Society Members Testify at State Board for Public Accountancy Hearing

By Simon Eskow

NEW YORK—The state body that governs CPA licenses should seek power to enforce existing regulation rather than pursue new rules that would put an undue burden on CPAs and their clients, representatives of the New York State Society of CPAs said during a hearing last month.

NYSSCPA members Vincent Love, Nancy Newman-Limata and Jeffrey Hoops testified before the New York State Board for Public Accountancy on May 16 in Manhattan to reiterate the Society’s stance on state efforts to reform the accounting profession in light of the Enron scandal.

“Fundamental reforms in the independence, funding, and disciplinary powers of the State Board for Public Accountancy that we (have) called for…remain important steps in promoting the public confidence in the accountability of those engaged in producing and auditing financial statements for public use,” Love said.

Fundamental reforms would include an expanded and well-funded board with more public membership, extended and intensified peer review and regulation of all CPAs with the power to discipline for violations of the profession’s code of ethics.

The board called the hearing to gain feedback from the Society, CPAs and public interest groups on three regulations it proposed to reduce conflicts of interest arising from relationships between auditors and clients. These include a prohibition against firms providing nonaudit services to clients during an audit engagement, a requirement for clients to change audit firms every five or seven years, and a two-year “cooling-off” period before a client can hire a CPA away from its audit firm. Such proposals would apply to CPAs engaged with publicly traded companies or governmental agencies, and could be established without new state legislation, although the board has supported similar legislation in the state Senate.

Society witnesses said the NYSSCPA opposed the three proposals and asked the board not to push for any reform legislation until matters are settled at the federal level.

“The NYSSCPA opposes legislation that would not conform to federal regulation,” Hoops said. “It would be inefficient for public entities to deal with different sets of regulation.”

Hoops said the board’s proposals would impose a financial burden on CPAs and public entities, and that mandatory rotation, in particular, would be disruptive to business.

Peering Through the Scope of Practice

Board members also are looking into changing the definition of the accountant’s scope of practice, which Daniel Dustin, the board’s executive secretary, said hasn’t been edited since 1947, even though the profession has evolved significantly since then.

“Proactive regulation is based on the definition of the scope of practice,” Dustin said in his opening remarks. Dustin said the board has supported legislation to expand the scope of practice to include advisory services, financial planning services and tax services, among others, because limiting the board’s authority to accounting and auditing is “harmful.”

The scope question led to a debate over what the board can and cannot do under existing laws, which one board member said has been ongoing for three years. Love and Newman-Limata said the board already had jurisdiction over the profession and that the Society supported the board’s right to discipline CPAs for violations of ethics set out by the American Institute of CPAs. Board members insisted that their authority lay only over auditing and accounting services.

“Enforcement of conduct would give the board jurisdiction,” Love said. “We support a strong board with public participation, which makes all the other stuff fall in place.”

Divergent Views

A diverse group of witnesses from universities, small- and mid-sized firms, pension fund management companies and public interest groups generally agreed on the necessity for reform to regain investor confidence, but held varying views on the board’s three proposals.

“We agree it’s important to ensure auditors are independent,” said Gary Illiano, a partner with Grant Thornton. “However, audit-only restriction could make firms more dependent on clients.” Consequently, there shouldn’t be any blanket prohibition of services, Illiano said. He also objected to the cooling-off period, and said that auditor rotation poses a “great risk” of audit failure. Wayne Kolins of BDO

Seidman agreed, adding that quality control for peer review should distinguish between large and small firms.

Eli Mason, however, told the board that he supported auditor rotation, and co-panelist Douglas Carmichael came out for limiting nonaudit services, saying that there was an automatic “taint” in firms providing advice to their audit clients.

Other witnesses agreed with the board’s proposals. Lynn Turner, former chief accountant for the Securities Exchange Commission, said the SEC relied on state boards to ensure the quality of the CPA license. Turner said the board’s oversight must carry weight, employing “effective discipline” and “effective and timely” sanctions. Many boards currently don’t have the power to enforce actions, he said, and he urged the board to “review the process” in place and hire adequate staff to guarantee that its authority has substance.

Turner also supported a “laundry list” of nonaudit services CPAs should be prohibited from providing, including information technology and consulting services. Turner also called for mandatory rotation with fee retention in order to obviate possible “lowballing,” or the practice of making an unrealistic bid for an audit engagement to undersell the competition.

Bevis Longstreth, a former SEC commissioner, and Louis Lowenstein, professor emeritus of finance and law at Columbia University, were among several other witnesses who called the board to take action. Longstreth said that state boards have been “inactive” and should “seize the authority” since state legislators may prove “unreliable.” Lowenstein also urged the board to “act where you can act,” adding that ideas such as mandatory rotation had “genius” in them.

Representatives from Common Cause, the AFL-CIO, TIAA-CREF, Consumers Union and both the U.S. and New York Public Interest Research Group testified as well.