December 1999

Scope of Practice and the Place of Compilations

Assembly Hearing Highlights Two Proposals

By James L. Craig, Jr., CPA

The November 16 State Legislature hearing sponsored by Assembly Majority Leader Michael J. Bragman (Syracuse) and Assembly Standing Committee on Higher Education Chair Edward C. Sullivan (Manhattan) on two pending accountancy reform bills--A. 8600, supported by the NYSSCPA, and A. 8789, the product of the State Education Department--addressed the CPA profession's scope of practice, including whether or not non-CPAs should be permitted to perform compilations.

Assembly Bill 8600 includes scope of practice as one of its many provisions based upon the third edition of the Uniform Accountancy Act jointly developed by the AICPA and the National Association of State Boards of Accountancy. Assembly Bill 8789 seeks primarily to expand public accountancy's scope of practice to include substantially all services that a CPA or CPA firm provides to the public.

The SED-supported bill splits scope of practice into two tiers: services that only licensed CPAs can perform while holding out to the public as a CPA or a registered CPA firm, and services that other professionals--including CPAs working for non-CPA firms--can perform. If the latter group of CPAs offer those second-tier services, however, they would have to indicate that their employers are not licensed or otherwise authorized by New York state to provide such services.

The SED's bill states that the first tier of services relates to those leading to a report on financial statements or other financial information that is "foreseeable" and may be relied upon by third parties. The second group of services--primarily bookkeeping, tax preparation, advisory, financial planning, and management advisory services--would be regulated if offered by a CPA holding out as a licensed CPA or within a registered CPA firm.

Recent developments have raised questions as to the authority of state regulators to discipline licensed CPAs for other than what are generally called attest services. Prompted by the acquisition of the nonattest assets of New York CPA firm Goldstein Golub Kessler & Co. PC by American Express Tax & Business Services, the SED extensively reviewed the state education law (which governs the accounting profession) and reached the opinion that since the law defines accountancy's scope of practice as attest work, state regulators only have authority over CPAs with respect to attest services.

SED Testifies Against A. 8600

Testifying in favor of A. 8789 and in opposition to A. 8600, Johanna Duncan-Poitier, deputy commissioner of the SED's Office of the Professions, said that A. 8789 would accomplish two major goals to help the state better regulate the actions of CPAs, including those employed by non-CPA firms.

"First, it would solidify the original purpose for regulating CPAs," Duncan-Poitier said. "As with their professional counterparts--physicians, dentists, etcetera--CPAs must be held accountable to the public for all of the professional services that they provide while using their titles. Second, it would allow CPAs to provide the peripheral nonattest services, such as financial advice and tax preparation, while working for business corporations."

Duncan-Poitier also testified on the importance of protecting the CPA title in the public's mind and of authorizing state regulators to intervene in allegations of professional misconduct.

SEC Staff Agrees

As part of her testimony, Duncan-Poitier referred to a letter from the Securities and Exchange Commission that expressed concerns about S. 4402, the companion bill to A. 8600, now pending in the state Senate.

"Should S. 4402 become law, the New York Department of Education could lose its ability to participate in the resolution of timely and vitally important public policy issues that will impact the provision of accounting services and the protection of investors in New York and throughout the country for many years to come," stated the letter, signed by SEC Chief Accountant Lynn Turner and General Counsel Harvey Goldschmid.

Turner and Goldschmid stated that their views are those of the SEC staff and that the commission has neither reviewed nor approved the letter.

"This narrow definition could be viewed as limiting the ability of the board of accountancy to consider the impact of pressures on auditors to sell consulting and other services to a client on the responsibility of the CPA to protect the public when providing accounting and auditing services to that client," the letter stated.

After the hearing, NYSSCPA Executive Director Louis Grumet said that the Society was not aware that the SED had sought the SEC's opinion.

"We don't know the way in which the issues were explained to SEC staff and whether they realize that the scope of A. 8600 is basically the same that has existed in New York for the past fifty years," Grumet said.

Protection for Public Interest Services

NYSSCPA President Alan E. Weiner testified at the hearing that A. 8600 would not fundamentally change the scope of practice of the current accountancy statute. He added that A. 8600 attempts to define the scope in terms of professional standards as they exist today. Weiner pointed out that the proposal maintains the state's original intent to protect the public through regulation of CPA services that involve reliance by third parties. The bill does not include other services for which clients contract directly with CPAs and for which the public has protection under contract law and various federal and state regulations.

"For example, if a CPA, because of a lack of knowledge or inexperience, makes a mistake in the preparation of a tax return, the taxpayer has legal recourse to the CPA under contract law," Weiner said. "The CPA would also be subject to the preparer penalty rules of the Internal Revenue Service. On the other hand, a third-party investor or creditor who relies on a financial statement has no contractual standing with the CPA and needs the protection of the regulatory system."

