A09831-A
STATE OF NEW YORK
________________________________________________________________________
9831--A
IN ASSEMBLY
February 13, 2002
___________
Introduced by M. of A. BRODSKY, MORELLE, TONKO, ORTIZ, LUSTER, HIKIND,
COLMAN, GALEF, KLEIN, STRINGER -- Multi-Sponsored by -- M. of A.
AUBRY, BRENNAN, CAHILL, CLARK, A. COHEN, COOK, CYMBROWITZ, ESPAILLAT,
FARRELL, GLICK, GREEN, JACOBS, LAFAYETTE, LAVELLE, MATUSOW, MAYERSOHN,
NOLAN, PERRY, PHEFFER, J. RIVERA, SWEENEY, TOWNS, WEINSTEIN -- read
once and referred to the Committee on Corporations, Authorities and
Commissions -- committee discharged, bill amended, ordered reprinted
as amended and recommitted to said committee
AN ACT to amend the business corporation law, the limited liability
company law, the partnership law, the public authorities law, the
general business law, and the retirement and social security law, in
relation to auditors' professional responsibility
The People of the State of New York, represented in Senate and Assem-
bly, do enact as follows:
1 Section 1. The business corporation law is amended by adding a new
2 section 521 to read as follows:
3 § 521. Applicability of general business law to business corporations
4 issuing audited financial statements.
5 Every business corporation organized under this chapter and every
6 foreign corporation (including every foreign professional service corpo-
7 ration) qualified to do business in this state pursuant to this chapter
8 that issues audited financial statements shall be subject to paragraph
9 (a) of subdivision three of section three hundred fifty-two-c of the
10 general business law.
11 § 2. The limited liability company law is amended by adding a new
12 section 510 to read as follows:
13 § 510. Applicability of general business law to limited liability
14 companies issuing audited financial statements. Every limited liability
15 company organized under this chapter and every foreign limited liability
16 company (including every foreign professional service limited liability
17 company) qualified to do business in this state pursuant to this chapter
18 that issues audited financial statements shall be subject to paragraph
19 (a) of subdivision three of section three hundred fifty-two-c of the
20 general business law.
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[ ] is old law to be omitted.
LBD14585-04-2
A. 9831--A 2
1 § 3. The partnership law is amended by adding a new section 44-a to
2 read as follows:
3 § 44-a. Applicability of general business law to partnerships issuing
4 audited financial statements. Every partnership or limited partnership
5 organized under this chapter and every foreign partnership or limited
6 partnership doing business in or qualified to do business in this state
7 pursuant to this chapter that issues audited financial statements shall
8 be subject to paragraph (a) of subdivision three of section three
9 hundred fifty-two-c of the general business law.
10 § 4. The public authorities law is amended by adding a new section
11 2802-a to read as follows:
12 § 2802-a. Applicability of general business law to public service
13 corporations that issue audited financial statements. Every public
14 service corporation organized under this chapter that issues audited
15 financial statements shall be subject to paragraph (a) of subdivision
16 three of section three hundred fifty-two-c of the general business law.
