SED Seeks Expansion of Scope of Practice and an Array of Accounting Reforms
A Call for Mandatory Peer Review and CPE, Firm Registration and Inspection, Among Other Actions

By Kevin J. McCoy

ALBANY—New York State Education Department (SED) officials are seeking new legislation to clarify the Board of Regents’ authority over the accounting profession while posing reform-minded regulations encompassing the profession’s entire purview.

In a report submitted to the Regents’ Professional Practice Committee in February, officials from the SED laid out an array of proposed reforms — from expanding scope of practice to mandatory peer review of all firms providing attest and compilation services—that SED members will discuss in the coming months with state legislators.

The report, The Mandate for Accountancy Reform: A Call to Action, stated that the corporate failures over the last two years underscore “the urgent need for an examination of the regulatory structure and the implementation of needed reforms in public accountancy.”

SED officials submitted the report for discussion at the committee’s Feb. 10 meeting.

Many of the ideas contemplated by the SED and its board of accountancy have been discussed in public hearings over proposed legislation since the Enron era began in the last half of 2001. The report, however, shows a concentrated effort by the SED to seize the initiative in accounting reform, even in light of a suggestion by Gov. George Pataki in his “State of the State” address to transfer authority over the profession to the state’s Department of State.

The Heart of the Matter

Central to the discussion and the current legislative session is expansion of the definition of the scope of practice for public accounting. Daniel Dustin, executive secretary of the New York State Board for Public Accountancy, told the committee that the Board of Regents currently is responsible for the discipline of licensees for professional misconduct for some areas of professional services, but not for other services not currently in the definition of the profession’s scope of practice.

Dustin said the SED will seek the introduction of legislation to clarify the Regents’ regulatory authority over all licensees for all professional services provided to the public, and to strengthen the Regents’ oversight of accounting practices in general. SED officials backed their argument for expanded scope of practice with statistics showing tremendous growth in consulting services for the Big Five through the 1990s, with a similar growth in revenue for consulting services among smaller firms from 1998 to 2000. Officials argue that an increasing majority of CPA activity is falling outside of Regents’ oversight.

Dustin said the SED would seek a widened scope of practice definition as part of a package of legislative proposals it will make to various legislators, including members of the Higher Education committees of both the Senate and Assembly. If that is not successful, the SED will ask the Regents to adopt a new rule that would require all CPAs who provide services of any kind not covered by the current definition to notify their clients that discipline for misconduct related to these services would not be within the powers of the Board of Regents or the SED.

CPE, Inspections, Peer Review and Other Proposals

The SED will also seek legislation beyond a new definition of scope of practice. This will include annual individual and firm registration whether the CPA is active in practice or not. There will also be a request for mandatory peer review for all firms providing attest and compilation services, clarification of rules on commissions CPAs receive for services, and increases in the statutory limits on fines for misconduct.

In addition, there is a proposal for implementation of a CPE requirement for all registered CPAs, and changes to the specific requirements to be coordinated with the expanded scope of practice definition under consideration.

The SED is also proposing the establishment of a Public Accounting Task Force to carry out inspections of CPA firms separate from the peer review process. It was stated that this task force would be funded with registration fees paid by accounting firms and would therefore be budget neutral.

The SED also told the Regents that under the Sarbanes-Oxley Act, state regulators are to make an independent determination as to whether the nascent Public Company Accounting Oversight Board’s standards will apply to small- and mid-sized, nonregistered accounting firms. Dustin mentioned that the SED and the state accounting board are in the process of evaluating the standards to determine which ones may be appropriate for state implementation. The SED is meeting and coordinating with the U.S. General Accounting Office, the New York state attorney general, the National Association of State Boards of Accountancy and the PCAOB.

According to Dustin, other items under consideration include investigation of a model that would allow for temporary practice permits for CPAs from other jurisdictions. They are also considering a requirement that all CPAs notify the SED of certain events, such as lawsuits, receipts of Wells notices and other investigations. Along these lines, CPAs would also report any restatement of a previously issued financial statement related to a public company incorporated, located in, or doing business in New York state; New York state government entities; charities, and any other entities that are required by law to make their financial statements public.

Additionally, the department is considering the requirement that the percentage of fees charged to a client for categories such as audit, tax, accounting and consulting be disclosed in the financial statements or some similar report.