While scheduling conflicts prevented Robert Israeloff, former NYSSCPA president and AICPA chair, from testifying in person, he submitted written comments that reflect views similar to Weiner's in support of the scope of practice definition in A. 8600 on the premise that government regulation is appropriate where there is a strong public interest.

"Only those services covered by A. 8600 rise to that level," Israeloff stated.

Weiner said the public is further protected by a requirement in the regulations of the Commissioner of Education and the Board of Regents that subjects CPAs to penalties for professional misconduct for "practicing the profession fraudulently, beyond its authorized scope, with gross incompetence on a particular occasion, or negligence or incompetence on more than one occasion."

In her testimony Duncan-Poitier took exception to Weiner's interpretation of these rules. The SED believes that without expanding the scope of practice definition there is no accountability for fraudulent or grossly negligent behavior of CPAs except in the performance of attest services.

"If the law does not change, we cannot do anything about it," Duncan-Poitier said. "We have no ability to regulate CPAs outside of audit and attest."

In response to questions from Assemblymen Bragman and Sullivan, Frank Muñoz, executive director of the SED's office of professional responsibility, attempted to clarify CPAs' accountability for practicing outside the scope of practice. He said the department was in the midst of an intensive study of what scope of practice covered under the existing statutes. Duncan-Poitier said that the SED plans to issue an advisory soon to all licensees regarding its current authority to regulate CPAs.

Non-CPAs Oppose Bills' Views on Compilations

Both pending bills include compilations as services that only CPAs can perform while holding out to the public as a CPA or CPA firm. At the hearing, a number of groups representing nonlicensed accountants objected to the inclusion of compilations in both bills' definition of scope of services.

Michael Connors, speaking on behalf of the National Society of Accountants, said that both bills threaten the ability of non-CPAs to work. The organization's major issue is the ability of nonlicensed accountants to issue financial statements that have been prepared in accordance with professional standards used by CPAs even though the report language may not be the same as that used by CPAs. Connors indicated that A. 8600 is restrictive and that the scope of practice in A. 8789 is extremely broad.

"This provision [in A.8789] could be interpreted to include just about every type of financial statement our members currently provide," Connors said. "The restrictions on the preparation and use of financial statements by non-CPAs would raise the stakes of civil liability so dramatically as to effectively put our members out of business."

Representatives from other associations, including Jacqueline L. LaBarge of the National Association of Tax Practitioners, Ben Harlan Boyd of the Accreditation Council for Accountancy and Taxation, and David J. Silverman of the New York State Society of Enrolled Agents, expressed similar criticism of the bills' impact on non-CPAs.

Boyd expressed the hope that New York legislation would reflect recent changes made to the UAA that acknowledge the right of a non-CPA practitioner to render compilation and review services and issue reports that do not use SSARS language and include acceptable safe-harbor language. The revised UAA language allows the non-CPA to state that the accountant has prepared the financial statements but has not audited or reviewed the statements and does not express an opinion or any other form of assurance on them.

Following the hearing, NYSSCPA Governmental Affairs Director Fong Chan acknowledged a need to focus on services that nonlicensed accountants can perform.

"We may explore safe-harbor language and the role of compilations in other than CPA firms," Chan said.

Financial Planners Oppose Disclosure Statement

Joseph Votava, Jr., president of the International Association for Financial Planning, and Michael C. Herndon, manager of government relations of the Certified Financial Planner Board of Standards (the owner of the CFP certification mark), spoke out against the provision of A. 8789 that requires CPAs working for non-CPA firms to state that certain services (primarily those related to financial planning) are provided by a firm that "is not licensed or otherwise authorized by the state of New York to provide such services."

Herndon said that obliging firms to issue such disclosure would cause them to make untrue statements since a financial planning firm's functional business activities already are regulated through state insurance departments for insurance services and federal and state securities agencies for securities advice.

Assemblymen Bragman and Sullivan opened the hearing stating that differences remain between A. 8600 and A. 8789; and the testimony regarding scope of practice underscored the opposing views. The NYSSCPA hopes that the Legislature will address the bills in the next legislative session. Watch http://www.nysscpa.org and future issues of The Trusted Professional for the latest developments. *

Scope of Practice

A. 8600 replaces the current definition of practice of public accountancy with a definition that describes specifically those services performed by CPAs that should be subject to regulation, i.e., audit, review, compilation and attest engagements. These are the types of services where the products are or may be relied upon by third parties. The bill also specifies that CPAs can perform these services, as defined, only through a firm registered by the State Education Department.