Spitzer Proposes Accounting Legislation

Spitzer Proposes Accounting Legislation
CPAs Discuss Provisions

By Jay Dismukes

Continued from the Home Page

At the request of Attorney General Eliot Spitzer, Sen. Kenneth LaValle on March 18 introduced the legislation, S.3501, which would update the definition of the practice of public accountancy; alter the makeup of the State Board for Public Accountancy to at least 16 licensed accountants and nine public representatives; and, depending on certain circumstances, prohibit specific employment opportunities and the provision of attestation services to publicly traded corporations. The bill also would raise fines for professional misconduct, define specific acts that constitute professional misconduct, and require the written concurrence of a public member of the state accountancy board to terminate an investigation of professional misconduct by a CPA or public accountant.

Two other items in S.3501 would require the rotation of lead and reviewing audit partners every five years on audits of publicly traded companies and governmental entities, as well prohibit the provision of nonaudit services to publicly traded audit clients and governmental audit clients. Over the last few years, CPAs have expressed particular concern with these latter two provisions, which have appeared in other proposed accounting legislation.

“Mandatory five-year rotation of lead and reviewing audit partners is going to be a real issue in rural communities,” said sole practitioner Barbara Dwyer, a member of the New York State Society of CPAs’ Board of Directors who lives and practices in Essex County. “I do the audit for my home school district…and when they sent out the notice for RFPs (request for proposals for audit contracts) last time, I was the only one who sent in a bid. So if this law passes, they don’t have an auditor because they can’t appoint me again.”

Not only could some counties find that they don’t have enough firm expertise in the area to conduct government audit work, but Dwyer believes even practices with the capability could be disinclined to take on the engagement because, in the case of many school districts and local government agencies, there isn’t enough financial incentive to do so.

“In the rural communities, there is a shortage of people willing to do it (school audits). You’re going to force school districts to find someone who is not available to them,” said Dwyer, who feels that the mandatory partner rotation provision could put government agencies and schools in a situation where they can’t afford to comply.

Primarily for the service delivery problem that Dwyer refers to, the Society has consistently opposed forced partner rotation or firm rotation for practices that conduct government audits. Instead, the NYSSCPA favors a mandatory request-for-proposal process.

Dwyer also believes small firms that don’t have the staff depth to rotate partners would be hurt by the provision as well.
“If you’re a small practitioner, you’re out of the job,” she said.

NYSSCPA board member Phillip Goldstein also thinks the requirement could be detrimental to the profession and its audit clients.

“The transition of auditors increases the likelihood of fraud, it doesn’t decrease the likelihood of fraud, and that is because in any engagement, the first or second year is a learning process,” Goldstein said. “I think by requiring mandatory rotation you are creating a whole new learning process. If you wanted to defraud a company, the time to do it would be the time in which they switch auditors.”

Goldstein believes that, instead of requiring partner rotation to prevent future conflicts of interest, one of the key issues to consider is the establishment of a fair and reasonable fee for school audits, to help ensure quality work.

“When you are buying intellectual property, you are buying the best. You’re making an investment, and that’s what governmental agencies don’t understand,” said Goldstein, a partner with Levitan Yegidis & Goldstein LLP in Middletown. “And that’s what school districts don’t understand, or if they do, they are mandated to select things on the cheap.”

Goldstein added that audit committees should be the ones selecting auditors for their school districts, not the school boards, which frequently are composed of individuals who lack adequate financial expertise.

While Dwyer said she generally supports the provision banning nonaudit services to government entities, Goldstein fears the requirement could “trickle down” to the private company sector. If that were to happen, he said, it could present significant financial burdens to many privately held companies and would be impractical from a business perspective.

Both CPAs said they understand the need to address financial problems like those that have occurred in some public companies and in school districts such as Roslyn, which State Comptroller Alan Hevesi found was bilked out of at least $11.2 million, but they hope that state lawmakers will proceed cautiously on any legislation intended to curb fraud and fiscal mismanagement.

“If you look at audit failures versus the number of audits in the U.S., they are miniscule,” Goldstein said. “And to set policies for exceptions to the rule, as opposed to the rule, is a reaction, not a correction.”

Though LaValle introduced Spitzer’s proposal, John D’Agati, director of the Senate Higher Education Committee, which LaValle chairs, said the senator’s top priority for accounting legislation will be S.302-D. D’Agati said LaValle plans to reintroduce the bill this year primarily in the form in which it has unanimously passed in the Senate for the last two years but which failed to advance in the Assembly. Among its major Society-supported provisions are mandatory peer review; a 40-hour CPE requirement for all CPAs, including those in industry, government and not-for-profits, as well as in public practice; registration of all CPAs; regulation of all services within the CPA’s scope of practice; expansion of experience for licensure; and temporary practice permits.

The state attorney general’s office declined to comment on S.3501. This is the second time Spitzer has proposed legislation to strengthen the oversight of the accounting profession in New York state. His office issued a draft legislative proposal with some similar provisions in early 2003.