Society Educates Albany on Profession

Members Pose Principles for Potential Accounting Legislation

By Simon Eskow

ALBANY—A delegation from the New York State Society of CPAs visited Albany over two days in March to educate legislators about accounting issues as senators and assembly members hammer out new bills that would alter how the state regulates accountants in the post-Enron era.

“The two days in Albany were spent communicating with members of the legislature over problems related to non-audit services, and educating them with what we believe should be the governing principles at the core of new laws,” NYSSCPA President Nancy Newman-Limata said.

Society representatives met in closed-door meetings with Sen. John Marchi, Sen. Michael Balboni, Assemblyman Peter Abbate and Assemblyman Richard Brodsky, and participated in a roundtable discussion sponsored by Sen. Kenneth LaValle. All the lawmakers serve on committees or sponsor legislation regarding regulation of the accounting profession.

“As long as you’re talking to these people, you’ve accomplished something,” said George T. Foundotos, who visited with the lawmakers. “Whether they can do anything with the information is another story, but at least they’re not going to do something in the dark.”

The two-hour roundtable, presided over by Senate Higher Education Committee Counsel Diana Georgia, followed two public hearings by the committee in previous months in New York City and Albany where NYSSCPA members served as witnesses. The roundtable discussion and the hearings could help shape legislation that would change how the state regulates and disciplines auditors, as the higher education committee is responsible for the New York State Education Department (SED), which, in turn, regulates 38 distinct professions.

Newman-Limata joined President-elect Jo Ann Golden and Vice President Kevin McCoy, and members Foundotos, Cono R. Fusco, David Rosenzweig and Larry Shapiro in the discussion moderated by Georgia.

Discussion ranged from defining the profession’s scope of practice to avoiding “one-size-fits-all” regulation that would treat auditors the same, no matter what the size. But members drove home the need to adopt regulation based on core principles that the Society board of directors had approved that same week.

The principles state that auditors may not have a direct or indirect financial interest in their clients or a mutual financial interest with their audit clients; may not perform management functions or make management decisions for their audit clients; and may not audit their own work.

“If we have these principles to live by, and you have the regulations, this can work,” Golden said.

The principles reflected a difference from laundry-list prohibitions suggested in some legislation curtailing what auditors can or can’t do. Such prohibitions would require mandatory rotation of accounting firms every seven years, and prohibit auditors from offering non-audit services to the audited entity. There would also be a two-year cooling-off period between the time a CPA audits a client and the time the same client hires the auditor.

Society members saw the combination of principle-based legislation and regulation by the state as the correct alternative to a regulatory approach susceptible to abuse. Members said that basic principles accountants learned as students can evolve into “cookbook accounting,” which can be manipulated.

“When you evade the cookbook, you get Enron,” Fusco said. “We must go back to principles-based accounting.”

During the roundtable discussion members opposed prohibition of non-audit services because it would prove harmful to small firms that offer many services to not-for-profit concerns, small companies, and government entities that can’t afford to perform those tasks in-house.

“They don’t have accounting departments or accounting staff, and they rely on CPAs to do this,” Foundotos said in a follow-up interview. “When you’re dealing with a big corporation or a large not-for-profit, they have a department, and they can do these things.”

Members added that new regulations should take into account the fact that many public companies are also small concerns that should not be hindered by overarching regulation meant to target the kind of abuses and conflicts of interest that created Enron.

“Our interest here is to protect investors and owners,” Fusco said. “When you deal with small companies, they are one and the same.”Representatives of the state education department’s accountancy board at the roundtable focused on expanding the scope of practice, with broadened enforcement capabilities through a proposed task force that would be able to perform quality control checks of audits and take a “proactive” approach to enforcement.

But members cautioned that broadened powers could create redundancies with the Securities and Exchange Commission, which already has power over the profession for publicly traded companies.