Accounting & Auditing

Summary judgements from both sides were presented in U.S. District Court for the Northern District of Florida. The judge, Maurice M. Paul, dismissed the State Board's summary judgement and ruled in favor of Stephen Miller, CPA, Senior Managing Director of the Tampa office of American Express Tax and Business Services (TBS). TBS was dismissed as the plaintiff in this case as it did not wish to call itself a CPA firm and had no actual complaint. However, Stephen Miller, CPA wished to call himself a CPA while working for TBS and claimed his first amendment right to free speech was being infringed upon by the Florida Board. The Court agreed and cited the Ibanez Supreme Court case. The decision is very narrow and does not preclude the Florida Board from requiring a disclaimer regarding the non-CPA firm where the CPA is employed. The Judge, stated that the disclaimer could not be so burdensome as to effectively abrogate the speaker's constitutional right to engage in such commercial speech.

The decision stated that the Florida Board didn't present any evidence of real harm to the public by CPAs holding out as CPAs: it only made claims of potential harm. Perceived potential harm is not good enough. Of course, there is no history of this activity from which to draw any evidence of real harm. That could now change. This decision affects Florida only.

Florida Accountancy Board Appeals American Express Decision

The Florida Board of Accountancy has filed an appeal with the U.S. Court of Appeals for the Eleventh Circuit in the case of American Express Tax and Business Services, Inc., and Stephen M. Miller v. George Stuart et al. American Express Tax and Business Services, Inc. has cross-appealed to the extent that the final judgment denied the company's standing to pursue its claims for relief.

The Florida Institute of CPAs, the AICPA, and the National Association of State Boards of Accountancy (NASBA) have all filed individual Amicus Curiae Briefs in support of the Florida Board.

The decision stated Stephen Miller had the Constitutional First Amendment Right to hold out as a CPA while working in a non-CPA firm—American Express Tax and Business Services (TBS). This decision invalidated two provisions of Florida's regulatory scheme—the requirement that a CPA practice public accountancy only in a licensed firm and the requirement that a firm must be owned and managed by CPAs in order to be licensed.

American Express claims this is a freedom of speech matter; if you are a licensed CPA, you should be able to hold yourself out as such. The Florida Board and its supporters claim the court ignored the fact that "holding out" is an essential element of the definition of the practice of public accountancy, whose presence or absence determines whether the conduct in question is subject to regulation. Holding out as a CPA in an unlicensed firm is prohibited conduct.

The Florida Board further maintains that the holding out requirements are permissible under the First Amendment. They directly advance important state interests in fostering consumer protection and the professionalism of the accounting profession by ensuring that CPAs, who use their license to practice public accounting and to attract business, work for firms that satisfy all of Florida's regulatory requirements for the use of such a license, including the firm licensure requirements.

Texas Board of Accountancy v American Express

The Texas Board of Accountancy sued American Express Tax and Business Services (TBS) for practicing public accountancy without a license or registration with the Texas Board of Public Accountancy. The Texas Board said that TBS is in violation of Texas statutes because TBS, which employs CPAs, affixed its name to a financial statement. A compilation report using SSARS language was issued and signed by TBS.

Recently the Texas Board of Public Accountancy adopted a rule that states that any licensee in good standing may use the CPA designation, regardless of whether the CPA is practicing for clients or is employed in industry or government accounting. According to a press release from the Texas Board "This rule brings Texas into compliance with the U.S. Supreme Court ruling in Ibanez v. the Florida State Board of Public Accountancy stating that a Florida Attorney/CPA may refer to herself as a CPA, even though employed full-time as an attorney in a law firm." The Board's rules state that any CPA practicing in an entity not qualified to register with the Board (a non-CPA firm) who uses the CPA designation must include an asterisk by the name of the employer stating that the employer is "Not qualified to register with the Texas Board of Public Accountancy to practice public accountancy in Texas." This requirement does not apply to CPAs performing services as a licensed attorney.

Texas has an unusual provision regarding holding out. Once a CPA is licensed in Texas, it doesn't matter if he or she holds out as being a CPA or not. The only way a CPA can be free of the responsibility of the license is to either have it revoked for disciplinary reasons or to surrender it. If the license is surrendered, the only way to get it back is to take the CPA examination again.

