State Board Recommends Competency Amendment
Proposal Would Grant Most CPAs Year to Meet Competency Requirements

By COLLEEN LUTOLF Trusted Professional Staff

NEW YORK - New York-licensed CPAs may soon have a choice in how they meet the state's new competency requirement for attestation services, now that the State Board for Public Accountancy has voted to recommend that the 1,000-hour experience requirement be waived if a CPA works for a quality-, or peer-, reviewed CPA firm.

New emergency regulations, which implement the state's accountancy reform law, require any New York-licensed CPA who supervises, signs or authorizes someone else to sign the accountants'report on a financial statement to have documented 1,000 hours of experience preparing or reviewing financial statements or reports within the past five years and to have earned 40 hours of continuing professional education (CPE) in accounting, auditing or attest during the three years immediately prior to performing those services.

But when those regulations were release for public comment, the State Education Department (SED) received a lot of push-back from small practitioners and CPAs in industry on the competency requirement as written, specifically the 1,000-hour requirement, said state board Executive Secretary Daniel J. Dustin at the board's Sept. 16 meeting. Dustin gave an example of a tax practitioner who does one audit a year, or perhaps has staff that may have the hours to meet the competency requirement, but he or she does not.

"At that level, [that individual] will never reach 1,000 hours over a five-year period," Dustin said.

So the state board set out to address their concerns.

"Whether the 1,000-hour requirement is right or wrong …the unintended consequence of the 1,000-hour requirement was that it created a situation where we were removing the ability of many licensees in the state to do something that they had been doing properly and professionally for their entire career," said board member Henry J. Krostich.

After discussing different options with several board members prior to the board meeting, the group came up with the peer review solution.

"While peer review may not cover every partner, it isn't as if the firm has different administrative controls for one partner versus another partner," Dustin said. "If you deem a system to be working properly, then theoretically, it should apply to all partners or all owners and not just the ones being peer reviewed. That's the safeguard we saw in using the peer review model."

Board Chairman Richard D. Isserman pointed out to board members that "once you go to peer review, understand that the 1,000-hour requirement is moot for many, perhaps the overwhelming majority, of people in practice, because many firms have peer reviews," he said.

He asked board members if they felt the proposal weakened or maintained public protection.

"The issue is not about keeping anyone from doing something or not," he said. "The issue is whether you can change the competency regulation in place of 1,000 hours and maintain protection of the public."

Board member John C. Olsen, the immediate past chair, said that at first he didn't support the idea, but after considering the other safeguards in the law and regulations, he does.

"The new regulations provide us with safeguards we never had before," he said. "Peer review for many practitioners, accounting and auditing CPE, which we didn't have, and the third requirement, 1,000 hours over five years."

Some other resolutions were floated, such as a suggestion from board member Lydia M. Washington that if 1,000 hours were unattainable, perhaps the state should require CPAs to meet some percentage of that figure, depending on the amount of attest work one does.

"How would you find the percentage?" Dustin asked. "Do you count only billable work, nonbillable work? If you were to ask a sample of the board members how they calculate [their hours], you could find two, three or four different models throughout the state."

The board voted unanimously, 14-0, to recommend that CPAs doing attest work for peer reviewed firms be exempt from the 1,000-hour requirement; however, firms would have to receive a "pass" or "pass with deficiencies" report in order to meet the requirement. Failed peer reviews would not be accepted.

"Pass with deficiencies is still defined as a pass," said NYSSCPA President David J. Moynihan, who attended the meeting as an audience member. Moynihan is also a former member of the AICPA's Peer Review Board and will be chairing the board's education task force next year. "You still had a system of quality control over statements, but there are areas you should improve upon."

However, the board deliberated at length about how to apply the competency requirement for those CPAs who do only reviews.

In July, the state board voted to recommend to the Regents that CPAs who do only compilations be exempt from the new competency requirement , since the requirement affects many small practitioners who do only compilations in addition to their tax preparation services, or CPAs in industry who supplement their incomes by providing compilation services. The board felt the amendment was warranted, since compilations provide no level of assurance with them.

Reviews, however, do. So the issue was raised again.

"There's a major difference in a review," Isserman said. "We really have to determine: Is a review closer to an audit or closer to a compilation? Which ‘bucket'should it be in? The audit bucket or the compilation bucket?"

