SED Poses Changes to Regents Rules
Focuses on Violations of Unprofessional Conduct

By Simon Eskow

NEW YORK—The New York State Education Department (SED) in April proposed amendments to state rules to implement Sarbanes-Oxley-style–restrictions on auditors of public companies, to expand the list of reportable events that CPAs must disclose to the SED, and to place new strictures on commissions.

The SED published the proposed rule change on April 23, launching a 45-day comment period but raising concern among some members of the New York State Board for Public Accountancy that the SED issued the proposal before formally consulting with the entire board, item by item.

In a meeting of the board on the same day, members pointed to a list of serious problems they saw in the SED’s sweeping provisions, according to an observer who attended the meeting.

At one point, member Ilene Persoff wanted to pass a motion that the board was “not at all an author” of the changes, nor did it as a whole support the amendments as written.

Persoff and others took particular exception to the SED’s array of reportable events. Under the provision, CPAs would have to report within 30 days any governmental investigation, criminal charge or civil case, even before a judgment or conclusion of an investigation could be reached.

According to a Society report, the SED arranged a special meeting for May 28 to discuss details of the rule changes with the board of accountancy.

Board members encouraged NYSSCPA members to review the proposal during the 45-day public comment period that began on April 23.

“It’s extremely important for every CPA to look at these proposed amendments and put in their public comments,” Persoff said.

Problems with Proposed Rule Changes

Board members also questioned the state’s authority to issue regulations in some areas, the ability of the state to implement and fund the provisions, and many aspects of the “reportable events” section.

Under this section, CPAs could be charged with unprofessional conduct if they fail to submit written reports to the SED within 30 days of the occurrence of a slew of events. In many cases, the CPA would have to report to the SED on the initiation of an investigation related to his or her practice, the accusation of a criminal act or involvement in a civil suit, even before a regulatory, governmental or judicial body takes action in such a case.

Board members objected to having to report to the SED before any outcome in such cases. Under the rule change, a CPA would have to report to the SED in the event of settlement in a civil action. Some members disagreed with the requirement, stating that a settlement is not an admission of guilt.

A similar requirement to report within 30 days following restatement of any financial statement attested to by the CPA for some clients lacked reference to the materiality of such restatement, members said, according to the observer.

Some members took issue with another requirement that would force CPAs to inform the SED when they learn of other CPAs involved in such cases.

Finally, some members indicated that the state board as a whole should have deliberated and voted upon such changes before they were published.

Officials took exception to board-member criticism, saying that the board can’t be a rule-drafting body, though they recognized that the particular proposal did not go through the traditional route, which would have sought advisory board comments before submission for offical publication. Officials promised to submit the views of the board to the Regents and also agreed to delay introducing the rules change until after a special meeting of the board on May 28, when discussion of the proposal will continue.

Other Provisions

The proposed rule change also declares violation of auditor independence as unprofessional conduct. It generally would disallow CPAs to function as a manager for a client, auditing their own work, and serving “in an advocacy role” for the client.

The rule would ban CPAs from providing their audit clients a number of nonaudit services, including bookkeeping, financial information systems design and implementation, appraisal or valuation, internal audit outsourcing, human resources or management services, broker or dealer or investment advisory services, and “legal services and expert services” unrelated to the audit. Any other services would have to be approved in advance by the client company’s audit committee.

There also are provisions, similar to Sarbanes-Oxley, against providing audit services for a public client if the lead audit partner or audit review partner has performed audit services for the client in the previous five years.

The rule change also calls for a ban on commissions for referring a client to a third party’s services. Commissions would be barred when a licensee expects that a third party might rely on the review, audit and compilation work or financial statements in a fixed period of time around the engagement. The CPA would be able to receive a commission from a client for other nonprohibited services as long as it is noted in a disclosure statement.

To read the full text of the proposed rule change, go to www.nysscpa.org and click on the “Proposed Amendments to Regents Rules” link beneath the “Info Highlights” banner.