Also, in Texas a CPA (whether holding out as a CPA or not) must use SSARS language on a compilation or review report. A CPA working for American Express or any non-CPA firm in Texas has a dilemma. SSARS language is properly reserved for licensees and CPAs must use SSARS language if a compilation report is prepared. However, a non-CPA firm cannot use SSARS language. It appears that American Express may not be in a good position.

American Express CPAs Investigated by Texas Board

On April 23, 1996, a Texas state court ruled that American Express, or any non-CPA firm, could not use SSARS language on its reports on financial statements. CPAs working for American Express were put in a difficult position. Professional standards require CPAs to use SSARS language on compilation and review reports. Reports on financial statements are coming out of American Express without SSARS language (as the court mandated) so American Express CPAs are being investigated for possible violation of professional standards.

Massachusetts Non-CPAs Can Call Themselves Accountants

David Volin, a non-licensee, compiled financial statements and provided other business and accounting services. On his business letterhead and in his advertising materials he referred to himself as an "accountant," to his firm as "experienced accountants," and to his membership in the National Society of Public Accountants (NSPA) and other organizations. His advertising further asserted that he is a "professional" who provides "quality accounting" services, that he aspires to provide "the very best accounting services available," and that he is "one professional for all your financial needs."

Volin attached a transmittal letter to financial statements which he prepared on his business letterhead which stated, "The accompanying financial statements and management reports...have been prepared independently by us for your use in accordance with our engagement agreement. We have prepared and assembled the financial statements and management reports from information provided to us by management."

Volin's name followed by the letters "NSPA" appeared at the bottom of every page of the financial statements.

The Massachusetts Board of Accountancy requested that Volin enter into a consent agreement which would prohibit him from engaging in such practices in exchange for the Board's promise to not initiate criminal prosecution. Volin refused to execute the consent agreement and commenced action against the Board.

In Volin v. Massachusetts Board of Public Accountancy, the Massachusetts Supreme Judicial Court affirmed an earlier Superior Court ruling. The Superior Court ruled that Volin and other non-licensees can hold themselves out publicly as accountants and as providing accounting services. They may not use any advertising, letterhead, or work product which contains their affiliation with the National Society of Public Accountants or its initials NSPA. They can not describe their accounting services or modify or enhance their title as accountants with the words "professional," "independent," "experience," or "quality." They may not advertise aspirations to provide "the very best" accounting services, or their ability to address "all" financial/accounting needs.

They may, as accountants, issue financial statements. They may not use language in financial statements or letters transmitting financial statements to the effect that they were prepared "independently" or from "information provided by management" if submitting such financial statements as an accountant.

Although both sides are disappointed with the decision, at this writing no appeals are pending.

Sources: Circuit Court of the Second Judicial Circuit in and for Leon County, Florida IDS Financial Services, Inc. a Delaware corporation, and Stephen M. Miller v. State of Florida, Department of Business and Professional Regulation, division of Certified Public Accounting, United States District Court for the Northern District of Florida, Tallahassee Division. IDS Financial Services Inc. a Delaware corporation, and Stephen M. Miller v. ..Florida Department of Business and Professional Regulation and...Florida Board of Accountancy.

Plaintiffs' Motion for Summary Judgment and Defendants' Motion for Summary Judgment.

Public Accounting Report, May 15, 1996.

Board of Accountancy, et al. Case No. 94-1298. United States District Court for the Northern District of Florida Tallahassee Division, American Express Tax and Business Services, Inc., and Stephen M. Miller, Plaintiffs, v. George Stuart et al., Defendants. Case No. TCA 94-40526-MMP.

Brief of Amicus Curiae Florida Institute of Certified Public Accountants in Support of Appellants and NASBA's State Board Report, April 1996.

Texas Public Accountancy Act, Sections 501.2; 501.3; 501.4; 501.40.

Case No. 94-040526-MP. David R. Volin & another (Massachusetts Society of Independent Accountants, Inc.) v. Board of Public Accountancy SJC-06892.

