts or special verdict form;
(iii) for a written
notice of imposition of a disciplinary penalty upon the licensee,
as prescribed in subparagraph (iii) of
paragraph (2) of this subdivision, the report shall consist of a copy of the
notice; or
(iv) in lieu of the documentation described
in subparagraphs (i), (ii), or (iii) of this
paragraph, a narrative statement on a form prescribed by the department setting
forth information specified by the department, including but not limited to the
date and jurisdiction of the court decision and/or judgment, conviction,
arbitration award, or notice of imposition of disciplinary penalty, as
applicable.
(4) A public accountancy firm shall be
responsible for reporting reportable events
relating to the public accountancy
firm, and shall designate an individual to make such reports. An individual
licensee shall be responsible for reporting those reportable events specifically
relating to the licensee. Licensees who are partners in a registered partnership
may designate an individual to report reportable events relating to 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
accountancy in
(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
reports;
(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:
Ø
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
states, including
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.
Conclusion
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
entity in
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
Next Steps
After discussion with the Regents in March, staff will make final
adjustments to the draft amendments consistent with the direction of the
Regents, and the amendments will be published in the State Register for public
comment. Once any public
comment received has been taken into consideration, the amendments will be
brought back to the Regents for action in June 2006.
How Other
States Approach Federal Disciplinary Actions
|
|
Loss of
Practice Rights |
Acts Discreditable |
|
Major
States |
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|
√* |
|
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|
√** |
√ |
|
|
√*** |
√ |
|
|
√ |
√ |
|
|
|
|
|
Contiguous States |
|
|
|
|
√ |
|
|
|
|
√ |
|
|
√ |
√ |
|
|
√ |
√ |
|
|
√ |
|
*
imposition of any discipline, penalty or
sanction
**
revoked, suspended, or otherwise
acted against
***
revocation or
suspension of, or a voluntary consent
decree