N.Y. Accounting Board Weighs Major Changes to Regents Rules
Discusses Wide Array of Reform Issues

NEW YORK—With new Securities and Exchange Commission rules in place, the New York State Board for Public Accountancy is actively considering a number of proposals and positions that it will recommend over the next several months to the state Board of Regents regarding the Sarbanes-Oxley Act of 2002 and accounting reform in New York.

As discussed during a Jan. 29 public meeting, chief among the board’s considerations is whether the State Education Department (SED) should publicly support key provisions of Sarbanes-Oxley as they apply to firms that audit publicly traded companies, but not to nonpublic companies. The board also plans to address two proposed rules under SED deliberation concerning disclosure of a ratio of fees, as well as a disclosure notice to clients for services that fall outside the scope of the state Board of Regents’ regulatory authority.

Meanwhile, an SED-sponsored accounting reform bill appears to be moving forward and currently is with the department’s counsel for review, Daniel J. Dustin, executive secretary of the public accountancy board, said after the meeting.

The SED also plans to present amendments to the regents rules to the Board of Regents for its discussion in April and possible action in June. These changes, which are similar to provisions in Sarbanes-Oxley that affect CPAs and CPA firms auditing publicly traded companies, will cover the Sarbanes-Oxley Act requirements on audit partner rotation, a “cooling-off” period, and prohibition on specified nonaudit services, Dustin said during the meeting. On the issue of nonaudit services, Dustin asked the board, which serves as an advisory body to the SED and the Board of Regents, whether a distinction should be made in the regents rules regarding the provision of tax services. Several members recommend that the state follow federal regulations with respect to tax services.

Dustin also announced the rule changes would cover commissions.

Under Construction

During the meeting, a board subcommittee on ethics and independence rules headed by member John Laschenski recommended that the SED publicly endorse key provisions of Sarbanes-Oxley. Among other reasons, the subcommittee believes the public should be aware of the state’s involvement and initiative in the wake of last year’s corporate scandals. However, at least one board member disagreed with the recommendation, stating that support for the act is premature until the new Public Company Accounting Oversight Board is fully operational. Board Chair Charles Schoff requested a written response by the subcommittee for the board’s April 23 meeting in Albany, which would then be released to the board of regents.

Though the subcommittee believes the act is an appropriate response for firms auditing public companies, it does not feel the same toward audits of nonpublic companies. According to Laschenski, the subcommittee opposes a “trickle-down” of Sarbanes-Oxley provisions to private entities. Schoff noted that the application of the act to nonpublic companies is unnecessary, since they already have their own auditing standards.

The meeting also elicited an in-depth discussion of two proposed rules that the SED would submit to the Board of Regents for discussion later this fall. According to Dustin, the first rule would require licensees performing professional services, other than attest or compilations, to provide written disclosure to their client, at the time of acceptance of the engagement, that such services (e.g., tax preparation, financial advisory, estate planning, etc.) do not fall under the regulatory jurisdiction of the Board of Regents. Currently, the regulation and discipline of CPAs by the regents is limited to attest and compilation services. 

The SED also will propose to the regents a rule that would require all licensees who provide attest or compilation services for closely held businesses to disclose a percentage breakdown of fees for their clients “so that third-party viewers have an understanding of the relationship between the independent auditor and the client itself,” Dustin said. This disclosure, which would be an item in the footnotes of the financial statements, would pertain to a percentage breakdown of audit fees, other accounting fees, tax service fees and other consulting fees. 

During the meeting, several board members questioned the need for such a rule for private companies. Another member observed that requiring a statement of percentage of fees on a financial statement was inappropriate and is not required by generally accepted auditing principles. The board decided to put the fee requirement on the agenda for the next board meeting.

On another matter, the board unanimously decided that assessment of a public company’s internal controls under section 404 of Sarbanes-Oxley, which is not associated with a full-scope audit, would not qualify as audit experience for purposes of license qualification as a CPA in New York.

During the meeting, Dustin also announced that the regents plan to retain the option of seeking disciplinary action against CPAs who violate Sarbanes-Oxley regardless of whether federal regulators decide to move against a licensee under investigation.

In the Hopper

As reported in the December 2002 Trusted Professional, the SED bill appears to focus on the registration of all individual CPAs and CPA firms; mandatory peer review and inspections for firms providing attest services, and the establishment of a public accounting task force. Further, it would modify the 24-hour-per-year CPE concentration requirement, currently limited to accounting, taxation and auditing, to include any area of recognized study; require CPE for all CPAs (currently, CPAs who are not in public practice are exempt); change the CPE year to a calendar basis, and increase fines and penalties for professional misconduct by individual licensees and firms. The bill also would expand the regulated scope of practice that currently is confined to audit and attest service.

Dustin reported that he, Schoff and board member Nicholas Mastracchio met with representatives of the New York State Society of CPAs and the Accountants Coalition on Dec. 6, 2002, to hear their views and discuss their concerns about the SED’s proposed legislation.