Commissions and Contingent Fees

Mississippi Supreme Court Upholds Commissions Rule

In the case of Mississippi State Board of Public Accountancy v. Stephen W. Gray, the Mississippi Supreme Court ruled that the Mississippi State Board of Accountancy's revocation of Mr. Gray's CPA license for the acceptance of commissions for securities sales to clients was appropriate. The court said the Board "was acting within its regulatory power when it revoked Gray's license. There is substantial evidence in the record to support the decision, which was not arbitrary or capricious or in violation of Gray's rights."

Mr. Gray had a broker's license and served as a registered representative of H.D. Vest Investment Securities, Inc. He didn't deny receiving commissions but challenged the legality of the board's blanket prohibition against an accountant's negotiation of a private contract with his client.

Sources: NASBA's State Board Report, July 1996.

California's Commissions Prohibition and Holding Out Statutes Upheld in U.S. Appeals Court

Ross Johnson, a California CPA who is affiliated with H.D. Vest, Inc., a financial products firm, brought an action in the United Stated District Court in Sacramento seeking to enjoin the California Board of Accountancy from disciplining him for taking commissions while holding out to the public as a CPA. He claimed the California Board was interfering with his First Amendment right to call himself a CPA while taking commissions. The Ninth Circuit Court concluded that California's statute did not ban Johnson from holding out to the public as a CPA. It prohibited him from taking commissions while doing so. The statute did not restrict commercial speech but rather the conduct of taking commissions. The Court said: "Johnson can identify himself in advertising and letterhead as a CPA ... What Johnson is not permitted to do under the combination of sections 5051 and 5061, is to use his various professional licenses to engage in commission-yielding transactions that create a conflict between his interests and those of his client.." This decision is final.

Sources: Ross A. Johnson v. State of California Board of Accountancy, No. CV-91-01250-LLK: 9th Circuit Court of Appeals. NASBA's State Board Report, August 1995.

Louisiana's Commission Ban Upheld

The Court of Appeals of the Fourth Circuit, State of Louisiana, found that the State Board of Certified Public Accountants of Louisiana did not act in excess of its statutory authority when it found Kenneth Don Earles in violation of its rule on incompatible occupations. Mr. Earles represents some of the same clients as both a CPA and a commission-based securities broker. He claimed that the Board's decision should be vacated because it was an abuse of discretion. The original court agreed but the appeals court reinstated the Board's decision. The Board's rule in question states, "A licensee shall not concurrently engage in the practice of public accountancy and in any other business or occupation which impairs his independence or objectivity in rendering professional services."

The decision of the Court of Appeals stated, "The Board's very detailed written opinion makes it clear that the Board was concerned that Mr. Earles' serving a client as a commission-based securities broker creates a conflict of interest as to Mr. Earles' serving the same client as a CPA. A CPA must exercise professional judgment as to the financial affairs of a client. That professional judgment must not be affected, not even subconsciously, by the prospect of financial gain to the CPA. If the CPA is receiving commissions on the financial transactions of the client (in this case, securities transactions) then there is the potential, or at least the appearance, that the CPA's judgment as to the client's financial affairs could be affected by the CPA's self-interest... the issue is whether the Board, whose decision is entitled to the presumption of validity because of its accounting expertise and because it is applying its own rule, acted in excess of its statutory authority or was arbitrary and capricious and abused its discretion in deciding that Mr. Earles' objectivity as a CPA could be impaired... Because the Board's analysis is rational and its conclusion reasonable, its decision should not be vacated on judicial review."

Sources: The Court of Appeal of the Fourth Circut, State of Louisiana in the case of Kenneth Don Earles v. State Board of Certified Public Accountants of Louisiana No. 95-CA-0505. NASBA's State Board Report, January 1996.

New Jersey to Allow Commissions and Contingent Fees

On April 18, 1996, the New Jersey Board of Accountancy approved changes to its rules and regulations with respect to commissions and contingent fees. Under the new rule, accounting firms will be permitted to receive contingent fees for professional services, except where the firm performs the attest function for the client involved. A contingent fee for the preparation of an original amended tax return or claim for a tax refund is prohibited.

