Questions and Answers About Senate Bill 4402

Why is this legislation necessary?

The proposed legislation has two purposes: 1) to modernize the current law regulating the profession, and 2) to clarify the scope of practice of public accountancy.

The principal purpose of the proposed legislation is to bring the practice into the 21st century. The current law (Art. 149 of the Education Law) was first enacted over 50 years ago, in 1947, a time when the terms "review," "compilation," and "prospective financial information" did not exist in the profession. The law has not changed in any substantial form since then. In this age of jet travel, the Internet, and intense competition among states for corporate businesses, the traditional structure of state by state regulation of the profession of public accountancy is obsolete.

In today's global and technology-driven marketplace, it is vital that New York state licensed CPAs be able to practice their profession beyond state lines. Differing requirements for CPA certification, reciprocity, temporary practice, and other aspects of state accountancy legislation constitute artificial barriers to the interstate practice and mobility of CPAs. Such barriers hurt New York CPAs disproportionately because the state of New York is the principal place of business or headquarters for many businesses and companies, a large number of which have out-of-state subsidiaries or plants.

The second purpose of the legislation is to clarify scope of practice. The current definition of scope of practice is vague, imprecise, and outdated and, therefore, needs to be clarified. Professions are established and regulated in law because the government has determined that it is in the best interest of the public to impose a minimum level of education and experience for those who hold themselves out as having special knowledge or skill in a particular area that serves the public. Since practice of the profession of public accountancy has changed dramatically over the past 50 years, it is important for the public to know more precisely the type of services that deserves public protection.

Of the many services currently being performed by CPAs, government intervention is clearly justified in those that are relied upon by the public, such as audits and other assurance services performed in accordance with professional technical standards. The proposed legislation replaces the current definition with one that clearly identifies the activities and services performed by CPAs that justify particular attention and regulation by the government.

As more CPAs provide their services to the public through nontraditional business entities, the law must be clarified for the public to know what type of services will be subject to government regulation.

Since the proposed definition of scope of practice is limited to attest engagements, how will the services provided by a CPA that are outside the proposed scope be regulated?

Under state law, the definition of professional misconduct includes practicing the profession fraudulently or with gross incompetence or gross negligence. Thus, a CPA who provides professional services fraudulently or with gross incompetence or negligence will be subject to disciplinary proceedings by the State Education Department.

In addition, CPAs who engage in tax preparation or advice are regulated by the rules of the IRS. Similarly, the SEC promulgates rules that govern those who practice before the SEC.

What services can a nonlicensed individual perform under this new act?

Under the proposed legislation, only attest engagements will be subject to state regulation. Other than these services that provide a level of assurance to the public, the unlicensed individual may continue to provide a host of services to the public, including bookkeeping, tax preparation and consulting, management, and financial advice.

Can a nonlicensed individual prepare and submit financial statements?

Yes. There is nothing in either the current law or the proposed legislation to prohibit any person, licensed or not, from preparing financial statements for the public. However, only a licensed individual through a registered CPA firm can provide assurances on financial statements.

Licensure Requirements

Under the proposed legislation, the state licensure requirements change the state's current education and experience requirements to conform with other states and with State Education Department regulations.

Education Requirement--150 hours

What is the purpose of requiring a standard of 150 hours of education in this state?

In today's technology-driven marketplace, there is a growing demand for a more educated workforce. To better serve the public, a higher educational requirement is needed for those entering the profession.

Last year, the New York state Board of Regents decided New York should adopt the 150-hour curriculum effective for persons sitting for the CPA examination after August 1, 2009. The proposed legislation merely accelerates that effective date to 2005, the earliest date that would not affect currently matriculated students.

Forty-four U.S. jurisdictions, including New Jersey and Connecticut, have adopted the 150-hour curriculum (The curriculum becomes effective in most of those before January 1, 2001). New York needs the 150-hour curriculum to stay abreast of these other jurisdictions.

New York City and state continue to be the financial center of the United States and one of the world's great financial centers. CPAs' clients in New York range from corner stores to multinational corporations. The users of CPA services in New York need the best trained, best qualified CPAs in the world.

