Society Calls for Significant Changes to Regulation of Accounting Profession

A Synopsis of NYSSCPA Testimony Given During State Senate Hearing

By Joanne S. Barry

On Feb. 6, the New York State Senate Higher Education Committee conducted public hearings to examine the regulation of the state’s accounting profession in light of the recent collapse of Enron Corp. The New York State Society of CPAs took part in those hearings, calling for the raising of the “quality bar” and changes in New York state regulation, disciplinary systems, enforcement and peer review.

Following are the recommendations outlined in the Society’s testimony provided by Marilyn A. Pendergast, CPA, of Urbach Kahn & Werlin LLP, former NYSSCPA president and current chair of the Ethics Committee of the International Federation of Accountants; Vincent J. Love, CPA, of Kramer & Love, a member of the NYSSCPA Board of Directors and Financial Accounting Standards Committee, and Allen L. Fetterman, CPA, of Loeb & Troper, chairman of the NYSSCPA Audit Committee:

Reconstitute the New York State Board for Public Accountancy. The New York State Board does not function as an independent regulatory and enforcement body, as it does in all other states. Instead, it functions in an advisory capacity only to the New York State Board of Regents, which regulates the profession. The NYSSCPA recommends that this Board be reconstituted with more power, independence, stature and resources to protect the public. Consistent with other initiatives at the federal level, the Board should include additional public members with stature and backgrounds that would ensure strong public oversight.

Enhance the State Education Department’s capacity and resources. The New York State Education Department’s Office of Professional Discipline (OPD) needs additional qualified staff and resources to be able to investigate and discipline effectively. The disciplinary process must reinforce the profession’s ethics code and New York state laws.

Ensure public and private cooperation in disciplinary proceedings. The Society recommends creating an effective, cooperative joint investigation and disciplinary action process between OPD and the NYSSCPA Ethics Committee to enforce the code of professional ethics and the public accountancy laws and regulations. Currently these two bodies proceed independently. Cooperation will coordinate efforts and expedite timely completion of investigations.

Extend and intensify the peer review process. Improve peer review (a process in which one CPA firm analyzes the quality control systems and professional work product of another) of CPAs with certified peer reviewers selected with an independent body. Currently firms can select their own reviewers. Make peer reviews mandatory for all registered CPA firms that provide audit and attest services. Currently, only CPA firms who audit Securities and Exchange Commission registrants are required to be peer reviewed.

Register and regulate all CPAs. Currently, New York state does not register or regulate CPAs who work as financial statement preparers or internal auditors. Like CPAs in public practice, they are a part of the system of checks and balances that provides integrity to financial statements. These CPAs should also be subject to discipline for professional conduct breaches and required to continue professional education.

Raise the quality bar. The NYSSCPA has developed educational programs and professional guidance on quality-control processes for CPA firms. It is currently developing more extensive guidance on issues such as the analysis of independence threats and safeguards and document retention and recovery guidelines.

Elevate public confidence in financial reporting. Strengthen the current regulatory environment to prohibit unregulated individuals from preparing financial statements.

Require ethics education. Integrate business ethics into high school and college curricula to highlight that technical competence is complemented by a demanding code of ethical conduct that stresses independence and protection of the public.

Directing attention to losses experienced by Enron employees in their retirement accounts, the NYSSCPA calls for the support of state initiatives to assist individuals in their retirement investment planning with proper advice about diversification in a retirement investment portfolio, the advice made available to all citizens of New York state.

“The events of the debacle at Enron deeply concern the members of the New York State Society of CPAs,” Pendergast said. “The CPA’s primary responsibility is to protect the public. The issues raised by the apparent failure of Enron management and external auditors cause us to want to find out what was known and done, by whom and when. We want to know to what extent inadequate accounting and auditing standards played a role in this case, so we can change them. If inadequate standards were not the cause, but lax enforcement was, then we should address their enforcement.”

Copies of the NYSSCPA full testimony are available at www.nysscpa.org.

The Senate Higher Education Committee will hold additional hearings in Albany later this month.