Accounting Legislation Percolates in the Post-Enron Era

Bills Abound, but Nothing’s Etched in Stone

By Simon Eskow

ALBANY—A pair of bills sponsored by New York state senators and drafted in response to the Enron debacle drew closer to passage in early May, though some doubt lingered over whether lawmakers would have time to vote on the legislation before the current session ends on June 20.

A bill sponsored by Sen. John DeFrancisco (S6248A) would make it a crime for corporate officers to knowingly deceive shareholders in financial statements. A second bill, sponsored by Sen. Kenneth LaValle (S6269), would create tighter controls on the relationship between governmental retirement funds, state agencies and instrumentalities, and their auditors, to reduce the risk of conflicts of interest and abuse that could threaten the pensions of state and local employees.

Both bills have cleared the final procedural hurdles for a full Senate vote.

Deep concern over the ramifications of the Enron case prompted lawmakers in the Senate and Assembly to draft many separate bills in the last six months. State activity mirrored federal moves to reform the kinds of financial disclosure practices and auditor-client relationships that led to the biggest bankruptcy in U.S. history, the decimation of investment funds and the razing of investor confidence.
As federal legislators hammered out a controversial bill covering publicly traded companies and their auditors, state lawmakers fashioned potential laws covering everything from establishing new criminal offences to controlling when and what kind of services CPAs can perform for their audit clients.

According to members of the New York State Society of CPAs who have been involved, state legislators have attempted to strike a
balance between regulation and protection of the public.

“All the politicians said, ‘I want to work with you,’” said David Rosenzweig, chair of the Society’s Large- and Medium-Sized Firms Practice Management Committee, who was part of a group of CPAs that visited Albany lawmakers involved in post-Enron legislation last March. “They said, ‘Tell me what works for you, and if it serves our purpose (of protecting the public) and it works for you, then we can work together.’”

Bills Piling Up

Legislation authored after Enron included Assembly versions of the DeFrancisco and LaValle bills.

Meanwhile, a third bill, drafted months ago by Sen. Dean Skelos (S6164), found a counterpart in the Assembly late in the session on May 7 in a similar bill authored by Assemblyman Steven Englebright (A11325). The bills would prohibit CPAs from providing accounting services to publicly traded companies that they had audited in the previous five years.

LaValle’s bill would place more severe strictures on CPAs engaged with pension funds and government entities by prohibiting the firm from offering any non-audit services, and by requiring the pension fund to rotate CPA firms every seven years. The legislation also would prevent a CPA from taking a job with the entity for two years after an audit engagement.

A bill written by Assemblyman Bob Barra (A9953) that would prohibit state agencies from engaging the services of Andersen was referred to the Assembly Governmental Operations Committee and has yet to be reported from committee, while a bill penned by Assemblyman Richard Brodsky (A9831) also has yet to be lined up for consideration by the full Assembly. Brodsky’s bill is similar to the Englebright-Skelos bill, proscribing auditors from performing non-audit services and preventing CPAs from engaging in non-audit services for a publicly traded company client. The Brodsky bill added one more dimension: requirement for the auditor of the publicly traded company to be licensed by the New York Department of State.

Members of the NYSSCPA have been mostly involved in hearings held by Sen. LaValle in his capacity as the chairman of the Higher Education Committee.

“LaValle is taking more of a traditional legislative approach: he’s giving everyone a chance to be heard,” Rosenzweig said. “If there was a rush to do this thing, there’s a chance that you might end up hurting the people you’re trying to help.”

While it is unclear what legislation might come out of LaValle’s roundtable and hearings, the State Education Department’s Office of the Professions advocated an expanded role for the New York State Board for Public Accountancy in performing quality control of peer reviews with an expanded scope of practice.

George Foundotos, president of the Society’s Political Action Committee, said he thought that the existing board for accountancy should be replaced by a new, independent board, because the current board doesn’t work.

“If they enforced what was already on the books, we wouldn’t be in the mess we’re in,” he said. “It has to be brand-new, with the resources for what it has to do.”

Board of Accountancy Executive Secretary Daniel J. Dustin said the board will hold a panel discussion at Baruch College in New York City beginning at 9:30 a.m. on May 16. Representatives from the New York State Education Department and the board will discuss accountants’ scope of practice, auditing firm rotation, cooling-off periods and other issues.

“We’re doing due diligence and fact finding…that could result in some revisions to the regents rules, depending on new state and federal rules,” Dustin said. “I don’t believe that would require state legislation.”

Federal Legislation

As of this writing, the U.S. House of Representatives overwhelmingly approved the “Corporate and Auditing Accountability and Responsibility Act,” though it wasn’t expected that the Senate—with its slight majority of Democrats—would follow suit. The House Republican majority supported the measure, which would create a new board under the authority of the Securities and Exchange Commission (SEC) with the power to regulate and discipline accountants and the publicly traded companies they audit, with a ban against providing consulting work and auditing simultaneously.

Democrats have criticized the legislation, sometimes called the Oxley Bill, named for sponsor Ohio Rep. Michael Oxley, chairman of the House Financial Services Committee. Opponents said the bill is too lax, and leaves too much for the SEC to decide. But a bill backed in the Senate also would create a new board, though this one, at least according to the legislation, would be independent. At press time, the Democrat-backed bill hadn’t moved since being referred to the Committee on Banking, Housing and Urban Affairs.