The proposed legislation also embraces the concept of "substantial equivalency" to permit CPAs to more easily practice across state lines. To be substantially equivalent with other jurisdictions, New York needs the 150-hour curriculum. Without it, New York CPAs would face an unfair imbalance. Other states' CPAs could practice in New York while New York CPAs would be unable to practice in the other states.

Currently, accounting students who sit for the CPA examination take on average 140 hours of college credit. Thirty percent of first-time examination candidates have taken 150 hours or more, and 60 percent have 130 hours or more.

Most comparable professions, such as law and medicine, require additional graduate education ranging from three to four years. It is in the public interest to require a higher educational achievement for the profession of public accountancy.

Will this place an undue burden on current students, particularly students from low-income households?

No. This requirement will not take effect until 2005, so that it will allow plenty of time for potential candidates to comply with the new requirement. However, it is important to note that CPAs who possess only
120 hours of education may have difficulty obtaining a license from states that require the 150 hours.

Experience Requirement--One Year

What is the purpose of the one-year requirement? Will this lower standards for the profession?

The one-year experience requirement is not new. Current State Education Department regulations allow any applicant who has received an education consisting of 150 semester hours in an approved program in accountancy to have one year's experience to be eligible for licensure. (The alternative is 120 semester hours and two years' experience.) The proposed legislation will now replace the two tracks with one track--150 semester hours and one year's experience. It is important to note that SED has promulgated in its regulations the elimination (as of August 1, 2004) of the 120 hours/two-year track.

What is new, under the proposed legislation, is allowing nonattest engagements to qualify as experience. Under current SED regulations, the applicant must demonstrate "diversified experience involving the application of generally accepted accounting principles and the application of generally accepted auditing principles in the practice of public accountancy." The experience can be obtained in private or governmental accounting or auditing work, and must demonstrate that the applicant is able to conduct an independent audit of a small but complex entity.

The current requirements have become a major barrier for young accountants seeking certification. They were written at a time when audit and other assurance services constituted a majority of the billings of a CPA or CPA firm. Such services now constitute a smaller part of the practice of many mid-size and smaller CPA firms. Many small firms or sole practitioners today do not even engage in audit or review services. Potential candidates are finding it more and more difficult to obtain the one or two years' experience in generally accepted accounting principles and generally accepted auditing standards. Maintaining the current requirements will adversely affect the practices of the small firms and sole practitioners. The profession is already facing a hiring crisis.

Under the proposed legislation, an applicant would be able to fulfill the experience component by working in CPA firms that do not engage in attest services.

Moreover, the proposed legislation, consistent with the UAA, changes the focus with respect to assurance services from the individual to the CPA firm, based on the conclusion that it is the firm, and not the individual, that issues reports. Accordingly, the proposed legislation tightens and strengthens the oversight of attest services by requiring all firms that engage in attest services to be registered by the department and to have their attest practice, including the qualifications of those in the firm who perform or supervise performance of the firm's attest engagements, reviewed once every three years. The proposed legislation also will require any CPA who performs or supervises attest engagements to meet the experience requirements set forth in the professional standards for such services.

Finally, it is instructive to compare the legislation's one-year experience requirement with the experience requirements of other professions:

Attorneys - none

Architects - eight years of combined education and
experience

Engineers - up to four years, depending upon amount of education

Physicians - one year of post-graduate hospital training

Commissions and Referral Fees

The practice of the CPA has changed dramatically. Due to CPAs' intimate knowledge of the financial position of their clients, CPAs are now asked to serve as financial planners or investment advisors to their clients. As such, a CPA may become involved in financial or investment vehicles that lend themselves to a commission- or fee-based arrangement. At the same time, there could be instances where receipt of a commission or fee could compromise the CPA's independence or integrity. The proposed legislation merely clarifies those circumstances under which a CPA may be paid a commission or fee for his or her services.

A CPA cannot receive a commission or fee for services provided to any client for whom the CPA or the CPA's firm is retained to perform attest engagements. This prohibition applies to branch offices of the retained CPA firm. Thus, if a New York City-based CPA firm performs attest engagements for ABC company, the CPA firm's Albany office cannot receive commissions or fees for performing nonattest services for ABC.

Finally, a CPA who intends or expects to receive a commission or fee must provide written notice to the client of the commission or fee arrangement. Not only must the client be fully informed beforehand, the CPA must weigh the risk of losing a client over such an arrangement.