17 § 5. Subdivision 1 of section 352 of the general business law, as
18 amended by chapter 961 of the laws of 1960, is amended to read as
19 follows:
20 1. Whenever it shall appear to the [attorney-general] attorney
21 general, either upon complaint or otherwise, that in the advertisement,
22 investment advice, purchase or sale within this state of any commodity
23 dealt in on any exchange within the United States of America or the
24 delivery of which is contemplated by transfer of negotiable documents of
25 title all of which are hereinafter called commodities, or that in the
26 issuance, exchange, purchase, sale, promotion, negotiation, advertise-
27 ment, investment advice or distribution within or from this state, of
28 any stocks, bonds, notes, evidences of interest or indebtedness or other
29 securities, including oil and mineral deeds or leases and any interest
30 therein, sold or transferred in whole or in part to the purchaser where
31 the same do not effect a transfer of the title in fee simple to the
32 land, or negotiable documents of title, or foreign currency orders,
33 calls or options therefor hereinafter called security or securities, any
34 person, partnership, corporation, company, trust or association, or any
35 agent or employee thereof, shall have employed, or employs, or is about
36 to employ any device, scheme or artifice to defraud or for obtaining
37 money or property by means of any false pretense, representation or
38 promise, or that any person, partnership, corporation, company, trust or
39 association, or any agent or employee thereof, shall have made, makes or
40 attempts to make within or from this state fictitious or pretended
41 purchases or sales of securities or commodities or that any person,
42 partnership, corporation, company, trust or association, or agent or
43 employee thereof shall have employed, or employs, or is about to employ,
44 any deception, misrepresentation, concealment, suppression, fraud, false
45 pretense or false promise, or shall have engaged in or engages in or is
46 about to engage in any practice or transaction or course of business
47 relating to the purchase, exchange, investment advice or sale of securi-
48 ties or commodities which is fraudulent or in violation of law and which
49 has operated or which would operate as a fraud upon the purchaser, or
50 that any person, partnership, corporation, company, trust or associ-
51 ation, being either the issuer of any security, or any agent or employee
52 thereof, shall have issued or caused to be issued any audited financial
53 statement in connection with which the auditor engaged in professional
54 misconduct, or that any auditor who knew or should have known that his
55 or her certification or opinion would be used in connection with such
56 financial statement, or any agent or employee thereof, permitted the
A. 9831--A 3
1 issuance of such financial statement intending that any person rely on
2 such audited financial statement, or that any broker, dealer, or [sales-
3 man] salesperson, as defined by section three hundred fifty-nine-e of
4 this article, or any agent or employee thereof, has sold or offered for
5 sale or is attempting to sell or is offering for sale any security or
6 securities in violation of the provisions of said section or section
7 three hundred fifty-nine-ee, or that any other section of this article
8 has been violated, any one or all of which devices, schemes, artifices,
9 fictitious or pretended purchases or sales of securities or commodities,
10 deceptions, misrepresentations, concealments, suppressions, frauds,
11 false pretenses, false promises, practices, transactions and courses of
12 business are hereby declared to be and are hereinafter referred to as a
13 fraudulent practice or fraudulent practices or he or she believes it to
14 be in the public interest that an investigation be made, he or she may
15 in his or her discretion either require or permit such person, partner-
16 ship, corporation, company, trust or association, or any agent or
17 employee thereof, to file with him or her a statement in writing under
18 oath or otherwise as to all the facts and circumstances concerning the
19 subject matter which he or she believes it is to the public interest to
20 investigate, and for that purpose may prescribe forms upon which such
21 statements shall be made. The [attorney-general] attorney general may
22 also require such other data and information as he or she may deem rele-
23 vant and may make such special and independent investigations as he or
24 she may deem necessary in connection with the matter.
25 § 6. Section 352 of the general business law is amended by adding a
26 new subdivision 1-a to read as follows:
27 1-a. As used in this section:
28 (a) The term "financial statement" shall mean any balance sheet,
29 income or loss statement, any attachments or exhibits thereto, or any
30 other presentation of financial information concerning a business enter-
31 prise however denominated that is intended to portray the financial
32 position of such business enterprise or any significant portion thereof.
33 (b) The term "audited" used in connection with a financial statement
34 shall mean accompanied by an opinion, report, or certificate issued by a
35 licensed public account or certified public accountant acting within the
36 practice of public accountancy as defined in section seventy-four
37 hundred one of the education law.
38 (c) The term "auditor" shall mean the licensed public accountant or
39 certified public accountant, and his or her firm, which issued the opin-
40 ion, report, or certificate applicable to the financial statements that
41 are audited.
42 (d) The term "firm" shall mean a partnership, corporation, company,
43 firm, or other organization engaged in whole or in part in the practice
44 of public accountancy.
45 (e) The term "professional misconduct" shall have the meaning assigned
46 to it by the education law, or any regulations adopted by the board of
47 regents or the commissioner of education with the approval of the board
48 of regents pursuant to section sixty-five hundred nine of the education
49 law; provided, however, that in the absence of any such regulations, the
50 term "professional misconduct" shall mean, as a minimum, a situation:
51 (1) where an auditor or his or her firm has a conflict of interest,
52 meaning any interest, financial or otherwise, direct or indirect, which
53 is in substantial conflict with the proper performance of an audit and
54 issuance of a proper report, opinion, or certificate; or
55 (2) where an auditor or his or her firm has provided to any publicly
56 traded company any non-audit services after the effective date of this
A. 9831--A 4
1 subdivision; provided, however, that it shall be an affirmative defense
2 to any charge or professional misconduct under this subdivision that the
3 amount or value of non-audit services rendered by the auditor or his or
4 her firm is so small in relation to the audit relationship with the
5 publicly traded company that no reasonable person could believe that a
6 conflict of interest would exist.