The Board also changed its rule on commissions and referral fees. An accounting firm will be able to receive a commission for (1) recommending or referring to a client any product or service, or (2) recommending or referring any product or service to be supplied by a client, except where the firm performs the attest function for the client involved. Permitted commissions and referral fees must be disclosed to the client in writing contemporaneously with the referral or recommendation. The changes are expected to become effective in September 1996, after a public comment period.

Sources: NASBA "Highlights of Recent Regulatory Developments" Regional Meeting,

June 9-12, 1996.

Accreditation and Specialization

AICPA Action

AICPA council approved a proposal relating to accreditation. Accreditation is different than specialization as it asserts a CPA has passed an examination and actively practices in the area. Under the proposal:

Any accreditation program approved by the AICPA Board or Directors must be submitted to AICPA council for final approval.

Members must accumulate 450 hours of relevant experience in the three-year period before they take the appropriate examination. After they pass the examination, they must have 600 hours of experience and 60 hours of CPE in their designated area during each successive three-year period.

Proponents of a new credential must develop a business plan that, among other things, indicates clear evidence of members' demand.

After a program has been approved, the AICPA Board of Directors will support it by establishing a separate committee and any needed budget.

Current Status

AICPA currently has an accreditation in Personal Financial Planning.

AICPA Council will vote in October 1996 whether to approve the accreditation on Business Valuation.

Member involvement is a key part of this process.

Sources: Florida Legislation H.B.1635 and Report of the AICPA Special Task Force on Specialization. CPA Specialization Research, Texas Society of CPAs, June 16, 1995.

Proposal to Issue CPA License by AICPA

The lack of uniformity of accountancy regulations among the 54 U.S. jurisdictions has prompted an interesting proposed solution. In an article appearing in the March 1996 issue of the Journal of Accountancy, Robert Mednick, Vice-Chair of the AICPA, recommended a new method of licensing CPAs, which would include an AICPA-sponsored national accreditation service. This service would permit all individual who earned the national certification—whether in public practice, industry, education, or government—to call themselves CPAs in any U.S. jurisdiction, and leave the states to license firms that perform the attest function. Obviously, the ramifications of this proposal are significant and will require close monitoring.

Sources: An article appearing in the March 1996 issue of the Journal of Accountancy, by Robert Mednick, Vice-Chair of the AICPA.

Joint NASBA and AICPA Committee on Structure and Regulation of the Profession

Joint AICPA and NASBA Committee Created

The AICPA and the National Association of State Boards of Accountancy have combined their efforts and formed a 12-member joint committee "to study closely the current regulatory system and develop a shared vision for the future of the profession that will protect the public interest while enabling CPAs to better compete in a changing practice environment," said Barry Melancon, the AICPA's president and chief executive officer.

The joint committee was formed after NASBA voiced some concern over the formation of the AICPA Special Committee on Regulation and Structure of the Profession. NASBA became more concerned with the publication of an article in the Journal of Accountancy by vice chairman Robert Mednick that among other things recommended that individual CPAs be licensed on a national basis, with CPA firms being registered or licensed on a state basis.

The Joint committee initially was planning to complete the project in time for the October 1996 annual meetings of the two organizations. The joint committee has not released any news of its progress. Some observers do not believe the project will be completed by October 1996.

Sources: Various communications from the AICPA and NASBA.

AICPA Task Force to Study Non-Audit Services

At the end of December 1995, the Public Oversight Board instructed the AICPA to address the performance of certain non-audit services that are inherently incompatible with the performance of attest services, and the structures by which CPA firms are entering into arrangements with entities that are not part of the firm--including the licensing of a firm's name. The AICPA formed a task force, which expects to issue a report to the SEC Practice Section Executive Committee by the summer of 1996. There are, however, many variables that could impact this timetable.

Sources: Communications from representatives of the AICPA.

General Accounting Office Reviews Performance of the Profession

The GAO is about to issue a "report card" on the performance of the profession in recent years. Part of the project was to formally classify and catalog the recommendations made by various groups—the Cohen, Anderson, and Treadway commissions; the Public Oversight Board of the SECPS; various AICPA special committees; the SEC; etc—to improve the performance of the accounting profession in serving the public interest. The project involves a review of all the reports and recommendations that have been made of the past two decades, the responses to those recommendations, and the significance of the outstanding issues. GAO has established an advisory committee of high-level people who use the services of the profession to assist in developing conclusions about the review. The recommendations have been grouped into the following areas:

Setting accounting and auditing standards.