Would the authority to accept commissions and fees compromise the independence of a CPA?

No. First of all, it is important to remember that, under the proposed legislation, a CPA can only accept commissions or a referral fee for services provided to a client for whom the CPA is not engaged to perform attest functions. Under the Code of Professional Conduct, a CPA must maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. Moreover, any CPA who performs audit or other attestation engagements must be independent "in fact and in appearance." By establishing a wall between attest and nonattest clients, the legislation protects the independence of the CPA.

The legislation provides further protection to the public by requiring any CPA who is paid or expects to be paid a commission or fee to provide written disclosure of such payment or acceptance to the client.

Will the CPA steer clients to products and services offered by the non-CPA side of the business?

There is nothing inherently wrong with steering clients to other products or services offered by the firm or an affiliated entity, provided that there are sufficient protections for the public.

In this case, the public's interest is fully protected even on the non-CPA side of the business. As indicated above, under the proposed legislation, the CPA who expects to be paid a fee must inform the client of this fact. The informed client is then free to accept or decline the other services.

Clients also are protected under the NYSSCPA Code of Professional Conduct, which requires members to perform all professional responsibilities with "the highest sense of integrity." Integrity requires that "service and public trust not be subordinated to personal gain and advantage." Also, under the Rules of the Board of Regents, "unprofessional conduct" includes exercising undue influence on a client, including promotion of the sale of services and goods in such manner as to exploit the client for the financial gain of the practitioner or third party.

Will the CPA inform the client if the product or service is financially flawed?

Yes. Under the NYSSCPA Code of Professional Conduct, members shall perform all professional duties with the highest sense of integrity, and maintain objectivity in the performance of such duties, which requires members to be honest and candid.

The principle of due care requires members to discharge professional responsibilities with competence and diligence. It imposes on members an obligation to perform professional services to the best of their ability in the best interest of those for whom the services are performed.

Will the CPA recommend an insurance policy because it pays the highest commission?

As described above, unless the CPA honestly believes that the policy is in the best interest of the client, by recommending such a policy the CPA would be violating the NYSSCPA Code of Professional Conduct and could be committing unprofessional conduct.

What happens to an out-of-state CPA who commits in this state an act that is subject to disciplinary charges under state laws and regulations?

Under the proposed legislation, the State Education Department is authorized to take disciplinary action against any out-of-state CPA who commits professional misconduct within this state, and is also required to file a complaint with the licensing entity of the out-of-state CPA for appropriate action.

States are finding that they have no legal authority over individuals and companies licensed in another state who practice their profession (e.g., pharmacists who sell prescriptions) on the Internet. This legislation would give the State Education Department express legal authority to take disciplinary action against out-of-state CPAs who commit professional misconduct against a New York state resident.

Under the new ownership requirements, what protections exist to ensure that licensees actually will be in control?

The proposed legislation specifically limits non-CPA ownership to 49 percent of the equity and voting interests of a firm. This will ensure that only licensed individuals make the management decisions for the firm. It is important to note that the legislation uses the term "equity interest," which connotes ownership, instead of "financial interest," which may be construed to mean revenue or profit sharing. The use of "equity" clarifies that licensees will actually be in control.

The peer review process will ensure that the firm's practice is consistent with federal and state laws and regulations, as well as professional standards.

Does this legislation violate antitrust laws?

No. In order for a practice or conduct to be considered in violation of antitrust laws, it must be shown that its effects are anticompetitive, monopolistic, or an illegal restraint of trade.

Rather than being anticompetitive or monopolistic, this legislation will benefit the public by clarifying the scope of practice of the profession. The current law is unclear as to what services are reserved for the licensed professional.

The proposed legislation will now specify the profession's scope of practice to include only attest engagements, that is, those services that provide assurances to the public and, thus, should be subject to government oversight and regulation. The legislation does not deny the public the full range of choices or restrain competition in the marketplace.

What are the other states doing?

As of January 1999, only Tennessee has enacted the UAA into law intact. Seven states have laws in place that incorporate the core provisions of the UAA (Alabama, Arkansas, Ohio, Oregon, South Carolina, Texas, and West Virginia). About a dozen states have bills introduced or pending in their state legislatures.