7 (f) The term "publicly traded company" shall mean any business organ-
8 ization, regardless of the form of organization, that issues or has
9 issued securities as defined in this section.
10 (g) The term "non-audit services" shall include, but not be limited
11 to, business consulting, bookkeeping services, appraisal or valuation
12 services, fairness opinions, contribution-in-kind reporting, actuarial
13 services, internal audit outsourcing, management functions, broker-deal-
14 er services, investment advisement, investment banking, expert services,
15 risk consulting, tax services, corporate financing services, human capi-
16 tal consulting, legal services, business internet services, assurance
17 services, and outsourcing services.
18 § 7. The opening paragraph of subdivision 3 of section 352-c of the
19 general business law is designated paragraph (b) and a new paragraph (a)
20 is added to read as follows:
21 (a) It shall be illegal and prohibited for any person, partnership,
22 corporation, company, trust or association, being either the issuer of
23 any security, or any agent or employee thereof, knowingly to issue or
24 cause to be issued any audited financial statement in connection with
25 which the auditor engaged in professional misconduct, or for any auditor
26 who knew or should have known that his or her certification or opinion
27 would be used in connection with such financial statement, or any agent
28 or employee thereof, to permit the issuance of any such audited finan-
29 cial statement intending that any person rely on such audited financial
30 statement; provided, however, that this paragraph shall not apply to any
31 person, partnership, corporation, company, trust, or association that is
32 a small business concern as defined in section one hundred sixty of the
33 state finance law, except in a case where such small business concern
34 issues an audited financial statement for the purpose of obtaining cred-
35 it or any state benefit. In addition to the penalties provided in subdi-
36 visions four, five and six of this section, any violator of this para-
37 graph shall be subject to the civil penalties provided in section three
38 hundred fifty-two-cc of this article.
39 § 8. The general business law is amended by adding a new section 352-
40 cc to read as follows:
41 § 352-cc. Civil penalties resulting from violations of paragraph (a)
42 of subdivision three of section three hundred fifty-two-c of this arti-
43 cle. Any issuer of any security or any auditor (in addition to any other
44 sanction for professional misconduct under the education law) that
45 violates paragraph (a) of subdivision three of section three hundred
46 fifty-two-c of this article shall be subject to the following:
47 1. Each such violator shall be jointly and severally liable to stock-
48 holders, members, partners, lenders, purchasers, or other investors in
49 an individual or class action for damages resulting from such violation.
50 If any plaintiff shall be unable to prove any actual damages resulting
51 from such violation, such plaintiff shall be entitled to nominal damages
52 set by the court, but not less than fifty dollars. Any successful plain-
53 tiff shall be entitled to recover reasonable attorney's fees.
54 2. Each person convicted of a misdemeanor or a felony under paragraph
55 (a) of subdivision three of section three hundred fifty-two-c of this
56 article, or who has entered into any consent order, judgment, or decree
A. 9831--A 5
1 as a result of allegations of a violation of paragraph (a) of subdivi-
2 sion three of section three hundred fifty-two-c of this article, whether
3 or not such consent order, judgment, or decree admits any such
4 violation, shall be barred for a period of five years, or such other
5 period established in such consent order, judgment, or decree, from
6 receiving any economic development grants, any waivers or rebates of
7 taxes, or other similar benefits from the state or any political subdi-
8 vision or public benefit corporation of the state, or any contract to
9 sell goods, services, or both of any kind or description to the state or
10 any political subdivision or public benefit corporation of the state.