Maintaining auditor independence.

Detecting fraud and illegal acts.

Evaluating accounting measures.

Risks and uncertainties.

Audit quality.

Boards of directors/audit committees.

Internal control reporting.

Corporate accountability.

Auditor's communication with users.

Expanded financial reporting and the auditor's role.

The project was undertaken in response to a request from a Congressional committee looking at liability reform for the profession. The report is complete and has been given to the parties involved. Release is expected in September 1996 prior to the expiration of the term of Charles Bowsher as U. S. Comptroller General.

Sources: "Regulating Derivatives to Protect the Public," An Interview with GAO's Donald H. Chapin appearing in the October 1995 issue of The CPA Journal.

AICPA Adopts Ethics Interpretations and Rulings

The AICPA has adopted the following ethics interpretation and rulings which became effective with their publication in the August 1996, Journal of Accountancy.

Interpretation 101-13 Under Rule of Conduct 101: Extended Audit Services

A member or a member's firm (the member) may be asked by a client, for which the member performs a professional service requiring independence, to perform extended audit services. These services may include assistance in the performance of the client's internal audit activities and/or an extension of the members audit service beyond the requirements of generally accepted auditing standards (hereinafter referred to as "extended audit services").

A member's performance of extended audit services would not be considered to impair independence with respect to clients for which the member also performs a service requiring independence, provided that the member or his or her firm does not act or does not appear to act in a capacity equivalent to a member of client management or as an employee.

The responsibilities of the client, including its board of directors, audit committee, and management, and the responsibilities of the member, as described below, should be understood by both the member and the client. It is preferable that this understanding be documented in an engagement letter that indicates that the member may not perform management functions, make management decisions, or act or appear to act in a capacity equivalent to that of an employee.

A member should be satisfied that the client understands its responsibility for establishing and maintaining internal control and directing the internal audit function, if any. As part of its responsibility to establish and maintain internal control, management monitors internal control to assess the quality of its performance over time. Monitoring can be accomplished through ongoing activities, separate evaluations or a combination of both.

Ongoing monitoring activities are the procedures designed to assess the quality of internal control performance over time and that are built into the normal recurring activities of a entity and include regular management and supervisory activities, comparisons, reconciliations and other routine actions. Separate evaluations focus on the continued effectiveness of a client's internal control. A member's independence would not be impaired by the performance of separate evaluations of the effectiveness of a client's internal control, including separate evaluations of the client's ongoing monitoring activities.

The member should understand that, with respect to the internal audit function, the client is responsible for—

Designating a competent individual or individuals, preferably within senior management, to be responsible for the internal audit function.

Determining the scope, risk and frequency of internal audit activities, including those to be performed by the member providing extended audit services.

Evaluating the findings and results arising from the internal audit activities, including those performed by the member providing extended audit services.

Evaluating the adequacy of the audit procedures performed and the findings resulting from the performance of those procedures by, among other things, obtaining reports from the member.

The member should be satisfied that the board of directors and/or audit committee is informed of roles and responsibilities of both client management and the member with respect to the engagement to provide extended audit services as a basis for the board of directors and/or audit committee to establish guidelines for both management and the member to follow in carrying out these responsibilities and monitoring how well the respective responsibilities have been met.

The member should be responsible for performing the audit procedures in accordance with the terms of the engagement and reporting thereon. The day-to-day performance of the audit procedures should be directed, reviewed, and supervised by the member. The report should include information that allows the individual responsible for the internal audit function to evaluate the adequacy of the audit procedures performed and the findings resulting from the performance of those procedures. This report may include recommendation for improvements in systems, processes, and procedures. The member may assist the individual responsible for the internal audit function in performing preliminary audit risk assessments, preparing audit plans, and recommending audit priorities. However, the member should not undertake any responsibilities that are required, as described above, to be performed by the individual responsible for the internal audit function.

