Accountancy Hearing Yields Broad Consensus on Reform

Accountancy Hearing Yields Broad Consensus on Reform

By Jay Dismukes

Continued from the Home Page

Testifying before the Senate Higher Education Committee, CPA stakeholders, including Hevesi and representatives from the State Education Department (SED) and the New York State Society of CPAs (NYSSCPA), expressed their deep concerns with an accountancy law that has not been updated since 1947, and appeared to agree on a number of key issues, including enhanced peer review, increased education and training, and more state regulatory oversight and resources.

The Jan. 25 Albany, N.Y., hearing, led by Committee Chair Sen. Kenneth P. LaValle, took place in response to findings released earlier in the month in which Hevesi’s office concluded that audit work performed by CPA firm Miller, Lilly & Pearce for the Roslyn School District allegedly failed to uncover $1.6 million in questionable payments, created a conflict of interest and resulted in nine violations of mandatory professional standards. The findings are just the latest developments in a series of financial scandals that first came to light last spring, involving Roslyn and at least three other school districts. To date, five school officials have been arrested and charged with theft or misuse of school funds, while others remain under investigation.

As a result of the scandals, the public fallout, particularly in Long Island, has been considerable, with over one-third of school budgets being rejected by voters in 2004, the comptroller said. To help restore public confidence, Hevesi asked the committee to support his office’s proposed legislation that seeks to strengthen internal controls in school districts. Among its major provisions, the bill, already introduced in both houses, would require more external audit involvement and financial oversight training for school board members, establish an internal audit function and audit committee for each school district, and establish a competitive process for audit firm selection.

On this last point, NYSSCPA Executive Director Lou Grumet during his testimony cautioned the committee to avoid implementing forced rotation of auditing firms that conduct school audits. Given that few firms are believed to possess the required school audit expertise, such a step could create a “service delivery problem.” Though the NYSSCPA is willing to help train firms in this audit area, the mandatory request for proposal process is a more prudent approach, Grumet remarked.

Hevesi also asked the committee to endorse his request for $5.8 million to hire and train 89 additional auditors who would be responsible for routinely auditing all of New York’s school districts, a practice that budget cuts effectively suspended more than 20 years ago.

Though a deterrent to mismanagement and fraud, Hevesi indicated that this combination of stronger internal controls and a comprehensive state audit program relies heavily on improved standards for independent audits and for peer review of CPA firms, alluding to the need for a modernized accounting statute like that already proposed in the state legislature.

During her testimony, Deputy Commissioner for Higher Education and the Professions Johanna Duncan-Poitier said the SED agrees with mandatory peer review. The department, she said, believes peer review could serve as an effective enforcement tool. As such, “these quality reviews would have reviewers approved by the department conduct reviews and report substandard practices to the department,” Duncan-Poitier’s prepared comments stated.

Calling for passage of S302-D, a reform bill firmly supported by the NYSSCPA and twice-passed unanimously in the Senate, Grumet said one of the bill’s provisions, mandatory peer review, is essential to any meaningful regulatory improvement. He pointed out that 37 states now require mandatory peer review as a condition of registration for all CPA firms that perform attest or compilation services.

Grumet added that, as part of any peer review mandate, any firm that audits a school district or entity receiving federal funds, should also be monitored for its compliance to government auditing standards, commonly referred to as Yellow Book requirements. These independence standards prohibit certain nonaudit services, including bookkeeping services, and do not permit auditors to install or maintain accounting software systems for attest clients. Hevesi’s office maintains that Miller, Lilly & Pearce violated these standards when it allegedly sold financial management software, in which two of the three partners of the firm had a 55 percent stake, to the Roslyn School District.

Based on Duncan-Poitier’s other remarks, the SED also stands behind some provisions in S302-D, such as mandatory continuing education for all CPAs, including those in industry, and an expanded scope of regulated practice. However, it differs from the NYSSCPA on specific aspects.

Though the Society supports the 40-hour education concentration implemented by 48 other states, the SED believes that a 24-hour requirement is sufficient. Similarly, the department believes that a revised definition of services is important to reflect the profession’s range of practice areas; however, the SED requests that certain stipulations of the provision be modified. These stipulations, the SED maintains, compromise its ability to regulate licensees.During the hearing, the SED also called for more resources for the Office of Professional Discipline. Specifically, the department would like to set up a dedicated investigatory unit that would handle complex and large firm cases. Referred to as a public accountancy oversight group, this unit would be responsible for investigating and prosecuting instances of criminal misconduct by firms. The NYSSCPA has long advocated for increased staffing and resources for the Office of Professional Discipline.

At the conclusion of the hearing, LaValle said he would like to put a reform bill that reflects all parties’ concerns on the fast track, with the hope of a vote occurring as early as the beginning of April.

Testimony from Hevesi, the SED and the NYSSCPA can be read by going to www.nysscpa.org/enron/hearings.htm.