11 3. The attorney general shall give notice of any conviction or any
12 consent order, judgment, or decree with respect to any violation of
13 paragraph (a) of subdivision three of section three hundred fifty-two-c
14 of this article to the governor, the temporary president of the senate,
15 the speaker of the assembly, the chief executive officers of all poli-
16 tical subdivisions and public benefit corporations of the state, and the
17 trustees of all public pension funds subject to section one hundred
18 seventy-seven-c of the retirement and social security law. The violator
19 shall, in addition to all other fines, penalties, and costs, pay the
20 reasonable costs of preparing and giving such notices.
21 § 9. Paragraph (c) of subdivision 1 of section 359-e of the general
22 business law, as added by chapter 692 of the laws of 1959, is amended to
23 read as follows:
24 (c) A ["salesman"] "salesperson" shall mean and include every person
25 employed by a broker or dealer as said terms are defined in this
26 section, for the purpose of representing such broker or dealer in the
27 sale or purchase of securities to or from the public within or from this
28 state.
29 § 10. The retirement and social security law is amended by adding a
30 new section 177-e to read as follows:
31 § 177-e. Investment barred in certain securities. 1. The trustee or
32 trustees of a fund shall not make any investment in any security or
33 securities issued by any person convicted of a misdemeanor or a felony
34 under paragraph (a) of subdivision three of section three hundred
35 fifty-two-c of the general business law, or who has entered into any
36 consent order, judgment, or decree as a result of allegations of a
37 violation of such section, whether or not such consent order, judgment,
38 or decree admits any such violation, for a period of five years or such
39 other period established in such consent order, judgment, or decree from
40 the date when such trustee or trustees shall receive notice of such
41 conviction or consent order, judgment, or decree from the attorney
42 general or from the time when such trustee or trustees shall have actual
43 knowledge of such conviction or consent order, judgment, or decree,
44 whichever is earlier.
45 2. In the event that at the time of receiving the notice from the
46 attorney general described in subdivision one of this section or of
47 receiving actual knowledge of the conviction or consent order, judgment,
48 or decree described in such subdivision one, the trustee or trustees of
49 a fund shall hold on behalf of the fund any security or securities
50 issued by a violator of paragraph (a) of subdivision three of section
51 three hundred fifty-two-c of the general business law, such trustee or
52 trustees shall divest themselves of such securities, unless in the judg-
53 ment of such trustee or trustees of such fund such divestment would not
54 be in the best interest of the beneficiaries of such fund.
55 § 11. This act shall take effect on the first day of April next
56 succeeding the date on which it shall have become a law.
NEW YORK STATE ASSEMBLY
MEMORANDUM IN SUPPORT OF LEGISLATION
submitted in accordance with Assembly Rule III, Sec 1(e)
RETRIEVE BILL
BILL NUMBER: A9831A
SPONSOR: Brodsky (MS)
TITLE OF BILL: An act to amend the business corporation law, the
limited liability company law, the partnership law, the public authori-
ties law, the general business law, and the retirement and social secu-
rity law, in relation to auditors' professional responsibility
PURPOSE OR GENERAL IDEA: Ensure integrity in audits and professional
responsibility of those who perform audits.
SUMMARY OF SPECIFIC PROVISIONS: Amends various sections of the busi-
ness corporations law, the limited liability law, the partnership law,
the public authorities law, the general business law, and the retirement
and social security law to:
* Makes a fraudulent practice the act professional misconduct by those
who issue audited financial statements and subject to investigation by
the attorney general.
* Professional misconduct includes: the definition assigned it by the
education law, and includes conflicts of interest and performing non-au-
dit services while conducting audits.
* Makes illegal the issuance of audited financial statements by those
entities being audited who knew or should have known that such audit was
subject to auditor professional misconduct.
* Outlines civil penalties for violations of this chapter.
* Prohibits the state from investing in those entities that violate
provisions of this chapter.
JUSTIFICATION: Recent developments have brought to light widespread
problems associated with professional auditing standards and account-
ability. This legislation will ensure the proper oversight of audited
financial statements for consumers of the state of New York who rely on
them.
PRIOR LEGISLATIVE HISTORY: New bill.
FISCAL IMPLICATION FOR STATE AND LOCAL GOVERNMENTS: None.
EFFECTIVE DATE: This act shall take effect on the first day of April
next succeeding the date on which it shall have become law.