Performing procedures that are generally of the type considered to be extensions of the member's audit scope applied in the audit of the client's financial statements, such as confirming of accounts receivable and analyzing fluctuations in account balances, would not impair the independence of the member or the member's firm even if the extent of such testing exceeds that required by generally accepted auditing standards.

The following are examples of activities that, if performed as part of an extended audit service, would be considered to impair a member's independence:

Performing ongoing monitoring activities or control activities (for example, reviewing loan originations as part of the client's approval process or reviewing customer credit information as part of the customer's sales authorization process) that affect the execution of transactions or ensure that transactions are properly executed, accounted for, or both, and performing routine activities in connection with the client's operating or production processes that are equivalent to those of an ongoing compliance or quality control function.

Determining which, if any, recommendations for improving the internal control system should be implemented.

Reporting to the board of directors or audit committee on behalf of management or the individual responsible for the internal audit function.

Authorizing, executing, or consummating transactions or otherwise exercising authority on behalf of the client.

Preparing source documents on transactions.

Having custody of assets.

Approving or being responsible for the overall internal audit work plan including the determination of the internal audit risk and scope, project priorities and frequency of performance of audit procedures.

Being connected with the client in any capacity equivalent to a member of client management or as an employee (for example, being listed as an employee in client directories or other client publication, permitting himself or herself to be referred to by title or description as supervising or being in charge of the client's internal audit function, or using the client's letterhead or internal correspondence forms in communications).

The foregoing list is not intended to be all inclusive.

Ruling No. 103 Under Rule 101: Member Providing Attest Report on Internal Controls

Question--If a member or a member's firm (member) provides extended audit services for a client in compliance with Interpretation 101-13, would the member be considered independent in the performance of an attestation engagement to report on the client's assertion regarding the effectiveness of its internal control over financial reporting?

Answer--Independence would not be impaired with respect to the issuance of such a report if all of the following conditions are met:

1. The member's activities have been limited in a manner consistent with Interpretation 101-13.

2. Management has assumed responsibility to establish and maintain internal control.

3. Management does not rely on the member's work as the primary basis for its assertion and accordingly has (a) evaluated the results of its ongoing monitoring procedures built into the normal recurring activities of the entity (including regular management and supervisory activities) and (b) evaluated the findings and results of the member's work and other separate evaluations of controls, if any.

Ruling No. 104 Under Rule of Conduct 101: Member Providing Operational Auditing Services

Question--As part of an extended audit engagement, a member or member's firm (member) may be asked to review certain of the client's business processes, as selected by the client, for how well they function, their efficiency, or their effectiveness. For example, a member may be asked to assess whether performance is in compliance with management's policies and procedures, to identify opportunities for improvement, and to develop recommendations for improvement or further action for management consideration and decision making. Would the member's independence be considered to be impaired in performing such a service?

Answer--The members independence would not be considered to be impaired provided that during the course of the review the member does not act or appear to act in a capacity equivalent to that of a member of client management or of an employee. The decision as to whether any of the member's recommendations will be implemented must rest entirely with management.

Ruling No. 105 Under Rule of Conduct 101: Frequency of Performance of Extended Audit Procedures

Question--In providing extended audit services, would the frequency with which a member performs an audit procedure impair the member's independence?

Answer--The independence of the member or member's firm would not be considered to be impaired provided that the member's activities have been limited in a manner consistent with lnterpretation 101-13 and the procedures performed constituted separate evaluations of the effectiveness of the ongoing control and monitoring activities/procedures that are built into the client's normal recurring activities.

Ruling No. 191 Under Rule 501 and No. 22 Under Rule 301: Member Removing Client Files From an Accounting Firm

Question--If a member terminates his or her relationship with a firm, may he or she take original or copies from the firm's client files or proprietary information without the firm's permission?

Answer--No, except, where permitted by contractual arrangement. If upon leaving the firm, the member takes any of the firm's client files or proprietary information without permission, the member would be committing an act discreditable to the profession in violation of Rule 501.

If the member provides original or copies of the firm's client files, records, or workpapers to another firm without the prior specific consent of each client, the member would also be in violation of Rule 301, Confidential Client Information.

Sources: Journal of Accountancy, "Official Releases" August 1996. See also "Internal Audit Outsourcing" in the October 1996 issue of The CPA Journal.