State to Revisit Proposed Work Paper Retention Rule

By Simon Eskow

ALBANY—State authorities will revise proposed work paper retention rules released for public comment in August by the New York State Education Department. The proposal would have required CPA firms to keep not only audit and attestation work papers, but also nonattestation documents, such as tax returns and “special reports,” for a minimum of seven years following an engagement.

New York State Board for Public Accountancy Executive Secretary Daniel Dustin told the board in September that the revisions would address some of the concerns raised in written comments from the New York State Society of CPAs, Consumers Union and the Big Four accounting firms.

The revised proposal was slated to be published in the state register in early October for a 30-day comment period, and is most likely to be approved by the New York State Board of Regents at its December meeting. Dustin said the revision probably would conform to two specific suggestions raised by a special NYSSCPA task force.

The task force, chaired by Vincent J. Love, said in a letter to the state education department the requirement to maintain documentation of nonaudit and nonattest services for at least seven years was “inappropriate” and detracted from the effectiveness of the proposal. The task force asked the state education department to limit retention requirements to established definitions of audit and attestation services as delineated in Statements on Auditing Standards.

“The proposed rule…should focus only on the statutory responsibility of CPAs for audits and on their other attestation engagements,” the letter stated. Other regulatory authorities already set the standard for services in nonattest functions like tax consulting under guidelines laid down by the Internal Revenue Service, the task force noted.

“The standards of evidence for tax documentation and other services, which are properly set by the tax authorities and other regulatory and self-regulatory authorities, differ dramatically from the professional standards for audit evidence documentation,” the letter stated.

The application of the rule “probably” will be limited to audit, attestation services, forecasts and projections, Dustin said, and not apply to tax returns or special reports.

Additionally, the Society expressed concerns over whether a failure of audit documentation should raise a rebuttable presumption of violation of audit standards.

“Failure of the audit documentation to meet professional standards should raise a presumption that audit standards were not met,” the letter stated. “This presumption should be a rebuttable presumption affecting the burden of proof relative to those portions of the audit that are not documented as required. The standard of the burden of proof should be a preponderance of the evidence.”

Dustin indicated that the language for a rebuttable presumption is under review by the state education department’s counsel. The proposal also would require that substantive alterations to work papers after the fact clearly document the subject, date and reason for the alteration. The Society pointed out that no definition is provided on what constitutes a substantive alteration, and Dustin acknowledged that the revisions would address that concern.

The revisions, however, will not conform to two of the Society’s concerns in the revision: incorporation of professional standards into the law by reference—as opposed to inclusion in the language of the law—and elimination of the requirement for licensees to establish a formal written policy on record retention. Under the revision, firms, not individual CPAs, would be responsible for establishing a formal record-retention policy.