July 2002

Summer Brings Fits and Stops in Race to Reform the Profession

NEW YORK-A U.S. Senate committee approved a bill in mid-June that would establish a full-time accounting oversight board with broad powers over auditors. At the same time, the U.S. Securities and Exchange Commission announced plans to create a similar part-time board intended to be independent of the accounting profession.

The New York State Senate, meanwhile, went into recess near the end of June without moving on bills developed to improve regulation of the profession at the state level. These included a bill by Sen. Kenneth LaValle that would restrict the services auditors can provide clients. A bill sponsored by Assemblyman Richard Brodsky that could ban auditors from providing any nonaudit services to their clients also was waiting in the wings in the Assembly, and, as of this writing, had not been taken up for a vote.

Summer recess calls to question whether legislative and regulatory bodies will produce any of the reform that has been bandied about since the Enron collapse and myriad other corporate financing fiascoes put the spotlight on the accounting profession. Washington heated up as some Republicans objected to the Senate's legislating the definition of conflicts of interest between auditors and their clients, while Democrats criticized an SEC plan for a proposed Public Accountability Board (PAB) as stepping on the Senate's toes with a weak approach to restoring investor confidence.

Senate majority leader Tom Daschle (D-S.D.) called the SEC plan a "toothless tiger that has no real merit," according to the Washington Post. "I think people would perceive it as the fox in the chicken coop," he said, averring that the accounting industry would have too much influence on the proposed board, and that a bill pushed by Sen. Paul Sarbanes (D-Md.) was the better solution, the Post reported.
The American Institute of CPAs in an alert to its members called the Sarbanes plan a "de facto government takeover" of the profession that would create an "unnecessary bureaucracy that would cause harm to the market and investors."

Well-Laid Plans…

The Senate Banking, Housing and Urban Affairs Committee passed Sarbane's "Public Company Accounting Reform and Investor Protection Act of 2002" on June 18 by a whopping 17-to-4 vote. The bill would establish a five-member body to monitor, investigate and impose disciplinary actions on all auditors of publicly traded companies. The board would conduct quality control reviews of audit engagements regularly, depending on how many audit engagements a firm has per year. The board would be financed through mandatory fees paid by the accounting firms.

But the bill, which is now scheduled for a full Senate vote, also bans auditors from providing a laundry list of services to a client-such as bookkeeping and information system design and implementation-while the firm is engaged in an audit. Some services, like tax consultation, would have to be approved by the company's audit committee in advance. The committee rejected an amendment proposed by Sen. Phil Gramm (R-Texas) that would eliminate the restrictions on nonaudit services.

Just days after the Sarbanes bill passed in committee, the SEC announced its PAB proposal in an open meeting on June 20. According to the SEC, the PAB would consist of nine members, at least six of whom must be independent, public members. The board could include up to three practicing or retired accountants, but it does not have to have any.

The PAB chair and vice chair would be full-time members, though the time involvement for the other members as well as the duration of terms for all have yet to be resolved. The three practicing or retired accountants would not be able to serve in the chair or vice chair positions. The PAB also would conduct quality control reviews; SEC staff testified during the open meeting that the AICPA-directed peer review process failed to produce "credible results." The proposed board would require annual reviews of the 10 largest public audit firms, with recommendations for a course of action based on the review's findings. Firms that fail to cooperate with the PAB can't be members and would effectively not be allowed to conduct audits. The PAB would be financed by all public audit firms and public companies. These entities would be considered auxiliary members of the PAB.

The SEC unanimously accepted the reform plan, which is now in a 60-day public comment period. The SEC plans to issue a final rule by mid-November.

Simmering Summer

The state Senate left Albany on June 21 for summer vacation as pending bills simmered on the backburner.

LaValle's bill, the Accountability Act of 2002 (S.6269), was committed to the Senate Rules Committee on June 20. When the Senate reconvenes, the committee's chairman, Joseph Bruno, will decide which of the bills will be slated for a vote.

LaValle's bill would prohibit an auditor who audits the activities or operations of state and local entities and retirement systems from providing nonaudit services to their clients, with a prohibition against the client hiring on an auditor within two years after an engagement. The bill also requires entities to rotate auditors every seven years.

As of this writing, the state Assembly remained in session, with Brodsky's bill referred to the Codes Committee. The bill (A11371-A) would prohibit auditors from providing nonaudit services to their clients. At first this applied to auditors of SEC registrants, but expanded to include all companies that issued securities, raising a red flag for many state practitioners whose clients rely on CPAs for many nonaudit services they can't afford to perform themselves. The bill had several hurdles to clear before making it to the floor; it wasn't clear as of this writing whether the bill would be moved on at all before the Assembly went into recess.

A second Brodsky bill (A9831-A) pending sets out criminal penalties for misconduct in relation to audited financial statements, while a bill (S6248-A) in the Senate by Sen. John DeFrancisco would make it a crime for corporate officers to knowingly deceive anyone with a financial stake in a corporation. The DeFrancisco bill also was referred to the Senate Rules Committee.