Proposed Accounting Regs to Go Before Regents
Reform Includes Number of Mandatory Reportable Events

By Jay Dismukes

NEW YORK—The New York State Board for Public Accountancy in early June recommended preliminary draft regulations that could have a major impact on the accounting profession, from extending SOA-like provisions to certain companies to considering disciplinary action by federal regulators as grounds for professional misconduct.

On June 1, the state board met in Albany during a special session that introduced seven specific proposals, the bulk of which concern unprofessional conduct issues. The session, which took place at the same time state legislators were reviewing several different bills to reform the profession and strengthen financial accountability in public school districts, appeared to have found its roots in a board meeting held last November. At that time, board members learned that the State Education Department (SED) actively sought state regulatory changes with or without accompanying legislative measures. Johana Duncan-Poitier, the deputy commissioner for Higher Education and the Professions, told the board that her department planned to become more aggressive in pushing for reform and asked the board for their cooperation in approving draft regulations that could be submitted to the Board of Regents.

“We’ve been working on regs for some time…The current preliminary draft is compatible with both the Senate and Assembly bills. It doesn’t duplicate anything in either of the bills,” said Duncan-Poitier in a follow-up interview.

“The Society has not yet seen the exact wording of the proposed regs being given to the Regents,” NYSSCPA Executive Director Lou Grumet said.

However, Grumet noted that if they are similar to the ones presented to the board of accountancy, a number of them might raise serious questions of legality if there is not underlying statutory support. He added that it is highly unusual for an administrative agency to push regs at the very moment the legislature is acting in the same area. He expressed his hope that the regulations will not “muddy the legislative waters.”

Grumet said he did not understand the sudden urgency to deal with problems that have been discussed since Enron occurred.

Robert L. Gray, the board’s new chairman, stated at the June 1 meeting that “we need to proceed” with the regulatory proposals, cautioning the board that it would not be fully responsible to wait for legislative action.

One of the regulatory proposals, an issue that previously has come before the state board, would require licensee or firm reporting of criminal convictions, court decisions, disciplinary proceedings and settlement agreements to the SED. According to the draft proposal, failure by a licensee or CPA firm to submit a written report within 45 days of these and other events’ occurrence would constitute unprofessional conduct.

In addition to criminal convictions, these reportable events include the following: court decisions and arbitrations awards where liability is found for specified conduct; receipt of written disciplinary charges by a state or a federal regulatory agency; and receipt of an executed settlement agreement of a civil action or arbitration proceeding alleging specified misconduct, or a settlement agreement that is $150,000 or more, and all settlements, regardless of amount, after the fifth settlement in agreement. Reportable events also include the issuance of a restatement of a financial statement reporting the correction of an error in a previously issued financial statement of a client, when the financial restatement exceeds the planning materiality used by the licensee, registered partnership or CPA firm; and the receipt of a modified or adverse peer review report.

The Society traditionally has opposed the self-reporting, under penalty of professional misconduct, of information that is not based upon any guilty finding, such as required reporting of a pending disciplinary action or a settlement in private litigation.

Under another proposed reg, discipline of a CPA or a firm by the Public Company Accounting Oversight Board or the Securities and Exchange Commission would constitute professional misconduct under the laws of New York state, if committed in the state. Current regulations require the SED to prove its case against a licensee or firm by a preponderance of the evidence, including cases where a consent decree was signed with another regulatory body. SED officials have said in the past that, without a new regulation, the state is unable to investigate the vast majority of cases referred to them by federal regulators.

A third regulatory proposal would apply certain Sarbanes-Oxley restrictions—five-year lead or reviewing audit partner rotation and specified nonaudit service prohibitions—to publicly traded corporations, which are not currently subject to SOA. The reg originally referred to an “issuer of a publicly traded security,” but was changed in the course of the special session to “publicly traded corporation.” The board, however, could not reach a consensus on the characterization of this entity, at which point former NYSSCPA President and state accounting board member Jeff Hoops expressed his concern with the proposal, asking, “What is the definition of a publicly traded corporation?” He observed that without clarification, every company, from one with 100 or more shareholders to a hedge fund with 50 investors, could be affected by the reg, not only saddling those companies with more compliance measures but causing a huge disservice and confusion to the accounting profession as well.

“It appeared that the purpose of the rule was to reach certain companies that are not covered by Sarbanes-Oxley under federal law, but nobody could define what they are,” Hoops said after the meeting. “My only point was, I don’t know how you can propose a rule on a group of companies that are not defined.”

As a result, Hoops made a motion to table the rule until a publicly traded corporation could be defined. After the motion was defeated, Hoops and four other board members voted against the reg, which still garnered enough votes by the board to pass.

During the meeting, Hoops also noted that similar regs to the ones described above have been proposed by the accountancy board before, but ultimately had been withdrawn in deference to accounting-reform proposals being considered by the state legislature. Consequently, Hoops said the timing of these proposed regs seemed slightly at odds with the current situation in the Senate and Assembly.

“The legislature seems to be closer together than ever before, and yet now we are moving forward with regs. I don’t understand why we wouldn’t wait until after we see what happens in the legislature,” Hoops said.

At the time of press, proposed regs were expected to be presented to the state Board of Regents’ Professional Practice Committee in late June. Prior to this discussion, Duncan-Poitier said the SED is seeking input from all key stakeholders.

“In the event that it is necessary to modify the draft because something has changed legislatively, and assuming a bill passes, there is plenty of time to do that,” she said.