If the board decided to lump review services with compilations, CPAs who perform reviews could meet the competency requirement by taking 40 hours of accounting, auditing or attestation CPE. If the board decided reviews require the same competencies as an audit, CPAs who perform these services would have to either earn 1,000 hours of experience or work for a peer reviewed firm and meet the 40-hour CPE requirement.

Donald Ingram, who attended the meeting as a representative of the National Conference of CPA Practitioners, told the board he was opposed to lumping reviews in the same competency category as audits because he would lose his two review clients.

"I'm the small practitioner," he said. "You're looking at my firm."

Ingram said he does two reviews a year.

"If you put [reviews] into the audit bucket, I'll lose those clients," he said. "You're not here to protect me. I thought you were, but you're not. You're here to protect the public."

But Ingram said the board wouldn't be protecting the public by lumping reviews with audits because he would lose those clients to a bigger firm that will charge them more for the same service.

NYSSCPA Executive Director Louis Grumet was also invited to address the board. He told the board that the Society has been conducting communications outreach througout the state and has presented nearly 50 information sessions on the law to various CPA audiences since February.

Grumet said that, based on membership feedback, members welcomed the 1,000hour requirement, because the initial response to the law was that it had provided insufficient protection for audits, although some felt the 1,000-hour requirement was still too low. When he and other Society leaders proposed to an audience of 55 CPAs in Binghamton that the competency requirement to conduct a review may be reduced, the crowd opposed the idea.

Of the 55 CPAs in the audience, "54 of them thought review belonged with audit," Grumet said. "And the sole question they raised was the public interest question. …They felt that if you move review into the compilation bucket, it would lower public protection and be perceived that way."

There is mixed concern among NYSSCPA members, Grumet said, about there being enough peer reviewers to conduct the quality reviews.

"If you can find good enough peer reviewers, then I think that [amendment] would be popular," he said.

"Reviews require a level of expertise that compilations don't require," Moynihan said." There's a certain level of training, you have to know what you're doing, to conduct a review."

In a traditional, privately held business, a review is the statement of choice in 75 percent of the cases, Moynihan said.

"Reviews say we actually did something," he said. "We performed inquiries, analytical procedures, and they provide a limited sense of assurance. It's a much larger leap from a compilation to a review than it is from a review to an audit."

After years of working in a public CPA firm, board member Michelle A. Cohen said she recently took a job in industry. The experience shaped her opinion regarding competency requirements for reviews.

"We were a public company, doing financial statements four times a year," she said. "Now, not being in public and doing financial statements every day, it's hard to keep up on disclosure requirements. I don't see how a person who does two reviews a year could keep up on all of that - not having the experience of doing it all of the time. I think the review should go into the audit bucket. I think you need that experience."

The board voted, 13-1, to recommend that reviews require the same competency requirement as audits - 40 hours of accounting, auditing or attestation CPE and either 1,000 hours of experience or working for a peer reviewed firm.

However, the board stipulated that those firms who do only review work would only be required to undergo an engagement review, which is much less intensive and expensive than a system review. Engagement reviews examine the CPA's performance on the submitted engagements, determining whether it met with standards in all material aspects, according to the AICPA.

CPA practitioners whose firms performed only audit services would be required to obtain a system review. System reviews focus on independence, integrity and objectivity, according to the AICPA. They require interviews with top management and staff in order to evaluate the firm's quality control policies and procedures. They also review a sample of the firm's engagements.

"I don't think we should go down that pathway …that if someone did only compilations and reviews [that the] regulation demand they have a system review," Dustin said. "I think it's to no one's benefit - the profession's or the public's - to establish different criteria in New York than any other jurisdiction for the peer review requirement."

Dustin was referring to the AICPA's peer review standards. AICPA firm members are required to be peer reviewed. Those firms who perform only review and compilation work are required to have engagement reviews, not full system reviews. It was Dustin's recommendation that New York state's requirements mirror the AICPA's for consistency, and the board agreed.

More Time to Comply

Most CPAs may also have an extra year to comply with the competency requirements, Dustin said. The proposed regulations would allow the competency rule go into effect Aug. 1, 2010, for individuals licensed prior to July 26, 2009. Anyone licensed on or after July 26, 2009, would have to meet the requirements before they provide attestation services, Dustin said.

The proposed amended emergency regulations will be sent to the state Board of Regents in October to address feedback received during the public comment period and for any necessary editorial changes, Dustin said. Any revisions will require a second, 30-day comment period.